Increasingly, it would appear that the chief executive of the Armed Forces Fund Board (LTAT) Nik Amlizan Mohamed (pic) has been handed a poison chalice upon taking over the fund last year.
For the second year running, LTAT is expected to return a poor set of results. In a statement on Thursday, the fund spelt out seven discrepancies in the accounts for 2018 that are due to be released next week.
Among them are overstating the assets for the period between 2015 and 2017, having a high concentration of investments in BOUSTEAD HOLDINGS BHD and an unhealthy practice of rewarding members with unit trusts as a special bonus.
It is not unique for large funds to give members unit trusts as part of the dividends. It is to prompt them to manage part of their savings. However, in the case of the unit trusts received by the members of LTAT, the investments are locked up until the point of retirement. This means that the members are not able to sell the unit trusts they receive until they retire and opt out of the scheme. In some ways, it is a form of forced savings on the members.
However, the downside is that the members are not able to sell the unit trusts when the price appreciates. This is detrimental to their interest and defeats the purpose of giving them the unit trusts in the first place.
With assets under management of RM10bil, LTAT has been paying out double-digit dividends to its members since 1991. The highest amount declared was 18.25% in 1996. Even in the midst of the stock market meltdown in 1998, LTAT managed a dividend of 13.5%.
Even in the last four of the five years since 2014 when Bursa Malaysia finished in negative territory, LTAT gave double-digit dividends between 12% and 15%. Half of that sum was in the form of unit trusts that members are not allowed to liquidate until they retire.Based on the latest developments on the state of its accounts for 2018, LTAT is not likely to continue with its double-digit dividends for many years to come. In fact, the fund was not supposed to declare a dividend for 2017, where its profits were almost halved following a review of its financial position.
For 2017, LTAT’s profits were halved from RM662.2mil to RM370.7mil after a review. In an announcement in April this year, it was revealed that with the adjusted profit, LTAT would have accumulated losses and should not have declared dividends.
However, the fund had already declared the dividend under the old government.
The profits were over-stated mainly due to inadequate provisions and impairments in the books. A similar tone has appeared for the results in 2018.
LTAT’s over-stated results should not come as a surprise, as the fund took on deals that none of the other government-linked investment companies would undertake when it was under the old chief executive, Tan Sri Lodin Wok Kamaruddin.
Lodin, who left in September 2018 after helming the fund for more than 36 years, was a close ally of former Prime Minister Datuk Seri Najib Razak. He was the chairman of the controversial 1Malaysia Development Bhd (1MDB) when it undertook a series of opaque investments with funds raised outside the country.
Apart from 1MDB’s former chief executive Azrul Kanda Kandasamy, who is better known as Arul Kanda, Lodin was the other personality from the beleaguered fund that defended its investments when reports of money raised but being diverted to questionable investments and individuals cropped up.
Now, from the ongoing 1MDB trials, it has become clear that the reports were all true.
During his 36-year tenure at LTAT, Lodin kept a low profile. Even when LTAT declared double-digit dividends year after year, he rarely spoke of its “success”, which was quite perplexing as not many would have been able to accomplish such a feat. Any other head of a fund would have gone on a chest-thumping spree trumpeting the achievement. But not Lodin, for reasons best known to himself.
Closer scrutiny of the audit over the last few months has revealed that the dividend payouts cannot be sustained.
Some of it is due to LTAT’s investment strategy, which is not something other funds would adopt. The bulk of its investments are in Boustead Holdings Bhd and AFFIN HOLDINGS BHD. Boustead and its associated companies are involved in many areas of the economy from ship repair to plantations and property development. As for the Affin group, it is primarily in the financial services sector and has a large unit trust arm.
LTAT has a high concentration of shareholdings in Boustead and its group of companies. It controls 60% of Boustead and holds more than 45% of Affin, which is not a healthy asset allocation strategy for any investment fund.
Normally, the fund manager should ensure that the investments are spread out so that the risk is mitigated.
Towards this end, the new management of LTAT has said that it would undertake a strategic asset allocation initiative, which probably means paring down the interest concentrated in a fistful of companies under Boustead. However, the market is not conducive for any asset re-allocation strategy for now, which does not favour LTAT.
It will take a few years for LTAT to come up with a portfolio that would be able to give sustainable dividends. Going back to the old double-digit dividend days is unlikely to happen.
A decent return of a single digit is what members can expect when the numbers are unveiled next week.
The views expressed here are soley the writer’s own.