WHEN Tan Sri Zeti Akhtar Aziz stepped in as the chairman of Permodalan Nasional Bhd (PNB) in 2018, she acknowledged that the fund must quickly diversify into overseas investment as it faces declining income.
The local stock market gauged by the performance of the benchmark index FBM KLCI has been shrinking over the past five years, even before the novel coronavirus (Covid-19) crisis took the world by storm.
PNB’s Achilles heel is its heavy exposure in Bursa Malaysia. About 60% or RM187bil of its funds are invested in locally listed stocks and it holds majority stakes in a number of public-listed companies namely Malayan Banking Bhd, Sime Darby Bhd, UMW Holdings Bhd, Sapura Energy Bhd, Chemical Co of Malaysia Bhd and MNRB Holdings Bhd.
Some of these companies are now trading at their all-time low and their dividend payments are likely to be lower as businesses and households are hit by the economic fallout from the Covid-19 pandemic.
PNB’s income would not be spared in this carnage and, in turn, would impact the returns of its 14 million shareholders.
Its flagship fund Amanah Saham Bumiputera (ASB) unitholders have been enjoying returns of 7% to 8% over the past 29 years, churning its return mainly from the local stocks.
Its shareholders are not used to getting anything less than that even despite economic downturns, low-interest rate environment and financial crisis. And that puts additional pressure in delivering returns.
The Malaysian economic performance peaked in the early 1980s through the mid-1990s as the economy experienced sustained rapid growth, averaging almost 8% annually. At that time, Malaysia’s equity market was on rapid growth as state-owned enterprises such as Telekom Malaysia Bhd were being privatised.
In the 1990s, average interest rates were between 8% and 10%, causing handsome returns from Malaysia Government Securities (MGS).
So when PNB declared a dividend of 5.5% including bonus in 2019 for ASB holders, which is the lowest dividend since the fund’s inception in 1990, it sparked a question: Would this be a new normal from PNB?
PNB was not the only one feeling the hurt as the EPF declared a 5.45% dividend last year, the lowest since 2008
The FBM KLCI last year was one of the worst-performing indexes in the region. Meanwhile, the MSCI Emerging Markets index, which tracks big stocks in markets like China, Taiwan, Indonesia and India, rose by 8.5% in 2019.
Also, major equity indices in the United States, United Kingdom, Europe, Japan and Asia made returns of between 9% and 23.4% over the same period.
An overhaul of PNB’s fund is needed, given the declining returns from its local assets.
This week, PNB organised its first-ever virtual press that saw Zeti and president and group chief executive Jalil Rasheed share the fund’s new strategic plan, dubbed Focus 4, which looks at an asset diversification exercise and how to enhance the return of its “strategic companies” that include taking a more active role in the companies’ management.
Zeti says investing overseas is not only to future proof the fund’s returns but diversification is key in managing risk.
The former Bank Negara’s governor says PNB is eyeing to invest at least 30% of its RM312bil assets under management into global assets by 2022 from 8.5% currently.
Zeti says PNB’s diversification plans come at the right time to take advantage of the weakness in asset values and utilise the fund’s cash.
That said, PNB has cash and money market holdings to the tune of RM43.5bil, which it could deploy in overseas investments.
However, the weakness in the ringgit would raise the issue of obtaining approvals from regulators like Bank Negara for the mobilisation of its cash overseas.
Towards this end, Jalil says PNB has already invested in overseas real estate business such as logistics and warehouse assets, which are booming from e-commerce, as almost half of the world’s population is in some kind of lockdown.
“We started that kind of investment in Europe and are now looking at 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 declined by 7%, PNB managed to disburse a total of RM13.2bil in income distribution and bonus to its unitholders, thanks to its overseas investment.
“This was very much driven by our prudent investment approach in tandem with our recent diversification into new asset classes and global financial markets.
“International public equity generated the highest returns, contributing more than 11.6% to overall gross income in 2019, despite a small exposure of 5.9%, ” she says.
Another thing to consider is the liquidity of the local assets. Although there are more than 1,000 companies listed in Malaysia, the market is not deep enough for a fund like PNB, which has RM312bil assets under management. It is about 22% of the market capitalisation of Bursa Malaysia.
investmentThe recent plunge in global crude oil prices has raised concern over PNB’s stake in oil and gas (O&G) stocks especially Sapura Energy Bhd and Velesto Energy Bhd.
Compared to the price that PNB paid for its stake in Sapura and Velesto, the fund is sitting on a huge paper loss.
The O&G sector has been hit with a sharp decline in demand due to Covid-19 pandemic that froze business and consumer activity, as well as an oversupply situation.
Once a darling stock, Sapura is now trading at nine sen a share and suffered almost RM4.6bil losses for its financial year ended Jan 31,2020.
In 2017, PNB injected more than RM800mil into Velesto and in 2019 it invested RM2.68bil in Sapura. This is equivalent to a 3% of PNB’s total asset under management.
However, based on the last closing price of Velesto and Sapura at 16 sen and 9 sen on Wednesday, Velesto’s share price has dropped more than 80%, while Sapura plunged almost 70% since early last 2019.
Last month, the top management of Sapura took a 50% salary cut as part of the internal austerity measures to preserve its cashflow.
Jalil was appointed chairman of Sapura in January this year, which raised questions if the salary cut was part of PNB’s initiative in taking a more active role in its investee companies.
Under the Focus 4 initiatives, Jalil says PNB has introduced the “Stewardship Framework” to ensure the stability of its investee companies by promoting a performance-driven culture and improving the respective companies’ organisational health.
Under the programme, PNB will take a more active role as an investor, including a presence at boardroom level and working together with the management of its investee companies in driving their strategy.
“We want to be actively engaging companies, championing good corporate governance and exercise our shareholding by way of proxy voting, ” Jalil says.
Towards this end, PNB has set up Strategic Investment Council (SIC) that will be chaired by Jalil, consisting of all CEOs of PNB’s strategic companies.
Jalil says the SIC is aimed at aligning interests and reducing duplication where possible and serves as an avenue to share best practices.
The stewardship framework and asset diversification is an extension of the precious initiative STRIVE-15 to create value among its portfolio companies, and enhance risk management and organisational transformation.
Low returns for this year is expected as business and consumer activity have grinded to a halt due to the Covid-19 pandemic.
Zeti says PNB has to take a long-term view and focus on the fundamentals such as identifying a mega shift in the economy.
In the immediate term, Zeti says businesses are being heavily disrupted, which affects their earnings, increases unemployment and volatility in the financial market.
“In this bleak financial and economic conditions, there is however some room for optimism. While the necessary economic pain to contain the spread of the pandemic may be intense and immense, it will, however, be temporary.
“Once the economic shutdown is lifted, economic activity can be reignited. In the immediate timeframe, a recession may be felt before the recovery occurs. We, therefore, need to look beyond the immediate term, ” she says.
Zeti says the fund’s ability to perform this year will depend on factors such as no second Covid-19 wave, announced policies are effectively implemented, addressing the issues related to SMEs and rising unemployment, and how quickly consumer spending picks up.
“Of course, the performance of the companies that we are invested in is important. They are an important part of our effectiveness in being able to generate income and there are actions to be taken to raise the potential of these investments, ” she says.