This article first appeared in The Edge Malaysia Weekly on March 8, 2021 - March 14, 2021

JUST over two years from implementing its refreshed mandate that pursues twin goals of supporting the country’s strategic investment goals while having a commercial basket of assets that can generate sustainable returns for the country, Khazanah Nasional Bhd managing director Datuk Shahril Ridza Ridzuan says the sovereign wealth fund is already tasting the early fruits of its “reset” in 2018.

The added flexibility and clarity in direction gained from splitting its portfolio and nudging each towards a broader longer-term goal, he says, has already allowed Khazanah to seize opportunities that arose amid Covid-19 — proving that the strategy it embarked on under its refreshed mandate is the right way to go.

“We are really still in the early stages of the journey [to rebalance the portfolio] and we already see some pretty good results. The resilience of the portfolio through Covid has shown that basically this is the right track to go. We’ve shown that even with only two years of work, it is already good enough for us to get through Covid as a whole while still delivering profits and absorbing the impairments we have had to take on for aviation and tourism,” Shahril tells The Edge.

In fact, the volatility in global markets caused by Covid-19 early last year allowed Khazanah to accelerate some of its capital redeployment in certain mature markets that it was eyeing but where prices were high pre-pandemic.

“When Covid caused markets to slide towards the end of the first quarter, we were able to come in and benefitted from the rise of the markets when prices rose again towards the end of the year. In that sense, Covid gave us the opportunity to rebalance a bit quicker but, of course, the bad side is that there has been very direct impact on some of the key holdings we have in Malaysia and those will become a liquidity issue for us until we are out of this crisis [but] ultimately and more importantly, it has shown the importance of having a resilient and diversified portfolio.”

Khazanah made more money from global markets than it did from Malaysia where some of its key holdings in airlines as well as tourism and hospitality were severely hit by Covid-19.

There is a stark difference in terms of returns. “Public Markets: Global” saw 26.2% returns in 2020 and 27.5% in 2019, outperforming all other asset classes that largely saw single-digit declines — including negative 7.8% returns from its holdings in “Public Markets: Malaysia”, where declines in counters like Malaysia Airports Holdings Bhd and Tenaga Nasional Bhd exceeded gains enjoyed by Telekom Malaysia Bhd.

The gains were achieved as Khazanah’s asset allocation in “Public Markets: Global” under its commercial portfolio — a key focus area in terms of building its capacity and asset base — increased from 12% (end-2018) to 17% of commercial assets (end-2020) while holdings in “Public Markets: Malaysia” reduced from 58% (end-2018) to 50% of commercial assets as at end-2020 “partly due to divestments as well as market value changes”. That shifts just over RM3 billion more into global public assets, while seeing about RM16 billion reduction in “Public Markets: Malaysia”, our back-of-the-envelope calculations show.

Of the RM13.2 billion divestments that it made in 2020, about RM10 billion was reinvested — RM5.6 billion in its commercial fund “particularly in key global markets that [it] wanted to enter and capture value on” and RM4.2 billion in Malaysia via its strategic fund, which includes its investments into Malaysia Airlines.

Khazanah’s cash holdings, which stood at RM6.7 billion (7% of commercial fund) as at end-2020 compared with RM5.6 billion (1% of commercial fund) as at end-2018, will be invested this year to further improve risk-adjusted returns. Khazanah’s debt also reduced from RM55.2 billion (end-2018) to RM43.1 billion as at end-2020, putting its realisable asset value (RAV) cover “still at about three times” despite the fall in market value of its portfolio, Shahril said when presenting Khazanah’s 2020 Annual Review last Thursday (March 4) afternoon.

Khazanah was also able to raise its dividend to the government to RM2 billion, double the initially committed amount, even though profit from operation fell to RM2.9 billion in 2020 from RM7.4 billion in 2019. The decline was on the back of significantly lower divestment gains (RM2.7 billion in 2020 versus RM9.9 billion in 2019) although it received more dividends from its investee companies (RM5.2 billion in 2020 versus RM3.8 billion in 2019). It also had to take higher impairment of RM6 billion in 2020 (RM4.9 billion in 2019), mostly due to Malaysia Airlines as well as Themed Attractions Resorts & Hotels, whose portfolio includes Legoland Malaysia Resort, Desaru Coast resort and The Datai Langkawi.

For 2021, the amount of dividend pencilled in by the government from Khazanah is also RM1 billion. Whether Khazanah will also pay the government more dividend this year and in future “would depend on needs as well as our capability to do so. We’re not able to project that at this point of time”.

This year, Shahril says Khazanah will “keep shifting [its] portfolio” to be able to generate better risk-adjusted returns on a consistent basis. “We know basically that the strategies and the transformation that we put together in 2018 is working and basically has helped to already create a portfolio that is properly diversified, able to withstand the Covid  shock and also even take advantage of opportunities created by Covid, in allowing us to reinvest in the markets that we wanted to reinvest in and building a portfolio that will be focused on delivering that value for the long run.”

Khazanah, Shahril says, is also actively discussing with the government to decide on new strategic investments for Malaysia, including identifying new sectors to focus on to spur economic growth and boost the country’s competitiveness.

“We should be investing more domestically in the right assets and the right sectors — the important thing here, especially when you think about investments strategically in Malaysia as a tool to actually spur economic growth. If you are only buying and trading existing assets, I’m not sure whether that actually adds any more growth to the market apart from further inflating asset prices as you create demand for existing assets … That’s where we think about capital recycling, how we think about recycling capital from older assets into newer assets so that these new assets can create new economic growth potential and potentially create even new jobs for Malaysians,” Shahril says.

“There are a number of tracks we are working on at the moment. What’s important is to try and find the right investments which boost what the country is trying to do and, at the same time, also be mindful that if it is an area where you already have private funding, there is no real reason for someone like Khazanah to be there. We should really be there in respect of a strategic investment when there is a long gestation period, where sometimes you need a strategic investor to partner with a private investor to share the risk to start a business or a new sector. That’s where we are looking at. Investments in areas which are already well-funded where you have a clear commercial outcome will be under our commercial fund, not our strategic fund,” he explains.

“We are exploring other new ideas with the government but it is premature for us to make any announcement at this point in time. We are more likely to do so as these things crystallise and we start to do deals with either the government or private sector in terms of new investments that we are going to do in Malaysia.”

Whether Shahril will be speaking more on these new areas of investment would depend on whether his three-year contract, which will end in about five months in early August, is renewed.

He and his team are not allowing talk of potential management changes hinder the task at hand: “It shouldn’t affect us at all, to be honest. If you look at the strategy we are doing, it is very institutionalised, it is very portfolio based, and certainly a real institution doesn’t need to worry about things like that because your partners deal with you because of who you are as an institution, not any one individual. If it is too individual focused, there is also high risk in terms of the continuity of strategy or the institution.”

“We will sort it out in August when the time comes,” Shahril replies in his usual straightforward, matter-of-fact manner when asked on his contract at the virtual briefing.

“If you want to keep working forever, work never ends but I think what is more important is that Khazanah is an institution and we have to respect that. Certainly, like all institutions that I have been involved in before, including EPF, the job is to always make sure that the institution outlives whoever is running it. That’s the most important thing [alongside improving] all the systems and processes so that the institutions does well irrespective of what happens. You’ve seen that with the EPF — it is an institution that runs well and to a certain extent, can survive changes in leadership. Khazanah should not be any different.”

There is a chance, however, of him delivering Khazanah’s 2021 annual review this time next year. It is understood that renewing his contract remains an option at the current juncture, although there had been persistent talk of a replacement being sought — the case for all heads of government-linked institutions at one point.

It is worth noting that the change in government in March last year did not derail Khazanah’s reset because the benefits are clear. “The [current] government understands where we need to do the work and why that work is important. If you think about the purpose of Khazanah, it is really about delivering sustainable value for Malaysians.”

Moving forward, Environmental, Social and Governance (ESG) considerations will be embedded into its investment activities as well as operations. “We are taking small steps at the moment but hopefully, as years go by, this becomes more and more our commitment to future generations and the country’s own commitment to global goals — the Paris climate agreement, Sustainable Development Goals — essentially what we need to do to respond to both the climate crisis and the demand from all of us to have more responsibility in terms of business practices.”

Khazanah will be realistic in its approach on its journey to incorporate the ESG theme, taking into consideration any domestic constraints faced by its investee companies that may not exist in other countries.

Compared to when he first entered Khazanah, Shahril said the institution and its people are benefitting from clarity in direction of a clear mandate.

“Ultimately, people have to believe that Khazanah exists for the benefit of all Malaysians. It is the fundamental goal of a fund like Khazanah to achieve real growth in assets to the benefit of Malaysians via the government and via the dividends we pay to the government. Over the long term, we hope that the diversification and the growth in the portfolio would mean basically that Khazanah becomes an increasingly important contributor to the diversification of our government’s clout — similar to the role played by other similar wealth funds in other parts of the world, which increases over time as you build up your assets to be a meaningful contributor to government and country. That’s got to be the ultimate goal for [an institution] like Khazanah.”

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.