Malaysia’s Khazanah: Not Just a SWF But a “Nation Building Institution”

Khazanah Nasional Berhad, the strategic investment fund of the Government of Malaysia, stands out among global sovereign wealth funds (SWF) as a leading example of how such a fund can be an engine of economic development for the country — “a national building institution,” as it likes to refer to itself. Khazanah — literally meaning treasure — also has the distinction of being actively involved in Islamic finance, widely held as the fastest growing segment in global finance. To learn more about Khazanah, CFA Institute talked to Tan Sri Dato’ Azman bin Hj. Mokhtar, CFA, who is the managing director of Khazanah since 2004 and a member of CFA Institute

CFA Institute: Tell us about Khazanah, its purpose and a little bit of its history?

Tan Sri Azman Mokhtar, CFA: Khazanah commenced operations in 1994; at that time its mandate was primarily as passive custodian of the government’s shares in national agencies, which had been privatized. In 2004, the government ascribed a new mandate for Khazanah, namely to be an active shareholder to turn around the lagging government-linked companies (GLCs) and to invest in new sectors and geographies to support the economic development of the nation. Khazanah’s management has consistently adhered to this over the last nine years, the numbers rather tells the story that alhamdulillah [praise to God] we have managed to treble the net worth value of the portfolio over the nine years to RM 100bn. In terms of the GLCs per se, Khazanah is the secretariat to the Putrajaya Committee on GLC High Performance that drives the GLC Transformation Program in the country, and since the program started, earnings of the G20 group of companies grew by 12%pa to a record aggregate of RM25.8bn in 2012. We haven’t been only looking at existing companies, though, and have rolled out 95 new investments worth over RM51bn, in that same period of time. These discretionary new investments have generally provided a higher return than our legacy portfolio.

Compared to other SWFs, are there any unique characteristics of Khazanah?

Given its developmental mandate, we prefer to consider Khazanah as an SDF [sovereign development fund], with every potential investment that comes our way being evaluated on both its financial and strategic merits. Whilst a financial component is a given due to our core business as an investment house, the strategic benefits of each investment is also paramount to us. We look to make investments that can play a role in catalyzing and stimulating the nation’s growth, especially in new economy areas. One example close to our hearts is Iskandar Malaysia, [the new southern development corridor in Johor that has been identified as one of the catalyst developments to spur the growth of the Malaysian economy] on which we have expended much financial and human resources since the master planning stages in 2005, and is now starting to generate interest from investors everywhere. Not to be complacent, though, we know there is still much to be done and proven in Iskandar Malayaia. Back to our nation-building and developmental mandate, even foreign investments that we make are part of a carefully shaped regionalization strategy to optimize returns to Malaysia.

Tell us about Khazanah’s portfolio, its size, significant sectors, geographic locations, and performance?

Currently Khazanah has approximately USD45bn assets under management, but after accounting for debt and transfers to shareholders, the net worth adjusted (NWA), which is a measure of value created, stands at USD30bn. This is treble our position when the reforms started in 2004, at which point the NWA had stood at USD10bn, giving a long-term return of 13%pa. We are satisfied with this rate of return, especially given the concurrent strategic objectives on the portfolio.

As for portfolio composition, Khazanah is fairly diversified across all sectors, closely approximating the weights between financials, utilities, telcos, and infrastructure as representative of the private sector in any developing economy. However, we are very careful not to crowd out the private sector players. On the contrary, we have a mandate to “crowd-in” and catalyze some parts of the economy, hence we tend to find our natural home in those areas where there is a strategic benefit, perhaps in providing an essential service or key infrastructure, and where there are high barriers to entry for the private sector, inter alia very long investment horizons or large balance sheet requirements.

We prefer to invest primarily in Malaysia, where we can extract economic as well as financial benefits, and also supporting the development agenda in our ASEAN neighbors. A small part of our portfolio is in China, India, and Turkey, to ride on the demographic and economic trends in those regions. Having said that, approximately 35% of our portfolio is exposed to overseas markets, and the bulk of this of through the foreign operations of our investee companies, such as Axiata, CIMB, and IHH. Indeed, we believe that the ongoing regionalization of Malaysian companies is a critical factor in the nation’s development aspirations.

What governance arrangements are used to safeguard the independence of Khazanah’s investment decision making?

In Khazanah we have instituted a framework for investment decision making — with all investments and divestments having to go through several “decision gates,” including the executive committee and a nine-member board, which is composed of a mix of senior government representatives and renowned private sector personalities. Thus every ringgit we have invested to date was approved by our board — certainly tedious, but it ensures the robustness of the investment decision. In terms of oversight, we are audited annually by one of the Big Four, reporting directly to the board’s Audit and Risk Committee, as well as subject to review by the government’s Auditor-General Department and on occassion, the Parliamentary Public Accounts Committee. We appreciate very much these checks-and-balances as both necessary and as a means to strengthen us as guardians of a public trust.

How long is Khazanah’s investment time horizon? Does a long-term horizon create any challenges of liquidity?

Khazanah’s portfolio is a balance between the medium and long-term horizons, which reflects both a discipline to harvest our investments for financial return, as well as a consequence of our nature as a strategic investor. As mentioned above, there are parts of the economy that require patient capital, and this is where we find our niche, together with like-minded partners, with whom we collaborate and co-invest. Liquidity then has to be managed by active ALM, including inter alia matching the tenure of our fundraising activities as closely as possible to our investment activities. On this point, we are blessed that Malaysia has a vibrant debt capital market that is at the forefront of Islamic finance.

In what way does Khazanah participate in Islamic finance?

Multiple ways! Khazanah is a regular issuer of sukuks and exchangeable sukuks, which have collected many awards due to the innovativeness and ground-breaking nature of some of these. Furthermore, we invest in Islamic securities, we invest in Islamic financial institutions in Malaysia and abroad, and we invest in human capital to push the boundaries Islamic finance. On the propagation and development side, we encourage our portfolio companies to use Islamic finance and Islamic structures where possible when raising capital.

However, I believe that Islamic finance is only half the story, covering only the liabilities side of the balance sheet. We also need to think about Islamic investments and assets, starting from principles of ethical investments (“do no harm”) and leading up into the latest ideas around impact investing (“do some good”) — only then can we claim to have a properly balanced Islamic economy.

What was the single most important lesson Khazanah drew from the financial crisis that started in 2008?

Our strategic stance during that period underlines a key lesson: “Defense first, then offense”. While this may sound like a football coach’s tactics, for Khazanah, this means that we “armor-plated” our balance sheet, we made tactical moves to term out our liabilities, and we spent a lot of effort to ensure that our portfolio companies were similarly resilient. Then for the offense plays, we made sure we had cash and funding lines to be able to take advantage of the depressed asset prices at that time.

Finally, on a personal note, what role has CFA charter played in your career as an investment professional?

Let me pick on one aspect of the CFA charter: ethics and integrity. This is a value that transcends all faiths and cultures, and is a foundation for the positive development of mankind and society. Its both a guidepost as well as a constant ideal to continually aspire towards at all levels — individual, institutional, national, and beyond.

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