Why Uber might not be a typical trade for KWAP

Uber is becoming more and more of both a known and unknown quantity. More and more pedigree names are buying into it which makes an IPO scenario pretty likely. But it has also made some of the biggest losses known for any tech company so there’s a chance that the next investor might not want to pay a higher price for it, resulting in disappointments for existing shareholders. In fact, some smart professor thinks Uber is worth less than half of what the latest deals suggest. But then again, the market is pretty forgiving of tech company losses, think Amazon for example, so investors/punters may still chase after the shares. But then again again, people are fearful of a bubble in the market. Think the dot-com crash in 2000. All in all, we can say that Uber is a very high-risk, very high-return type of bet with the binary outcomes of either very big losses or very big gains.

Given this background, was KWAP, a pension fund set up to fund civil servants’ retirement, crazy to buy into Uber? The answer isn’t so straightforwardly negative. KWAP used a nifty investment trick to make the Uber buy somewhat tactically reassuring: the RM123m doled out for Uber comprised only 0.1% of KWAP’s overall fund size of RM123b.

That these numbers are so utterly coincidental makes it entirely possible that this was an intentional, premeditated calculation. It’s not hard to picture a fund manager sitting behind his/her desk looking at the deal asking “if I were to buy Uber, what would be a comfortable allocation for the portfolio? Hmmm, I think 0.1%. And what is 0.1% of my fund size?…” And that could be how KWAP arrived at RM123m. Or not… it could be that 1-2-3 is a nice number. The coincidence seems pretty uncanny, though.

This minute exposure to a very high-risk, very high-return instrument is a good way to make money. If Uber turned out to be a dud, KWAP would limit losses to 0.1% or less of the portfolio. If it turns out to be the world’s next most sought after IPO, Uber could be a multi-bagger (making a few hundred percent returns or more) as early and pre-IPO investors of Google, Facebook, Alibaba etc. can attest to.

Looking further into KWAP’s asset allocation, according to the 2014 annual report, they have roughly only 35% of funds invested in equity which means that the Uber investment represents only 0.35% of their risky stock portfolio. Limiting 0.35% of your portfolio into each stock would put you in the realm of prudence as you would need almost 300 stocks to fill up the portfolio – a pretty good diversification policy in my books. I’ve seen fund managers acting more insanely by sinking 10% of their fund into a single high-risk stock.

Having said that, if KWAP goes on the hunt to fill its portfolio with more Uber-like investments , they risk destroying a lot of wealth for their members. I doubt Mr/Ms 0.1%  would cave in to such impulse, but you never know. To adjust to a higher risk-higher return profile more efficiently,  KWAP only needs to raise their stock (35% currently) and foreign (10% currently) allocations without going ballistic on tech and private equity investments. This is what the EPF did a few years ago to good effects.

The move to prudently raise the return potential is the right move as being a “defined contribution” fund, retirement sufficiency is an even bigger time bomb for KWAP than EPF as they run a higher risk of over-promising benefits to civil servants.


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