This article first appeared in The Edge Malaysia Weekly on August 28, 2017 - September 3, 2017

QUESTIONS over whether the high dividends at the Permodalan Nasional Bhd (PNB)-managed Amanah Saham Nasional (ASN) and Amanah Saham Bumiputera (ASB) are real and sustainable have been bandied about for some time. After all, even when the local bellwether FBM KLCI fell 39% year on year in 2008 — and the dividend payout by the Employees Provident Fund (EPF) dropped to 4.5% — ASB’s dividend remained at an envied 7%.

That is 378 basis points above the so-called risk-free rate or 10-year Malaysian Government Securities of 3.22%. The EPF, on the other hand, only managed to beat the risk-free-rate by 128 basis points, but due to the spike in headline inflation, real dividend yield from the EPF was a rare negative 0.94% that year.

If one includes the 1.75% bonus units, total dividend and bonus for ASB was 8.75% in 2008 — almost double the EPF’s payout. Even when the FBM KLCI ended lower y-o-y in 2014, 2015 and 2016, ASB’s dividend was 7.5%, 7.25% and 6.75%, compared with 6.75%, 6.4% and 5.7% at the EPF.

PNB chairman Tan Sri Abdul Wahid Omar is well aware of the scepticism and earnestly offers simple logic instead of going on the defensive.

“It is a very simple model in the sense that during good times, you don’t pay all the returns. So, we keep some reserves. And during tough times like the past three years, we’ve been realising returns from the unrealised gains. No magic. It’s a very basic model,” he explains.

What about speculation that PNB is raising new funds to be distributed as dividends?

“There is no such thing. This is not a Ponzi scheme. As I said, in good times, we create reserves and we don’t distribute all the gains in any particular year. So, we will have those reserves to buffer the payment of dividends during the tough years,” Abdul Wahid says.

Just how much reserves does it have in its coffers?

“Alhamdulillah, 2017 has been a good year. Of course, we will have to build up the reserves,” he tells The Edge.

Although PNB is government-backed and it manages people’s money, Abdul Wahid notes that it is different from the EPF and Retirement Fund Inc (KWAP) in that PNB is not a pension fund. It is for this reason that PNB has 69% of its funds invested in equities and only 5% in fixed income. It is holding 20% in cash and money market instruments. (Equities are deemed higher risk compared with fixed income but usually command higher returns versus bonds or fixed income instruments.)

The EPF, on the other hand, has 48.58% of its funds invested in fixed income and 42.33% in equities as at end-2016. Similarly, KWAP has about 40% in equities versus 46% in fixed-income instruments such as Malaysian Government Securities.

“There’s no money from elsewhere. We have to generate returns from our strategic asset allocation. In the case of the pension funds, for example, whether it is the EPF or KWAP, naturally they will have a lower proportion of equities and more fixed income. So, for us to be able to generate that kind of dividends, naturally we will need to have a more sizeable proportion in public equities,” Abdul Wahid says.

According to him, PNB has had 55% to 70% of its assets invested in equities the past 10 years and is now looking to reduce its 20% cash holding and invest more in private investments, real estate and fixed income. For the record, PNB has RM266.5 billion under management as at end-2016 and is looking to grow that to RM350 billion by 2022. As at end-2016, the EPF’s total investment assets stood at RM731.1 billion while KWAP’s asset base amounted to RM125 billion (RM133 billion as at end-May 2017).

Abdul Wahid downplays PNB’s capability to maintain dividends above 7% in perpetuity, highlighting tougher investment conditions, its growing fund size and the lack of low-hanging fruits in a more mature environment.

“If you look at those days when the fund size was relatively small and we benefitted from mega IPOs (Tenaga Nasional Bhd, Telekom Malaysia Bhd) ... there were huge gains that could be distributed to a smaller number of unit holders. So, it was possible to have those double-digit returns.

“[But] times have changed. Economic growth is no longer the 7% to 9% that we experienced in the past. Now it’s more like 5% on average. Interest rates are now much lower. In terms of the IPOs, companies that go for IPOs are now valued closer to the actual market value. So, there’s no significant upside within a matter of days of listing. Those days are gone. Therefore, all investors, whether they are investors in our funds or in other funds, they will have to expect lower returns compared with that in the 1990s and 2000s,” says Abdul Wahid.

In spite of tougher conditions, PNB continues to aspire to have higher returns than those of funds such as the EPF and Lembaga Tabung Haji, he says. Last year, PNB paid out 6.75 sen per unit or 6.75%, plus a 0.25-sen bonus — higher than the 5.7% and 4.25% declared by the EPF and Tabung Haji respectively.

While those with more money to save or invest would ultimately stand to benefit more from PNB, Abdul Wahid says great importance is placed on inculcating the savings habit among those who may not have as much to put in the market.

“The idea is that if I have only RM1,000 or RM10,000, for me to be able to invest directly in the stock market would be challenging because I may not have the necessary expertise and so on.

“So, by PNB being there, we are able to collect the RM1,000 or RM10,000 and pool that with the funds  from the nine million unit holders to get the scale of RM266 billion. With that chunky size, we will be able to invest more meaningfully ... in some strategic stakes where we can influence the board and the management to have greater impact on the returns and the economy. [Salary deductions in favour of PNB funds are] actually a form of systematic savings that people can do,” says Abdul Wahid, who came from humble beginnings and is the ninth of 11 children.

Whether or not sceptics are convinced, Abdul Wahid says PNB has nothing to hide.

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

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.