ACTIVE fund managers always rebalance their portfolios when economic and market conditions change. It is an acceptable practice and considered prudent for active funds.
However, when Urusharta Jamaah Sdn Bhd (UJ) disposed shares in listed companies in the last few months it was frowned upon.
But what the special-purpose vehicle (SPV) is doing is merely to rebalance its portfolio and shore up its financials to invest in stocks with attractive valuations.
UJ, which is the Finance Ministry’s SPV set up in late 2018 to take over the non-performing assets of Lembaga Tabung Haji (LTH), has been aggressively trimming its stake in listed companies since early this year.
Even when market conditions were weak in March, UJ continued with its divestment and investment strategy.
UJ chief executive officer Izad Sallehuddin says the recent market weakness had presented the company with an opportunity to take a holistic review of its portfolio.
“Everybody sees UJ as divesting shares. But we also bought shares when there was a selldown recently. We could seize on the opportunity because we started re-balancing our portfolio earlier, ” Izad tells StarBizWeek on questions in relation to UJ’s disposal of interest in listed companies.
According to him, the SPV was taking advantage of opportunities offered by the recent stock market weakness and mispricing to buy into better quality stocks at attractive valuations.
Previously, UJ was a substantial shareholder in many companies such as Eastern and Oriental Bhd, WCT Holdings Bhd, Lion Industries Corp Bhd, CSC Steel Holdings Bhd, Alam Maritim Resources Bhd and Puncak Niaga Holdimgs Bhd. The SPV started disposing of its stakes in these companies to less than 5%, hence no longer a substantial shareholder.
Following the takeover of LTH’s non-performing assets, which was part of the rescue and restructuring plan for the pilgrim fund, UJ landed with stakes in 106 listed companies at end-2018, . This included a 29.8% interest in TH Heavy Engineering Bhd, which has been under the PN17 status for three years, and 26% stake in Pelikan International Corp Bhd.
The government-guaranteed SPV issued debt of RM19.9bil to LTH for the assets, far above the book value of only RM10bil.
The disposal of shares by UJ amidst the weak market conditions in March raised eyebrows because shares prices were at their lowest.
For perspective, on March 19, the FBMKLCI fell to a low of 1,219.72 points or close to a quarter in value since the start of the year.
According to Izad, the assets which UJ inherited were already considered underperforming, providing zero to low yields to LTH and transferred to UJ at significant premiums.
“Furthermore, the concentration of the portfolio was heavily disproportionate towards a small number of stocks, and stock and sector weightings were not well-balanced. We also held large positions in illiquid, small-cap counters which had no analyst coverage, making it difficult for us to make proper assessments, ” Izad, who was appointed to the helm in April last year, says.
Considering there would not be any further capital injection by the government for re-investment purposes into UJ’s portfolio, the SPV must manage these assets responsibly through active portfolio management that includes buying and selling shares, he adds.
He says it is inaccurate to call UJ’s share disposals a “selling spree”, pointing to the fact that it only sold a small portion of its portfolio at this point. At the same time, “we have made investments in new counters, added our position in some names we inherited and we trimmed or exited a few.”
According to him, UJ has taken positions in a series of syariah-compliant counters in various sectors such as utilities, healthcare, finance and insurance, ports, electronics manufacturing services and construction.
“We are positioning ourselves in more defensive and solid names to ensure that UJ can re-emerge stronger with a healthier portfolio of stocks from this downcycle.”
On the other end, in some sectors like telecommunications, it views itself having enough exposure.
Where possible, UJ aims to maintain a shareholding of below 5% for any company it invests in, going forward, excluding the legacy holdings it has inherited, he says.
According to Izad, the strategy has produced positive results.
“Our net asset value (NAV) as at the end of the first quarter of 2020 (which captures its trading activities) was higher in comparison to the NAV of the inherited portfolio as at the end of the same period, had we not done anything at all. This is the simplest way to compare our performance at the moment.”
That said, he contends it’s still early days. “The results of UJ’s portfolio restructuring, as with any others, should be measured in two to three years’ time.”
For context, UJ’s management team was only constituted in the third quarter of 2019. It spent the third and fourth quarters of last year framing the necessary governance, guidelines, systems and structure. It also formed an investment panel consisting of experts in the field including former top key personnel of government-linked companies, asset management companies and banks, to oversee its investments and which reports to the board.
UJ is also collaborating with external fund managers (EFM) to manage portions of its equities portfolio – a move that would allow it to diversify its risk and benchmark performance with other professional fund managers. However, for now only a small portion of its portfolio has been farmed out, says Izad.
Izad declines to disclose how many listed stocks UJ is invested in now because there could be more movements in terms of what is being raised and what is being reinvested.
“As in any trading cycle, there will be some sectors and stocks that are more attractive, and the only way to get exposure to that is by selling some of our holdings.
“This will enable us to buy into counters that we believe may perform better in the medium to long term, ” he adds.
On plans to revive TH Heavy’s fortunes, Izad says UJ has been working closely with its management over the past year to undertake a thorough assessment as well as to address legacy issues.
Izad, who is also TH Heavy’s chairman, says this turnaround is guided by clear mandates and founded on good governance practices. He declines to elaborate on the options on the table towards this end, but mentions that as a positive milestone to uplift itself out of PN17 status, TH Heavy recently inked a memorandum of understanding with ICE Petroleum Ventures Sdn Bhd. The latter is an oil and gas player with projects primarily outside Malaysia with key global clients.
Apart from listed stocks, UJ owns four operating hotels in Kuala Terengganu, Alor Setar, Kota Kinabalu and Bayan Lepas. It also owns one non-operating hotel in Kuching that was inherited from LTH. According to Izad, the company had plans to launch operations for the Kuching Hotel in the second half of this year, but that has to be delayed due to Covid-19.
“We are looking to increase the yield of the properties we own, including the hotels and the office building we own at Platinum Park, KLCC. We are facing various challenges with some of the assets that we own, and we are trying to address them as fast as we can.”
UJ is also exploring all options for the plot of land it owns at Tun Razak Exchange – a controversial land purchase by LTH that was disposed of at a 51% premium of RM400mil compared to the land’s book value of RM196mil. Given the soft property market, observers reckon that it is unlikely anything can be developed on the land soon.
At only 38 years of age, Izad has a big task ahead to rebalance a portfolio saddled with legacy issues. It is no easy task for any fund manager. The road ahead may be rocky with Covid-19 casting a pall on the market and economy.
But at least the strategy to put money into higher yielding stocks should pay off in the longer term.
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