The Armed Forces Fund Board (LTAT) has begun making sweeping changes to its investment style.
The move follows its lowest dividend declaration of 2% last year. This compares with a minimum of 6% paid out over the past four and a half decades.
LTAT was previously headed by its long-serving chief executive officer Tan Sri Lodin Wok Kamaruddin, who held the top post in LTAT since 1982.
Despite being known as an institutional fund with RM10bil of assets under management, LTAT never had a chief investment officer (CIO) and chief financial officer (CFO) until recently.
In 2018, LTAT saw the appointment of Nik Amlizam Mohamed as CEO. She was formerly the CIO with Retirement Fund Inc (KWAP).
Following her appointment, other changes took place at LTAT. The CIO position was created and so too were some management changes at LTAT investee companies.
Last year, LTAT appointed Haniz Nazlan as its first CIO.
Under the old structure, the specific position of CIO did not exist, and all investment matters were managed by two general managers who reported to the deputy CEO, who at the same time also oversaw non-investment operations.
The old regime had also made LTAT to be highly reliant on investing in a handful of companies that made about 55% of its asset profile.
Haniz says that the new management structure involved the creation of a streamlined and dedicated investment division under the purview of the CIO.
He acknowledges that the current LTAT’s investment portfolio is “risky” and “not suitable” for a pension fund.
“LTAT’s portfolio is highly concentrated.
“Two stocks, namely Boustead Holdings and Affin Bank alone make up 47% of the portfolio.
“Over-reliance on only a handful of investments exposes the portfolio to greater concentration risks, ” he tells StarBizweek.
“Essentially, the underperformance of a single investment has largely affected the overall portfolio performance, ” he adds.
Shares of Boustead and Affin Bank have been on a decline over the past years even before the coronavirus (Covid-19) crisis hit the global economy.
The share price of Boustead is currently trading at its lowest level at 46 sen a piece, far off from its price five years ago at close to RM3.
Meanwhile, Affin Bank’s share price was last traded at RM1.54, almost half from its value three years ago.
Haniz also highlights another challenging task for LTAT is its exposure in real estate and private investments. These make up about 33% of its AUM, and would require a longer investment horizon and gestation period.
“This creates challenges for us to move the portfolio and to be more agile, especially in periods of uncertainty and heightened market volatility, ” he says.
For comparison, the Employees Provident Fund (EPF), which has RM814bil in AUM, has invested 50.53% of its money in fixed income and 41.6% in equities.
Meanwhile, KWAP, a RM145bil fund, has invested 46% in fixed income and 40% in equities. Haniz points out that the LTAT portfolio is 100% domestically invested, and could not benefit from the global financial market upcycle.
Haniz reckons that the transformation plan for LTAT will require a delicate balancing act of delivering short-term wins while ensuring long-term sustainability.
He has stepped into the office at the most challenging time for an asset management house that not only needs to quickly diversify its investment portfolio but also need to overcome structural changes and face the market downturn resulting from the Covid-19 crisis.
“LTAT would look into rebalancing its portfolio into fixed income instruments, particularly government issuances.
“This will likely form the base of the portfolio, providing stability both in terms of yields and preservation of capital, ” he says.
In addition, Haniz says that the fund will be looking to diversify into international markets, starting with a small exposure and an initial focus on developed markets – given the lower volatility and risk as compared to emerging markets.
He points out that LTAT is currently developing a “strategic asset allocation” initiative that would include asset rebalancing.
“Under this framework, LTAT will have a clearer idea of where to invest and how much to invest over the long term.
“Typically, large multi-asset funds would take anywhere between five to 10 years to fully rebalance the portfolio, ” Haniz says.
He reckons that LTAT has a stable of good assets and some are undervalued.
“With the right strategy and approach, these assets could be nurtured further to generate better returns.
“Moving forward, LTAT intends to play a more active role as a shareholder to ensure that its interests are better safeguarded, ” Haniz adds.
It is noteworthy that last week, PNB also embarked on an almost similar plan that includes reducing its assets concentration risk by taking on more overseas investments.
PNB will also take on 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 to enhance returns.
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