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When Tan Sri Zeti Akhtar Aziz stepped in as president of Permodalan Nasional Bhd (PNB) in 2018, he recognized that the fund must quickly diversify into foreign investment as it faces declining revenue.
The local stock market as measured by the performance of the benchmark FBM KLCI has shrunk in the past five years, even before the new coronavirus crisis (Covid-19) took the world by storm.
PNB’s Achilles heel is its strong exposure in Bursa, Malaysia. About 60% or RM187bil of its funds is invested in locally listed shares and owns majority stakes in a number of publicly listed companies, namely MALAYAN BANKING BHD
Sime Darby Bhd, UMW HOLDINGS BHD, SAPURA ENERGY BHD, Chemical Co of Malaysia Bhd and MNRB HOLDINGS BHD.
Biggest exhibition: PNB headquarters in Kuala Lumpur. The fund is considering investing at least 30% of its assets under management in RM312bil in global assets by 2022 from the current 8.5%.
Some of these companies are now operating at their lowest point of all time, and their dividend payments are likely to be lower as businesses and households are affected by the economic consequences of the Covid-19 pandemic.
PNB’s income would not be saved in this butcher shop and, in turn, would affect the returns of its 14 million shareholders.
Holders of their flagship fund Amanah Saham Bumiputera (ASB) have been making returns of 7% to 8% for the past 29 years, producing their return primarily from local stocks.
Its shareholders are not used to getting anything less than that, despite economic recessions, the low interest rate environment and the financial crisis. And that puts additional pressure on return delivery.
Malaysia’s economic performance peaked in the early 1980s until the mid-1990s as the economy experienced sustained rapid growth, averaging almost 8% per year. At that time, the Malaysian stock market was rapidly growing as state-owned companies like TELEKOM MALAYSIA BHD were being privatized
In the 1990s, average interest rates were between 8% and 10%, which caused excellent gains for Malaysia Government Securities (MGS).
So when PNB declared a 5.5% dividend, including the 2019 bonus for ASB holders, which is the lowest dividend since the fund’s inception in 1990, it raised a question: Would this be a new GNP normal?
PNB was not the only one to feel hurt as the EPF declared a dividend of 5.45% last year, the lowest since 2008
The FBM KLCI last year was one of the worst performing indices in the region. Meanwhile, the MSCI Emerging Markets Index, which tracks large stocks in markets like China, Taiwan, Indonesia, and India, rose 8.5% in 2019.
In addition, major equity indices in the United States, the United Kingdom, Europe, Japan, and Asia posted returns of between 9% and 23.4% during the same period.
A reform of the GNP fund is needed, given the diminishing returns on its local assets.
Looking to the future
This week, PNB organized its first virtual press that saw Zeti and the group’s president and CEO Jalil Rasheed share the fund’s new strategic plan, called Focus 4, which looks at an asset diversification exercise and how to improve performance. of their “strategy” companies ”that include taking a more active role in business management.
Zeti says investing abroad is not only future proof of the fund’s returns, but diversification is key to managing risk.
The former governor of Banco Negara says PNB is considering investing at least 30% of its managed RM312bil assets in global assets by 2022 from 8.5% today.
Zeti says PNB’s diversification plans are presented at the right time to take advantage of weak asset values and use the fund’s cash.
That said, PNB has cash and money market funds in the amount of RM43.5bil, which could be deployed in overseas investments.
However, weakness in the ringgit would pose the problem of getting approvals from regulators like Bank Negara for the mobilization of its cash abroad.
To this end, Jalil says PNB has already invested in real estate businesses abroad, such as logistics and warehouse assets, which are booming in e-commerce, as almost half of the world’s population is in some form of blocking.
“We started that type of investment in Europe and are now looking for similar opportunities like that in Asia,” he says, adding that PNB is also exploring to invest in the private equity space.
In 2019, although the FBM KLCI decreased by 7%, PNB managed to disburse a total of RM13.2bil in income distribution and bonus to its shareholders, thanks to its investment abroad.
“This was largely driven by our cautious approach to investing alongside our recent diversification into new asset classes and global financial markets.
“International public equity generated the highest returns, contributing more than 11.6% to total gross income in 2019, despite a small exposure of 5.9%,” she says.
Another thing to consider is the liquidity of local assets. Although there are over 1,000 companies listed in Malaysia, the market is not deep enough for a fund like GNP, which has RM312bil assets under management. It is approximately 22% of Bursa Malaysia’s market capitalization.
Sweating current
The recent drop in world crude oil prices has raised concerns about PNB’s share in oil and gas (O&G) stocks, especially Sapura Energy Bhd and Velesto Energy Bhd.
Compared to the price PNB paid for its stake in Sapura and Velesto, the fund is in for a big paper loss.
The O&G sector has been affected by a sharp decrease in demand due to the Covid-19 pandemic that froze business and consumer activity, as well as a situation of oversupply.
Once a wanted stock, Sapura is now trading at nine sen per share and suffered losses of RM4.6bil for its financial year that ended on January 31, 2020.
In 2017, PNB injected more than RM800 thousand in Velesto and in 2019 it invested RM2.68bil in Sapura. This is equivalent to 3% of the total assets of GNP under management.
However, according to Velesto and Sapura’s last closing price at 16 sen and 9 sen on Wednesday, Velesto’s share price has fallen more than 80%, while Sapura has fallen almost 70% since early 2019.
Last month, Sapura’s top management took a 50% pay cut as part of internal austerity measures to preserve its cash flow.
Jalil was named president of Sapura in January this year, raising questions about whether the pay cut was part of PNB’s initiative to play a more active role in its investees.
Under Focus 4 initiatives, Jalil says PNB has introduced the “Management Framework” to ensure the stability of its investee companies by promoting a performance-based culture and improving the organizational health of the respective companies.
Under the program, PNB will take a more active role as an investor, including a presence at the boardroom level and working alongside the management of its investees to drive its strategy.
“We want to actively involve companies, defend good corporate governance and exercise our participation through voting power,” says Jalil.
To this end, PNB has established the Strategic Investment Council (SIC), which will be chaired by Jalil, made up of all the CEOs of PNB’s strategic companies.
Jalil says the SIC aims to align interests and reduce duplication when possible and serves as a way to share best practices.
The asset diversification and management framework is an extension of the precious STRIVE-15 initiative to create value among the companies in its portfolio and improve risk management and organizational transformation.
Low returns are expected for this year as commercial and consumer activity has been halted due to the Covid-19 pandemic.
Zeti says PNB must have a long-term vision and focus on the fundamentals, such as identifying a mega shift in the economy.
In the immediate term, Zeti says that companies are being badly affected, which affects their earnings, increases unemployment and volatility in the financial market.
“In these grim financial and economic conditions, however, there is room for optimism. While the financial pain necessary to contain the spread of the pandemic may be intense and immense, it will nevertheless be temporary.
“Once the economic shutdown is lifted, economic activity can resume. In the immediate term, you may feel a recession before recovery occurs. Therefore, we must look beyond the immediate term, “she says.
Zeti says the fund’s ability to function this year will depend on factors such as the second wave of Covid-19, whether the announced policies are implemented effectively, that they address issues related to SMEs and rising unemployment, and how quickly with which consumer spending recovers.
“Of course, the performance of the companies in which we are invested is important. They are an important part of our effectiveness in generating income and there are measures that must be taken to increase the potential of these investments, ”she says.
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