SINGAPORE (Feb 25): Contrary to speculation, Malaysia’s Khazanah Nasional is not being shut down. Talk that Khazanah might be liquidated was why congratulations was not the first word that came to mind for many when Shahril Ridza Ridzuan was plucked out of the highly successful Employees Provident Fund to fill the managing director’s seat at Khazanah in early August last year.
Not only was it about a week after the entire Khazanah board had tendered their resignation, but Prime Minister Dr Mahathir Mohamad had also lamented how the sovereign wealth fund he set up in 1993 had veered away from its original purpose.
One does not need a degree from Oxford or a master’s from Cambridge, like Shahril has, to know the 48-year-old needs to know upfront what Mahathir expects of him and Khazanah.
“He just wanted assurance that I would be able to deliver in terms of success for Khazanah in the same way that I’ve done in the past for, say, EPF,” Shahril tells The Edge Malaysia.
Mahathir was also the prime minister when Shahril first came under Corporate Malaysia’s spotlight 18 years ago when he and Abdul Rahman Ahmad — now Permodalan Nasional Bhd president and CEO — were brought in to restructure the then debt-laden Malaysian Resources Corp in 2001.
Perhaps Shahril’s largest feat to date is how he successfully rebalanced the EPF’s portfolio of assets, enabling it to earn a lot more income than if he had not directed more of its money outside Malaysia into dividend-paying stocks as well as alternative investments such as real estate and infrastructure, which provide a steady stream of income without the EPF taking on excessive risks.
The portfolio rebalancing allowed the EPF to pay the highest dividend rate in 21 years last year of 6.9%, despite the amount required to pay 1% in dividends having doubled from RM3.43 billion when Shahril joined the EPF as deputy CEO of investments in November 2009 to RM7.02 billion in 2017. He was EPF CEO from April 2013 until Aug 3, when the announcement that he would report for duty at Khazanah on Aug 20, 2018, was made.
Now, Shahril will be expected to rebalance Khazanah’s portfolio — not the short-term selling of assets or shares to fill government coffers, but to turn Khazanah into a significant income generator for Malaysia, one that can sustainably supplement the federal government’s annual budget.
“There has been this misconception that we are selling because the government needs money. Actually, that is not quite true. We are actually doing some disposals in order to rationalise the portfolio. For instance, we are highly concentrated in terms of our Malaysian exposure. From a more balanced point of view, we really should have more global exposure,” Shahril explains.
“What we’re trying to do is to give more certainty to what we can deliver for government budgeting purposes. That commitment of about RM1 billion [in dividends] a year is that certainty that we’re giving them,” he says, adding that the bulk of proceeds from any divestment will stay in Khazanah for reinvestment to restructure its portfolio for longer-term gains.
“As we restructure the portfolio and the portfolio starts to provide and generate the kind of returns that we think it should over the long term, that would give us more capacity, at that point in time, to look at a higher dividend to the government.”
Indeed, the RM1 billion ($332.1 million) dividend the government expects from it for 2019 was what Khazanah paid the government in 2017, and lower than the RM1.5 billion Shahril said Khazanah paid in 2018. (It is understood that there is a discrepancy between the dividend Khazanah reports and what is stated under the government’s income records as the latter is prepared using cash accounting rather than accrual accounting.)
Singapore’s annual budget has been enjoying what it calls a net income return contribution since 2000, which covered nearly 20% of its government expenses last year. The NIRC includes 50% net investment returns from Temasek Holdings, GIC and the Monetary Authority of Singapore.
GIC and Temasek — with US$390 billion ($528.8 billion) and US$375 billion in assets under management (AUM) respectively — are the world’s eighth and ninth largest sovereign wealth funds, according to data from the Sovereign Wealth Fund Institute. GIC manages Singapore’s government reserves while Temasek is its investment arm. SWF ranks Khazanah at No 25 with US$38.7 billion.
According to Shahril, the biggest difference between Khazanah’s old and new mandate is “clarity on the long-term goal and vision”.
Going forward, Khazanah’s portfolio will have a 70:30 split, with 70% of its assets falling under the “commercial” basket that is used to fulfil its long-term asset growth target. The remaining 30% will be its “strategic” basket, which, he says, fulfils a strategic role in the country’s development and encompasses Telekom Malaysia, Tenaga Nasional, Malaysia Airports Holdings, Malaysia Airlines as well as Iskandar Investment.
That leaves Khazanah’s previous core holdings such as Axiata Group, CIMB Group Holdings, UEM Sunrise and its remaining 26% stake in IHH Healthcare in the “commercial” pool that it will monetise, if the right value exists. Citing its deal with Mitsui & Co on IHH, Shahril assures other investors that Khazanah will not make any move that is counterproductive to its own portfolio value.
He also says Khazanah cannot simply apply a blanket 15% to 25% cap to all its holdings “because a lot depends on the maturity of the asset as well as the opportunity that exists for us to do some monetisation”. It will, however, be actively assessing its portfolio going forward to reap the best possible benefits for Malaysia.
Given the current portfolio constraints, Khazanah is looking at achieving 3% returns above inflation over a rolling five-year period. This target will be relooked over time as the portfolio is reshaped — a journey that Shahril reckons could take seven to 10 years. Khazanah will also be managing costs more tightly. One example is that it did not need to pay investment banking fees for its IHH deal with Mitsui because the capability exists in-house.
Below are excerpts of the interview with Shahril.
The Edge Malaysia: How have your past six months at Khazanah been? What is your mandate and is it clear? Are your money-making skills going to be put to good use?
Shahril Ridza Ridzuan: The first thing that was quite apparent, that really needed to happen, I think, was to ensure that the new board and new government in place had a clear understanding of what Khazanah’s vision or mandate was going to be.
The Khazanah mandate is really two-fold. One, Khazanah essentially should function like a traditional sovereign wealth fund [does] for other countries, which is focused on the long-term growth of its assets on behalf of and for the benefit of all Malaysians over generations. So, that’s a much longer-term goal, which is about growth and about making sure that on a risk-adjusted basis, we reach the kind of targets and returns that we set for ourselves. But we also recognise the fact that Khazanah, over the years, has also played a developmental role, that is a strategic role for the government, and that continues as well. And that is focused really on our strategic side, about making the right investments and working with the government on regulations and the environment to make sure that beyond just a commercial objective, those strategic investments also fulfil a role in creating the right atmosphere and right infrastructure for Malaysia’s development and economic growth.
When we look at that, essentially we think of Khazanah as having two pools of assets. One pool is focused on the long-term asset growth target. Internally, we call it our commercial fund. The other pool of assets — which focuses on Khazanah’s strategic role of helping develop Malaysia — is our strategic fund. The split between the two pools is roughly 70:30 — 70% is focused on long-term asset growth for Malaysians while 30% is focused on the strategic role that we reinforce.
What is the biggest difference between the old and new mandates?
It is clarity on Khazanah’s long-term goal and vision. The previous management was very focused on GLC (government-linked company) transformation and Khazanah did a fantastic job of raising the standard of the GLCs it was invested in and championing the regionalisation of Malaysian companies — with a lot of success. And if we look at the last 12 years or so, before I stepped in, it had seen a lot of success in terms of achieving those goals but really, as the organisation matures, you have to move forward because a lot of that work is done. We can’t keep focusing on that work; from the point of view of effort versus returns, most of it has been achieved but you will be on a path of diminishing returns if you keep focusing on the same strategy. I think that’s basically something that Khazanah itself recognises. To be fair, even before I stepped in, they’d already started thinking about taking all these steps, which is why it was quite easy to start the transition. Because really, it is about articulating where we go as an organisation.
Khazanah’s pool of assets is fairly limited, at RM100-plus billion, and there is speculation that it will sell a lot of those assets and give the money back to the government. Will Khazanah be given any leeway in keeping some of the funds from monetising its assets and investing that for longer-term growth and returns? Singapore, for instance, has NIRC (net investment return contribution), which contributes about 20% to the government’s budget…
One of the things we’ve worked on under the strategy adopted by the board is that when we look at Khazanah’s pool of assets and at our own requirements to restructure and balance the portfolio, we have fairly clear guidelines internally that for every divestment we make, a certain portion goes towards debt repayment, a certain portion towards reinvestment and from a government point of view, we now have a clear dividend policy. Last year, we committed about RM1 billion-plus to the government as dividends and that is to be an ongoing and steady dividend policy.
RM1 billion (dividend) every year?
Roughly RM1 billion a year. If you look at the asset rationalisation that we’ve been doing, a lot of it is towards the fact that, as we become a more mature commercial fund, the proceeds from the divestment are used for restructuring the portfolio.
There is this misconception that we’re selling because the government needs money. That is not quite true. We are actually doing some disposals to rationalise the portfolio. If you look at our portfolio, quite clearly, there is some imbalance. For instance, we are highly concentrated in terms of our Malaysian exposure. From a more balanced point of view, we really should have more global exposure.
Similarly, [with regards to] our concentration in certain companies, we felt basically that the time has come for us to actually look at diversifying our exposure. For instance, we did that IHH Healthcare transaction last year. That is a template for how we basically view the portfolio. When the opportunity arises for us to rationalise or dispose of certain assets, we will only do so if the value is right and the proceeds are used to reinvest and rebalance the portfolio.
I think people tend to misunderstand because we (Khazanah) are owned by the government. They seem to think that every time we sell an asset, the proceeds go straight to the government. The proceeds actually stay in Khazanah for the purpose of reinvestment because its longer-term goal is to grow that pool of assets for the benefit of Malaysia as a whole.
So, the dividend portion... yes, we have committed to a dividend policy to the government and that is reflected in the government’s budget itself where RM1 billion or so is anticipated from Khazanah on a yearly basis.
What we’re trying to do is to give more certainty to what we can deliver for government budgeting purposes. That commitment of about RM1 billion a year is that certainty that we’re giving the government.
So, there is no rush to sell assets?
Not at all. There will come opportunities where it makes sense for us to consider a sale. IHH Healthcare was obviously one of those, where basically we’ve done a lot of work in terms of building up that regional champion and our partner Mitsui is very keen to play a bigger role in the company and we are quite happy to let it do so. So, we remain a partner in the company as well and we will keep working with Mitsui to grow the company.
Will Khazanah be initiating more deals [to create/unlock value], such as merging companies or exercises like the airport REIT [which the government announced when tabling Budget 2019]?
Depending on the entity and the market it is operating in, there are different opportunities. In some cases, a merger may be the best solution in terms of creating more value for us. In others, it may just be an outright sale. In yet others, it may purely be a focus on organic growth, or if we think there are opportunities for us to put more money into the business for it to invest or to grow organically. It is very hard to over-generalise this. You would have seen many different forms in the market, through which value creation can take place.
Are you going to merge Axiata with other companies — Telekom or perhaps Astro? Is that being considered or does its current [low] valuation make it very difficult?
When we talk about mergers, you also have to be very careful about your own market position. I’m not talking about any company in particular but you have to also look at the fact that mergers sometimes may not be the solution because whenever you do a merger of two entities, you always have the problem of culture and integration. And that’s why from my point of view, you should always look at merger as a solution very, very carefully. Sometimes, those benefits, while they look good on paper, may actually be very difficult to achieve. A lot of the time when you look at a merger as a value creator, you are looking at cost synergies. Invariably, when you look at past mergers, those cost synergies become difficult to achieve because of inherent legacies or inherent problems, so you have to be very careful about pushing mergers as the main form of value creation.
This story was first published in The Edge Malaysia. Cindy Yeap is a senior editor with The Edge Malaysia.
This story appears in The Edge Singapore (Issue 870, week of Feb 25) which is on sale now. Subscribe here
