CAUTION is the word for Khazanah Nasional Bhd when it comes to investment decision-making for 2014. This is because the Malaysian sovereign wealth fund, whose portfolio value rose to a record last year, believes that the uncertainties that have been plaguing the financial markets in recent years have yet to recede.
“Since 2008 (after the collapse of US banking giant Lehman Brothers triggered a global financial crisis), the general outlook has been uncertain… but it is okay. Our investment stance has always been cautious,” Khazanah managing director Tan Sri Azman Mokhtar (pic) says.
“There are great opportunities, but there are also great dangers if one is not careful; so there is a premium on being alert and nimble,” he explains.
Azman, whose contract with Khazanah was renewed recently until the middle of next year, says the word caution does not just apply to the group’s investment decisions, but also to its divestment strategy. He says: “We have to be clear at what price we walk away and at what price we stand firm on.”
Suffice to say, Khazanah has started the year on a strong footing.
Following its steady performance over the years, Khazanah has seen its buffer grown to a comfortable level.
The ratio of its assets over liabilities as at the end of 2013 stood at 3.7 times, compared with 3.3 times in the preceding year, and 2.9 times in May 2004.
“We are starting this year (2014) from a position of relative strength,” Azman says, adding that with the strong buffer that the fund has built over the years, he is confident that Khazanah could weather any potential financial storm that may be brewing.
Khazanah is currently ranked the 26th largest sovereign wealth fund in the world based on assets under management by US-based Sovereign Wealth Fund Institute (SWFI).
The fund’s performance in the past decade has been encouraging to say the least.
Since embarking on its own transformation journey in May 2004, Khazanah has managed to grow its portfolio’s net worth by three-fold from RM33.3bil to RM103.5bil as at Dec 31, 2013. That represented a compounded annual growth rate of 12.5% over the last 10 years.
On a year-on-year basis, Khazanah’s portfolio value in 2013 represents a growth of 19.1% from RM86.9bil in the preceding year.
That shows Khazanah’s portfolio gains last year had not only outperformed the local benchmark FTSE Bursa Malaysia KL Composite Index, which registered total returns of 14.4%, but they also compare favourably against regional indices such as the Singapore Straits Times Index, which registered a gain of 7.3%, and Hong Kong Hang Seng Index, which rose 14.3%.
In a press briefing over the week, Khazanah attributed the growth of its portfolio’s net worth over the years to transformation in key investee companies.
Khazanah owns substantial stakes in some of biggest listed companies in Malaysia. These include telecommunications companies TELEKOM MALAYSIA BHD (TM) and Axiata Group Bhd; power producer Tenaga Nasional Bhd (TNB); financial institution CIMB GROUP HOLDINGS BHD; construction and property player UEM Group Bhd; airport management company MALAYSIA AIRPORTS HOLDINGS BHD (MAHB) and national carrier Malaysia Airlines (MAS).
TM, Axiata, TNB, CIMB, UEM, MAHB and MAS are collectively known as the seven key, or K-7, companies in Khazanah’s stable that are involved in the GLC Transformation Programme.
Private-sector fund managers say whether Khazanah would be able to stage another record performance in terms of its portfolio value will depend on how the share prices of the companies in its stable perform.
“Undoubtedly, the fundamentals of most companies in Khazanah’s portfolio have improved over the years… and the positive share price movements of most companies in its stable are certainly the main driver of Khazanah’s portfolio value rising to record levels,” a fund manager explains.
“Markets this year will be very volatile… and that could have an impact on every fund’s portfolio; that’s why it makes sense for every fund manager to tread cautiously,” he adds.
Last year, Khazanah made a total of 14 investments worth RM6.7bil and six divestments with a gain of RM682mil.
Its revenue last year totalled RM7.6bil, comprising a dividend income of RM6.6bil, with divestment gains and other income making up more than RM1bil. It posted a profit before tax of RM3.1bil, and had proposed dividend of RM650mil.
Khazanah’s realisable asset value as at Dec 31, 2013, stood at RM134.9bil, compared with RM121.5bil in the previous corresponding period.
At present, about 90% Khazanah’s gross assets come from companies domiciled in Malaysia.
In general, there is a consensus sentiment among financial observers that Khazanah is doing a good job as a caretaker of the Government’s commercial assets.
“We cannot deny that Khazanah has done well. The numbers that they have recorded over the years speak for themselves – their achievements have surpassed the overall growth of the local equity market as well as the regional markets,” a fund manager tells StarBizWeek.
Another analyst observes that Khazanah has indeed played a crucial role in contributing to the improved management of many government-linked companies (GLCs) under its watch.
“Since its own transformation journey about 10 years ago, Khazanah has taken a more active management role in its investee companies,” the analyst says.
“As a major shareholder, Khazanah has rightly become more demanding in terms of the performance of its investee companies. There are annual KPIs (key performance indicators) and ROEs (return on equity) that the investee companies are pressured to meet each year, and the standards imposed on the investee companies have contributed to them performing better in recent years,” the analyst explains.
Building regional champions
According to Azman, Khazanah’s next focus is to ensure the “graduation” of all the seven GLCs in its stable that are involved in the GLC Transformation Programme by 2015, the year which marks the 10th anniversary of the critical initiative.
“All the ‘K-7’ companies will have to ‘graduate’ next year,” he says.
Azman notes that all the K-7 companies are already moving in the right direction, although not all will graduate with “first-class honours” by 2015. The bottom line, he says, is to push the companies to improve on their financial performance so that they will not be a burden to the system any longer.
Importantly, Azman notes, the aim of the GLC Transformation Programme is to create regional champions and to develop the companies’ competitiveness.
“We are doing this in the belief that Malaysia will be a high-income nation by 2020. The country will then need developed companies that are strong, and with a strong presence in the regional and global markets,” he explains.
Meanwhile, Khazanah will soon see the departure of one of its key executive, Datuk Ganen Sarvananthan, who will be leaving to join global investment firm TPG Capital as a partner and managing director in its Asian business.
Since joining Khazanah as its executive director and head of investments, Ganen has played major roles for the past 10 years in driving key deals for the fund, particularly in the areas of healthcare and property.
“The fund management industry reckons that Ganen has played an instrumental role in Khazanah’s transformation, and given the fact that he has led the country’s fund through so many important deals, Ganen’s departure will indeed leave a big shoe to fill,” an industry observer says.
Ganen will be succeeded by Dominic Silva, the current executive director of investments in Khazanah, from Feb 1.
Dominic who had 18 years of experience in international banking joined Khazanah in August 2008.
“Dominic is a seasoned banker who knows the region well… He has the capability to lead the fund’s investment to good performances… But the pressure on him will be significant given the superb performance and track record that Khazanah has set in the last 10 years,” a fund manager says.
The departure of Ganen has further fuelled talks that there could be further change in store at the top management of Khazanah, whose ultimate holding body is the Minister of Finance Inc. That makes the fund an interesting space to watch in the medium term.