THE Armed Forces Fund Board (LTAT) is set for a historical transformation. Despite the RM10bil size of its asset under management, the fund plays a significant role in the local stock market with its controlling stakes in some of the major listed companies.
There is great interest in what kind of changes chief executive Nik Amlizan Mohamed will embark on. With her experience in Retirement Fund Inc (KWAP), the country’s largest pension fund, her role in LTAT marks a new era for the fund.
She believes that putting the right framework in place and tweaking the investment portfolio is vital for the fund to move forward. The following are excerpts of an interview with her.
What are some of the new aspects you have introduced as part of LTAT’s transformation? We recently set up a human resources (HR) department. In the past, HR functions mainly revolved around administrative work and not from a strategic perspective.
We have also set up a Legal and Secretarial Department, which is important as we need to get the house in order.
Our compliance function did not exist. Hence, we needed to create a compliance function inside risk management.
That was part of the reason why LTAT was found to be not keeping up with the standards of compliance as per our announcement pertaining to our financial year 2017 (FY17) results in Parliament last week.
We revisited the risk enterprise framework and when I asked for this, I was informed that it was introduced in 2004 and had not been revisited since.
There are so many new risks which have evolved since then. How do you address Black Swan events? We have to prepare ourselves for the future.
LTAT has been doing well in the past and when you are experiencing good times, you may not necessarily want to think about the bad times. But that has to change because the future looks nothing like the past. Is the fund agile enough to face that?
One of the major risks is that the fund’s investments are highly concentrated in very few investments.
LTAT is known for its dividend payments of an average of 11.3% per annum in the last 45 years. Can it keep up with the dividend payment track record?In 2017, LTAT announced a
6% cash dividend based on both the full members’ and government’s contributions amounting to RM498mil. The 6.5% special bonus, which is based only on
the members’ contribution and paid in the form of a unit trust fund managed by Affin Hwang Unit Trust, amounted to RM188mil.
What is important to note here is that the first 6% payout amount is a lot larger than the second 6.5% payout amount. This is because there is a different base used.
Therefore, we cannot simply add both amounts when the base is different.
For example, if you use your car 30% of the time and I use my car 20% of the time, I cannot say that we both use our cars 50% of the time. It is simply incorrect.
We have rebased, with the 6.0% plus 6.5% in this case actually being equivalent to 8.3%, which is still highly commendable.
So, it was not 12.5% in dividends that was given in 2018?It was not 12.5% because the bases were different. The amount of dividend paid for FY17 was RM686mil and this was higher than the income for the year – particularly after it was adjusted. The money for the dividend came from retained earnings and it is alright to do so, because it is also to manage the volatility in terms of dividends. But it should not cause retained earnings to fall into negative territory.
With the negative retained earnings, what do you do from here, moving forward?This question keeps me up at night – it is my bread-and-butter question. We need to work very, very hard to recover the accumulated losses.
Being a passive fund manager, does LTAT need to have controlling stakes in listed companies including Boustead Holdings Bhd, Boustead Plantations Bhd, Pharmaniaga Bhd and Affin Bank Bhd?If passive here means buying and holding for the long term, then LTAT would need to review and rebalance intermittently to ensure the decision to hold these securities remains intact.
This may not necessarily work anymore in this day and age.
Essentially, we are waiting for the dividends to come in. We should not be at the mercy of our investee companies.
It cannot be the case that due to the heavy exposure that we have in one company, we are unable to be flexible with our investments.
To have control over our investee companies is good, but to allow them to control LTAT funds simply because of our high exposure to them is unwise.
High holdings of the investee companies’ paid-up capital is different from high fund exposure to the investee companies.
That is to say that LTAT should not hold more than 10% of its fund size in one single company for prudence and diversification purposes.
How much is your exposure in Boustead? Are you looking to reduce your stake in it?We own 59.4% of Boustead Holdings. From our fund size, approximately 28% is placed here.
Moving forward, the market will be volatile and we need to be ready to be able to move our funds.
LTAT is a pension Fund. LTAT is not Boustead, and Boustead is not LTAT. The same applies to Affin. These are our investee companies.
If they perform well, which they have done in the past, we will keep them, to a certain level. Not to a level where we cannot move.
We would not undertake or change anything that would not benefit the soldiers.
We can take our time...not right now. When the time is right, we may look at scaling down, as the current stake is high.
There are ways to do it. For example, increasing other investments using new funds so that the exposure percentage will effectively be lower.
As a fund, do you steer the direction of your investee companies?As a shareholder, we practise shareholder activism via engagements. It would be very irresponsible for us not to do so.
We would not want to just buy and not do anything. We have been and will continue to engage with the Affin Bank and Boustead management and their respective boards to ensure they are clear on our expectations.
Moving forward, they cannot be worse off than the market. It needs to be better. There is
deep value in both Boustead and Affin. It is a matter of unlocking it and looking at ways to create value.
LTAT is also involved in property development and recently submitted a new proposal to win back the Klang Valley Double Track Phase 2 (KVDT2) contract. Why is a fund management house involved in such projects? What role does LTAT play and what kind of returns are you aiming for?For KVDT2, LTAT is a minority shareholder with a 20% stake in the joint-venture company. We envisage receiving some returns from the project if we are successful in our bid.
Currently, it is still premature to talk about it, as we only recently resubmitted our bid to the government.
Our investment philosophy moving forward is to look at brownfields and no longer greenfields. I want us to participate in businesses that are already generating an income stream, or better still, bottom-line growth.
Have you received payment for your Bandar Malaysia project?LTAT’s wholly owned subsidiary - Perbadanan Perwira Harta Malaysia (PPHM) - was tasked with the relocation and construction of eight bases. Except for some balance for the final works done, PPHM has been reimbursed for the bulk of the work done.
When you came into office in October last year, how did you describe LTAT and what was your impression of the firm? Was there are proper handover done by your predecessor? LTAT reminds me of KWAP back in 2007 when I first joined as the head of equity. My 11 years at KWAP taught me a lot about leadership and organisational structure. I am hoping to do the same, if not more, for LTAT.
The responsibilities are a lot more here and I am trying to
do it within a shorter period of time.
It’s like “trying to change the tyres while the car is moving”.
My first two weeks were spent speaking to our 260 team members here at LTAT. I knew then that they have been looking for change.
In the past, heads of departments had never presented to the board. Now, they have to do so to the board and the investment panel.
Currently, we do not have succession planning and we do not have talent management in terms of up-skilling and reskilling.