This article first appeared in The Edge Malaysia Weekly on November 29, 2021 - December 5, 2021

IN his first interview since being appointed to the top job at Permodalan Nasional Bhd (PNB), Ahmad Zulqarnain Onn comes across as calm and collected. As the interview progresses, it becomes apparent why many speak highly of him and why he was picked to helm the state-controlled fund management company.

Here are excerpts from the interview.

The Edge: How has it been at the helm of PNB?

Ahmad Zulqarnain Onn: The sense of purpose here is very strong and the duty of care and loyalty that the people have towards the mission of PNB is also very strong. This really stems from the work that the previous leaders did in setting the foundations 40-plus years ago and, in particular, the DNA and the tone set by the first chairman, the late Tun Ismail Mohamed Ali. He set the tone, he was a stickler for process, discipline, cost, et cetera. And to this day, everyone in PNB carries that DNA with them. For all of us who are occupying the temporary chair as leaders of the institutions, we continue this tradition, that the institution always comes first before the individual.

What’s next for PNB?

The next phase is about how we democratise access to good financial advice and planning for ordinary Malaysians at a low hurdle or entry level. Every individual is deserving of the right mix of assets and portfolio. You think about what your [investing] goals are. With those goals, you have a time horizon and amount.

Another factor is risk, which is about tolerance for variability and loss, and that can be determined easily and scientifically for an individual. Put those together into a portfolio that makes sense for you — that has the best chance of achieving the goals and the risks that you’re willing to take.

So, that’s the challenge that we’ve put on ourselves — how do we democratise good financial advice and planning so [that there is] the right portfolio at an individual level for all Malaysians? That’s building on what we have today, over 12 million Malaysians who invest through us. That is two in five Malaysians today.

Does PNB need to balance its returns to unitholders and support the national interest?

PNB’s mission is to generate wealth for our unitholders. There’s a second mission, which is about equity ownership, and that’s why PNB was set up 40 years ago, and we stay true to those.

But we are not a strategic fund. We don’t do strategic investments, for example for developmental purposes. We are purely a commercial institution. The simplest way to think about it is that the people have an account with us, so it is not the government’s money, it is the people’s money, and we have the fiduciary responsibility to manage that in the best way possible.

Are funds like yours, with exposure to foreign investments, affected by the withdrawal of tax exemption on foreign income?

Not for us. Our funds are unit trust funds and therefore, they are exempted.

In 2019 and 2020, your income distribution was higher than net income.

If you look at ASB’s (Amanah Saham Bumiputera) returns, there are two sources — there is the income from the fund itself and there is also a bonus amount. The bonus amount comes from the proprietary fund. That fund has been built up over the past 40 years, which is PNB itself, and it is separate from the unit trust funds.

This fund has grown from RM200 million at inception to a gross asset value of RM52 billion this year. Last year, it was RM48 billion. This fund is the shareholders’ funds, and every year, we take a small percentage of the returns from this fund to pay the bonus for ASB.

So, it’s not like you’re giving out more than you earn?

No, we won’t be able to do that as we are regulated by the Securities Commission Malaysia.

Merdeka 118 … how’s it coming along?

It’s coming along well. When we do open, we are fairly confident of hitting 70-plus per cent occupancy for the office building. There’s a retail mall that will open in 2023.

You don’t see any difficulty filling it up?

The project itself is a special and attractive project for many people to come and visit. It is the second-tallest building in the world, and we are building a proper observation deck at the top of the building. It will have a spectacular view of the KL skyline. You will go in a glass elevator all the way up to the deck, there will be glass floors on the observation deck, and you will be able to walk out [of] the building as well.

If you could turn back the clock and you were CEO of PNB, would you still build it?

The building is going to be a great project. It will be, if not No 1, high up there in terms of tourist attractions for KL. It will add to the fabric of the city. It really is going to be a fabulous public space.

Your investment in Sapura Energy hasn’t gone too well.

Sapura has had challenges.

What went wrong at Sapura Energy?

Oil prices collapsed, which resulted in a capital-raising [exercise] in 2018. As a result, PNB increased its shareholding to 40%. What we now see is challenges in the contracts signed during that period. Those contracts have resulted in losses by the company. It was also exacerbated by the much higher increase in costs resulting from Covid-19.

Covid hit in March 2020 and that negatively impacted crude oil prices, which fell precipitously as the world locked down, [and also caused] a material increase in operating costs from the additional testing, quarantine and so on. But [Sapura Energy’s] management is solid, very clear on what they need to do, and it is a turnaround situation that they are working on right now.

The market rumour we heard was that PNB went in to ensure Malayan Banking Bhd (Maybank) would get back whatever it is owed. Maybank’s exposure to Sapura is quite high, if we are not mistaken.

Our investment decisions will be about what we believe is in the best interests of our unitholders. If you rewind back to 2017, 2018, that was the time when the oil and gas industry was actually recovering.

When oil prices fell sharply [before that], there was stress in the industry and in Sapura, resulting in the rights issue. At that point in time, oil prices were on the rise again and the belief then was that with the additional capital, it would be able to ride [the recovery] and you would make returns on the new capital you put in. But that was not to be, for the reasons I explained, which made it worse.

Is Sapura Energy CEO and executive director Datuk Mohd Anuar Taib a PNB appointee?

No, Datuk Anuar is a board appointee.

In future, how will you ensure your investments will not face these sorts of difficulties?

The key pillar is diversification. That’s the whole point. You want less concentrated bets in the portfolio, and you want the mathematics of diversification to work because in any time period — a year or longer — there are always going to be assets that are going up [in value] while others are weaker. That’s just the way the markets work.

Achieving the right strategic asset allocation is paramount for us. Whatever we do at this point is to make sure we are moving the portfolio towards asset allocation that makes sense — we call it an all-weather portfolio, where during ups and downs, things are going to cancel out each other. But generally, there’s positive returns on assets, which then deliver dividends to our unitholders.

In Sapura Energy’s annual report, there is a payment of RM10 million for the use of the Sapura name …

I think the board is very clear about what is necessary and what is not necessary, so I’m going to leave it to the board to make those decisions in the best interests of shareholders.

Your investments abroad increased quite a bit in 2020.

Last year, we finished at 12%. We will likely end the year 4% higher, so our internationalisation is a very paced and gradual one. We are not going to rush into it because it is quite a big portfolio and we want to make sure that we are managing the risks and we are comfortable with our decisions.

But that is not to say we are not investing in Malaysia. We continue to anchor most of the large IPOs in Malaysia. And we continue to invest in real estate in Malaysia as well.

How do you see this year’s performance based on the last three quarters?

When you look at market returns over the last rolling 12 months, it’s slightly positive. But when you add on dividends as a component of returns, it is actually okay. The domestic portfolio is very much driven by dividends at this point in time, as opposed to capital gains.

What about the perception that the Malaysian market is not sexy? Basically, there are not many high-growth stocks on the local bourse.

We look for that growth. We see that in semiconductor companies in Malaysia. We had two successful IPOs of fast-growing companies — Mr DIY and CTOS — and we are expecting one or two more in the market next year. We wish there were more, of course, but that’s not to say there are none. And when there are, we will continue to deploy capital into Malaysian companies.

Moving forward, what will be your major challenges? The economic recovery is not smooth. And as you move into 2022, there are two views about inflation.

I’m fairly optimistic that the world is going to come out of the pandemic in 2022. When we look at [PNB’s wholly-owned road infrastructure development entity] Prolintas’ traffic data, we are back to 90% to 95% already. We were expecting a full recovery in 2024, but by 4Q2021, we are almost there.

There is increased risk that interest rates and the yield curve could move up faster than anticipated. On the flip side, inflation is good for equities. But as somebody wise said to me, inflation is like toothpaste — once it’s out of the tube, it’s hard to put back in. So that’s something to think about.

How are you going to position against the inflation risk you mentioned?

A few things we noticed in the markets today — the S&P 500 is at 50-plus days of all-time highs this year. And valuations on certain types of companies are getting quite stretched. It is something we take into account.

As markets become stronger, we also take into account which companies we believe are still going to experience growth irrespective of the business cycle, companies that are piggybacking on mega trends, also companies that are going to benefit from the reopening of the economy.

It is very much a bottom-up approach to stock selection for us, but also layering from a macro standpoint, which are the industries and the factors that are going to benefit at this point of the market cycle.

Can we ask your thoughts on the stamp duty changes?

I guess it introduces a little bit more friction into the local equity market with the release of the cap on the stamp duty. But in the grand scheme of things, it doesn’t really change things much for us.

What about the government’s recommendations on bumiputera equity requirements?

I think PNB is a great example of a policy that has worked. What does PNB do? PNB has mobilised bumiputera savings and managed that in a professional way, which has resulted in equity ownership. So today, PNB owns about 9% to 10% of all companies on Bursa Malaysia — a pretty high level. So, we should continue and enhance that because it is a policy that has worked.

Is there any political interference in PNB’s management?

No. None.

What are your thoughts on ESG?

How investors perceive a company’s commitment to ESG is going to drive the valuation of that company, in addition to its earnings and cash flow. It’s not just the earnings and cash flow any more. It has become yet another variable when we think about investments.

We thought it would be challenging because you have Sime Darby Plantation, UMW Holdings and Sime Darby in auto, and Sapura Energy and Velesto Energy in O&G.

Once you break it down, you start to understand where the sources of these ESG issues are. Then, we tackle it by engaging with the companies one by one.

What about new capital, new investments … Does that mean you may avoid companies or investments with high ESG risk?

Whatever we do in aggregate will reduce the emissions of the portfolio until the point it becomes net zero in 28 years’ time. It’s not to say we will not touch everything [that emits].

Does that mean your existing portfolio will change in a big way in the medium term?

It remains to be seen. But I think the portfolio necessarily has to change, as economies change and mega trends take effect as well.

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