A fresh start

New mandate calls for a clean up of investments

KHAZANAH Nasional Bhd, the trustee of Malaysia’s “national treasures” from which the name derives, has presented its financial report card for 2018. The numbers were, at first glance, not positive. It reported a net loss of RM6.5 billion, its first loss since 2005. This newspaper, in reporting the story, explained that the loss was in accounting terms, and had no immediate impact on Khazanah’s cash balance.

The sovereign wealth fund attributed the loss to a combination of factors. First, the companies it invested in paid lower dividend than before, down 50 per cent to RM1.4 billion. Khazanah also saw a big drop in the value of its assets, and set aside RM7.3 billion impairments against RM2.3 billion in 2017. The third reason was that Khazanah did not sell as many shares or assets as it did before.

Khazanah has investments in over 100 companies across more than 20 countries. Lest we forget, 2018 was the worst year for global equity markets in a decade, due to geopolitical tensions and pessimistic growth outlook. Locally, overall corporate earnings fell more than 20 per cent last year. These led to lower dividends and asset values. Selling shares for capital gains in such a market would have also been a bad investment move.

Khazanah has been around for close to 25 years, and its investment strategy has always been strategic and for long-term returns. It is normal for market fluctuations to occur over long periods of time, and Khazanah’s portfolio is mainly equity-based. Since 2004, the value of Khazanah’s assets have fallen four times before last year — in 2005, 2008, 2011 and 2016.

This is not to say that everything is rosy. The government must decide what to do with Malaysia Airlines, which was responsible for about half of Khazanah’s total impairments. The national carrier’s restructuring has gone through numerous permutations since the 2002 ‘unbundling’ advised by Binafikir Sdn Bhd, including a five-year turnaround programme initiated in 2014. MAS failed to meet its target to break even last year.

The government last year reorganised Khazanah, changed its board of directors and management, and introduced refreshed mandate and objectives. Tuesday’s annual report shows that the new leadership, having reviewed all investments in the fund’s portfolio, decided to bite the bullet and account for all liabilities and losses, once and for all, and then start afresh.

This strategy is called “kitchen-sinking”, to release all bad news at the same time rather than creating a drip-drip effect over a period of time. The opposite would be the "dead cat" strategy, meant to distract people from something that is garnering a lot of attention. When you place a dead cat on the table, you make people look in a different direction.

Speaking of which, to imply that Khazanah’s loss in 2018 after years of profitability is the fault of new management is misleading and ignores the facts and circumstances described above. That would be like buying a 10-year-old second-hand car without checking under hood, simply because the seller says the car has never broken down.

Lest we forget, 2018 was the worst year for global equity markets in a decade.