This article first appeared in The Edge Malaysia Weekly on February 18, 2019 - February 24, 2019

CONTRARY to speculation, Khazanah Nasional Bhd is not being shut down. Talk that Khazanah might be liquidated was why congratulations was not the first word that came to mind for many when Datuk Shahril Ridza Ridzuan was plucked out of the highly successful Employees Provident Fund to fill the managing director’s seat at Khazanah in early August last year.

Not only was it about a week after the entire Khazanah board had tendered their resignation, but Prime Minister Tun Dr Mahathir Mohamad had lamented how the sovereign wealth fund he set up in 1993 had veered away from its original purpose.

One does not need a degree from Oxford or master’s from Cambridge, like Shahril has,  to know the 48-year-old needs to know upfront what Mahathir expects of him and Khazanah.

“He just wanted assurance that I would be able to deliver in terms of success for Khazanah in the same way that I’ve done in the past for, say, EPF,” Shahril tells The Edge.

Mahathir was also the prime minister when Shahril first came under Corporate Malaysia’s spotlight 18 years ago when he and Datuk Abdul Rahman Ahmad — now Permodalan Nasional Bhd president and CEO — were brought in to restructure the then debt-laden Malaysian Resources Corp Bhd (MRCB) in 2001.

What is perhaps Shahril’s largest feat to date is how he successfully rebalanced the EPF’s portfolio of assets to earn a lot more income than what they would have earned had he not directed more money outside Malaysia into dividend-paying stocks as well as alternative investments such as real estate and infrastructure, which provide a steady stream of income without taking on excessive risks.

The portfolio rebalancing allowed the EPF to pay the highest dividend rate in 21 years last year of 6.9%, despite the amount required to pay 1% dividend having doubled from RM3.43 billion when he joined the EPF as deputy CEO of investments in November 2009 to RM7.02 billion in 2017. Shahril was EPF CEO from April 2013 until the Aug 3 announcement stating he would report for duty at Khazanah on Aug 20, 2018.

Now, Shahril will be expected to rebalance Khazanah’s portfolio — not short-term selling of assets or shares to fill government coffers — but to turn Khazanah into a significant income generator for Malaysia — one that can sustainably supplement the federal government’s annual budget.

“There has been this misconception that we are selling because the government needs money. Actually, that is not quite true. We are actually doing some disposals in order to rationalise the portfolio. For instance, we are highly concentrated in terms of our Malaysian exposure. From a more balanced point of view, we really should have more global exposure,” Shahril explains.

“What we’re trying to do is to give more certainty to what we can deliver for government budgeting purposes. That commitment of about RM1 billion [dividend] a year is that certainty that we’re giving them,” he adds, explaining that the bulk of proceeds from any divestment stays in Khazanah for reinvestment to restructure its portfolio for longer-term gains.

“As we restructure the portfolio and the portfolio starts to provide and generate the kind of returns that we think it should over the long term, that would give us more capacity, at that point in time, to look at a higher dividend to the government.”

Indeed, the RM1 billion dividend the government expects from it for 2019 was what Khazanah paid the government in 2017, and lower than the RM1.5 billion Shahril said Khazanah paid in 2018. [It is understood that there is a discrepancy between the dividend Khazanah reports and what is stated under the government’s income records as the latter is prepared using cash accounting rather than accrual accounting.]

Across the Causeway, Singapore’s annual budget has been enjoying what it calls a net income return contribution (NIRC) since 2000,  which covered nearly 20% of the city state’s government expenses last year.  The NIRC includes 50% net investment returns from Temasek Holdings Pte Ltd, GIC Pte Ltd and the Monetary Authority of Singapore.

GIC and Temasek — with US$390 billion and US$375 billion assets under management (AUM) respectively — are the world’s eighth and ninth largest sovereign wealth funds, according to data from the Sovereign Wealth Fund (SWF) Institute. GIC manages Singapore’s government reserves while Temasek is Singapore’s investment arm. SWF ranks Khazanah at No 25 with US$38.7 billion.

According to Shahril, the biggest difference between Khazanah’s old and new mandate is “clarity on the long-term goal and vision”.

Going forward, Khazanah’s portfolio will have a 70:30 split, with 70% of its assets falling under the “commercial” basket that is used to fulfil its long-term asset growth target. The remaining 30% will be its “strategic” basket, which, he says, fulfils a strategic role in the country’s development and encompasses Telekom Malaysia Bhd, Tenaga Nasional Bhd, Malaysia Airports Holdings Bhd, Malaysia Airlines Bhd as well as Iskandar Investment Bhd.

That leaves Khazanah’s previous core holdings such as Axiata Group Bhd, CIMB Group Holdings Bhd, UEM Sunrise Bhd and its remaining 26% stake in IHH Healthcare Bhd in the “commercial” pool that it will monetise, if the right value exists. Citing its deal with Mitsui & Co on IHH, Shahril assures other investors that Khazanah will not make any move that is counterproductive to its own portfolio value.

He also says Khazanah cannot simply apply a blanket 15% to 25% cap to all its holdings “because a lot depends on the maturity of the asset as well as the opportunity that exists for us to do some monetisation” but it will be actively assessing its portfolio going forward to reap the best possible benefits for Malaysia.

Given the current portfolio constraints, Khazanah is looking at achieving 3% returns above inflation over a rolling five-year period, a target that will be relooked over time as the portfolio is reshaped — a journey that Shahril reckons could take seven to 10 years. Khazanah will also be managing costs more tightly. One example is that it did not need to pay investment banking fees for its IHH deal with Mitsui because the capability exists in-house.

For more on what he has to say about Khazanah’s new mandate, read the following interview:

The Edge: How have your past six months at Khazanah been? What is your mandate and is it clear? Are your money-making skills going to be put to good use?

Datuk Shahril Ridza Ridzuan: When I stepped in at the end of August last year, it was a fairly abrupt shift from my previous position at EPF. But given that the Malaysian market is not that big and EPF and Khazanah have had many dealings in the past, the transition was fairly short. Obviously, I already knew quite a lot of people at Khazanah and we’d done some common investments in the past. Also, we more or less knew what was happening at Khazanah, so I would say it was a fairly steep learning curve in terms of the time that we had. But it was not something that was impossible to do, given that there was a lot of knowledge coming in already.

So, the first thing that was quite apparent, that really needed to happen, I think, was to ensure that the new board and new government in place had a clear understanding of what Khazanah’s vision or mandate was going to be. I think, really, that’s the most important thing that needs to be upfront because for any organisation, if you’re not clear about what the expectations are or what the mandate is, it is very hard to work on the policies within the firm to take it forward.

So, we worked on that upfront and I think we got a lot of clarity very early on in terms of my discussions with the government and the new board. By December, when we had our formal strategy review as well as our outlook for 2019, we formulated a very clear strategy, which was adopted [approved] by our board, so that’s the new Khazanah mandate.

The Khazanah mandate is really twofold. One, Khazanah essentially should function like a traditional sovereign wealth fund for other countries, which is focused on the long-term growth of its assets on behalf of and for the benefit of all Malaysians over generations. So, that’s a much longer-term goal, which is about growth and about making sure that on a risk-adjusted basis, we reach the kind of targets and returns that we set for ourselves. But we also recognise the fact that Khazanah, over the years, has also played a developmental role, that is a strategic role for the government, and that continues as well. And that is focused really on our strategic side, about making the right investments and working with the government on regulations and the environment to make sure that beyond just a commercial objective, those strategic investments also fulfil a role in creating the right atmosphere and right infrastructure for Malaysia’s development and economic growth.

When we look at that, essentially we think of Khazanah as having two pools of assets. One pool is focused on the long-term asset growth target. Internally, we call it our commercial fund. The other pool of assets — which focuses on Khazanah’s strategic role of helping develop Malaysia — is our strategic fund. The split between the two pools is roughly 70:30 — 70% is focused on long-term asset growth for Malaysians while 30% is focused on the strategic role that we reinforce.

What is the biggest difference between the old and new mandates?

It is clarity on Khazanah’s long-term goal and vision. The previous management was very focused on GLC (government-linked company) transformation and Khazanah did a fantastic job of raising the standard of the GLCs it was invested in and championing the regionalisation of Malaysian companies — with a lot of success. And if we look at the last 12 years or so, before I stepped in, it had seen a lot of success in terms of achieving those goals but really, as the organisation matures, you have to move forward because a lot of that work is done. We can’t keep focusing on that work; from the point of view of effort versus returns, most of it has been achieved but you will be on a path of diminishing returns if you keep focusing on the same strategy. I think that’s basically something that Khazanah itself recognises. To be fair, even before I stepped in, they’d already started thinking about taking all these steps, which is why it was quite easy to start the transition. Because really, it is about articulating where we go as an organisation.

Khazanah’s pool of assets is fairly limited, at RM100-plus billion, and there is speculation that it will sell a lot of those assets and give the money back to the government. Will Khazanah be given any leeway in keeping some of the funds from monetising its assets and investing that for longer-term growth and returns? Singapore, for instance, has NIRC (net investment return contribution), which contributes about 20% to the government’s budget …

One of the things we’ve worked on under the strategy adopted by the board is that when we look at Khazanah’s pool of assets and at our own requirements to restructure and balance the portfolio, we have fairly clear guidelines internally that for every divestment we make, a certain portion goes towards debt repayment, a certain portion towards reinvestment and from a government point of view, we now have a clear dividend policy. Last year, we committed about RM1 billion plus to the government as dividend and that is to be an ongoing and steady dividend policy.

RM1 billion (dividend) every year?

Roughly RM1 billion a year. If you look at the asset rationalisation that we’ve been doing, a lot of it is towards the fact that as we become a more mature commercial fund, the proceeds from the divestment are used for restructuring the portfolio.

There is this misconception that we’re selling because the government needs money. That is not quite true. We are actually doing some disposals to rationalise the portfolio. If you look at our portfolio, quite clearly, there is some imbalance. For instance, we are highly concentrated in terms of our Malaysian exposure. From a more balanced point of view, we really should have more global exposure.

Similarly, our concentration in certain companies, we felt basically that the time has come for us to actually look at diversifying our exposure. For instance, we did that IHH Healthcare transaction last year. That is a template for how we basically view the portfolio. When the opportunity arises for us to rationalise or dispose of certain assets, we will only do so if the value is right and the proceeds are used to reinvest and rebalance the portfolio.

I think people tend to misunderstand because we (Khazanah) are owned by the government. They seem to think that every time we sell an asset, the proceeds go straight to the government. The proceeds actually stay in Khazanah for the purpose of reinvestment because its longer-term goal is to grow that pool of assets for the benefit of Malaysia as a whole.

So, the dividend portion — yes, we have committed to a dividend policy to the government and that is reflected in the government’s budget itself where RM1 billion or so is anticipated from Khazanah on a yearly basis.

What we’re trying to do is to give more certainty to what we can deliver for government budgeting purposes. That commitment of about RM1 billion a year is that certainty that we’re giving the government.

Is that on an increasing basis, until you can get more? When do you think Khazanah can give more?

The plan is that as we restructure the portfolio and it starts to generate the kind of returns we think it should over the long term, that would give us more capacity. At that point, we will look at a higher dividend to the government.

But the focus right now is to restructure the portfolio because to have a proper balance between our exposure and the risks we’re taking, a lot of reinvestment needs to be done to restructure the portfolio now.

So, there is no rush to sell assets?

Not at all. There will come opportunities where it makes sense for us to consider a sale. IHH Healthcare was obviously one of those, where basically we’ve done a lot of work in terms of building up that regional champion and our partner Mitsui is very keen to play a bigger role in the company and we are quite happy to let it do so. So, we remain a partner in the company as well and we will keep working with Mitsui to grow the company.

Khazanah was reported to be looking to keep only 15% to 25% stakes in companies and disposing of the rest to raise cash for the nation’s coffers …

That story was not directly sourced from us (Khazanah), so there are some accuracy issues.

So, there is no 15% to 25% (equity holding) limit? A number of your holdings have breached that level: 66% in UEM Sunrise, 37% in Axiata, 33% in MAHB, 27% in CIMB ...

When you look at each of our assets, it is hard to apply a blanket rule like that because a lot depends on the maturity of the asset as well as the opportunity that exists for us to do some monetisation.

In some cases, like IHH Healthcare, we would do a partial sale because we still believe in the long-term future of the asset. But like any good portfolio manager, when the opportunity exists for you to take some of your money because you’re clearly sitting on some fairly decent gains, you should exercise the financial discipline to do so and rebalance the portfolio. Otherwise, as the value of the asset keeps growing, it takes up a larger proportion of your total portfolio and from a risk-adjusted basis, it becomes a bit more difficult to justify having so many of your eggs in one basket.

There will be opportunities for us to do a total sale — sometimes, if we feel that we’ve brought it as far as we think we can and that it might be better off in somebody else’s hands, and we can get good value for it, then we do a total sale. In some cases, like IHH Healthcare, we do a partial sale. In some instances, we might just continue to hold what we have today if we believe there is better value upside for us in doing so. So, it is not wise to assume that a blanket rule is applied to everything because it doesn’t make sense in a lot of cases.

Will Khazanah be initiating more deals [to create/unlock value], such as merging companies or exercises like the airport REIT [which the government announced when tabling Budget 2019]?

Depending on the entity and the market it is operating in, there are different opportunities. In some cases, a merger may be the best solution in terms of creating more value for us. In others, it may just be an outright sale. In yet others, it may purely be a focus on organic growth or if we think there are opportunities for us to put more money into the business for it to invest or to grow organically. It is very hard to over-generalise this. You would have seen many different forms in the market, through which value creation can take place.

Are you going to merge Axiata with other companies — Telekom or perhaps Astro? Is that being considered or does its current [low] valuation make it very difficult?

When we talk about mergers, you also have to be very careful about your own market position. I’m not talking about any company in particular but you have to also look at the fact that mergers sometimes may not be the solution because whenever you do a merger of two entities, you always have the problem of culture and integration. And that’s why from my point of view, you should always look at merger as a solution very, very carefully. Sometimes, those benefits, while they look good on paper, may actually be very difficult to achieve. A lot of the time when you look at a merger as a value creator, you are looking at cost synergies. Invariably, when you look at past mergers, those cost synergies become difficult to achieve because of inherent legacies or inherent problems, so you have to be very careful about pushing mergers as the main form of value creation.

So, is there low-hanging fruit that you’re looking to tackle first?

Yes, obviously, when we look at the portfolio, there are a number of things that we think we can do in terms of value creation and we will be actively pursuing that throughout the rest of this year. So, yes, there are a few opportunities, I think, but given market sensitivities, we can’t really discuss them in detail but we will make announcements as they come.

From your portfolio review, how big a percentage of the assets are ripe for monetisation? Any non-performing assets that Khazanah needs to hive off?

Clearly, in any portfolio, you always look at the return at portfolio level, as a whole. Within the portfolio, there are always those that are outperforming and those that are underperforming. So, Khazanah is no different. There are assets, which are clearly not performing to expectation.

So, one of the things we hope to instill in Khazanah going forward is a much sharper attitude towards cutting losses early or getting out of situations before they become worse. That’s always one of the fundamental difficulties for any asset manager or portfolio manager, which is that sometimes, you tend to fall in love with the asset or investment. You have got to have more discipline in terms of reducing your losses early and accepting the fact that you can’t win them all. No portfolio manager has 100% success in investment. It is mathematically impossible but the more successful managers have the right culture in place, which allows them to basically identify losers or underperforming assets and make decisions fast enough to redeploy the capital into other assets where you have better opportunities.

Similarly here in Khazanah, we are in the midst of looking at those underperforming assets and where we feel there is really no point in continuing — some foreign, some local. Even our global assets, we’ve had some real winners over the last year or so. We had, for instance, our investment in companies like FarFetch and Phunware, which have gone for listing and done well. Similarly, some of those tech investments — there’s always the danger of early-stage investment. You are bound to have some failures, and with those failures, we are just going to draw the line; we’re not going to pump in any more money because there is absolutely no point in good money chasing bad money.

One of the assets that need a lot of money is Malaysia Airlines. Is it still going to be on Khazanah’s books?

Yes. It is part of our strategic portfolio. In terms of commercial returns, we are encouraging the Malaysia Airlines board and management to close the gap in commercial outcome, but beyond that, Malaysia Airlines, for a very long time, also served a fundamental purpose for the Malaysian economy in terms of being the national carrier and promoting tourism, there are a lot of intangible and commercial benefits, which don’t necessarily accrue to the airline itself but to the country. This is why it sits in our strategic basket.

Obviously, I think a lot more can be done to improve the commercial outcome of the airline itself but we have to recognise that there is — at this point in time and for a lot of national airlines around the world — a cost to maintain the benefit to the economy as a whole in terms of linkages and trade and so on. The key here is for the Malaysia Airlines board and management to think through and accept the fact that it is an extremely competitive world out there. They have to find a way to actually compete and do it commercially.

Does this mean there could be additional help, apart from the previous plan that was announced?

Well, they are in the midst of a review of the strategic plan they’ve in place and quite clearly, there are elements of the strategy that have worked and those that haven’t. What we’re asking them to focus on is that you have to be realistic to see what is working and what is not. For what is not working, you might as well do something different because there is really no point in trying to do the same thing over and over again, if it is really not working.

So, we are waiting for them to come back to us. The onus is on the management and board to come back to the shareholders and say, ‘Look, we think this is going to be a more viable strategy’. Then, we will look at it and see whether or not we agree.

There is talk that the RM6 billion is not enough and that it is up to the management and board to convince Khazanah that they are worth additional support and money until they make it ...

Like I said, we’re waiting for them to come back to us. There is no point in pursuing a course of action that is not going to work in this business climate. If it is obviously not going to work, why do it? So, let’s wait and see.

I think there are elements that they are already implementing, which have a better chance of success. They have launched AMAL, which is a specialised service for umrah and haj. That looks decent as a strategy. It plays to one of their competitive strengths. We’re asking them, ‘If you can think of things like AMAL, then surely you can think of strategies for your other businesses that are not performing well and look at doing something different?’

When are they due to come back on the plan?

Hopefully, in a very short period of time. The aviation sector has become very complex because of the competition and quite clearly in Malaysia, you have a very clear market leader in low-cost airlines, which is AirAsia. The reality is that AirAsia now dominates that segment. So, the problem we’re facing is that it is very different from 20 years ago, when Malaysia Airlines was a monopoly. That’s not going to happen ever again. There is no point in pining for the good old days. You have to accept reality and move on.

You mentioned a 70:30 split and Malaysia Airlines sits in the 30% (strategic) basket. Can we generalise and say that the 30% comprises the not-for-sale assets and whatever is in the 70%, if its potential is maxed out, you will just sell it?

Yeah, if you look at it that way. I’ll be very frank with you. The strategic side encompasses TM, Tenaga Nasional, Malaysia Airports, our holdings in Malaysia Airlines, Iskandar, which is a catalytic development down south, and one or two small pieces in there like our tourism and resort business, which again, is a catalytic development for Malaysia in terms of encouraging growth in that area. Really, everything else is in our commercial side.

So Axiata, UEM, Astro and CIMB … are in the 70%?

Axiata, UEM Group, Astro, CIMB … that’s in our commercial fund. Our view, essentially, is that from a control point of view and from an influence point of view, we will remain focused in our strategic basket because those are the companies that I think makes more sense for us to spend time with [their] board and management in terms of regulatory outcomes because those have a bigger impact on Malaysia’s economy and infrastructure development. For the rest, really, the government has no interest or business influencing or being in control of private hospitals, or a commercial bank or a property development or building services. I think the right path, and our board agrees, is that these are businesses that really do not need government ownership or management. They should really be free to go and do their own thing. We will be purely an investor.

As you yourself said, we have to recognise that when the right opportunity comes, we will look at whether we can create value for Khazanah by either disposing, merging or organic growth. So, it is fully a portfolio-based approach to those investments.

We have heard the phrase ‘financial discipline’ a few times and you mentioned it alongside ‘loving the asset’ too much. Is that one of the shortcomings you found when you came in?

I wouldn’t say it is a shortcoming. I think basically, it is just a natural path. Khazanah for the past 12 years has been focusing on revamping these companies and we’ve done a great job in terms of revamping. When you look at the amount of value created for companies like TM, Tenaga and CIMB over the last 10 to 12 years, it has been fantastic, right?

Obviously, as the organisation matures, we have to recognise the fact that we’ve done our part. We now have professional boards, professional management at these companies. The onus now rests on those boards and managements to basically keep that value creation growing. Our role then shifts, as far as those companies are concerned, towards essentially being a capital allocator.

If we feel that the nation’s capital, Khazanah’s assets, are best deployed in those companies, they will continue to be deployed in those companies. If there are other opportunities, we will redeploy somewhere else because the main goal of Khazanah going forward is really about long-term growth of our assets. If that long-term growth can be achieved by staying with these companies, fine. If not, we should really have the discipline to say we’ve taken it as far as we can, it’s time to take that money and the profits that we’ve made and redeploy them somewhere else.

Is there a cap for Khazanah when it comes to foreign investments?

There’s not so much a cap. If you look at our portfolio, we are short on global assets. The reason for that is we’ve always been very mindful … Traditionally, the GLICs [government-linked investment companies] have had an outsized presence in Malaysia, especially on Bursa Malaysia. When Khazanah looks at it, our point of view is basically, we already have EPF and PNB. They are very big local investors and rightly so because on their account are Malaysian holders who are expecting decent ringgit outcomes [returns].

If the focus is really on long-term asset growth, then we have to have a more balanced portfolio that looks at both Malaysia as well as globally on the commercial side. The strategic side will always be Malaysia-focused, but on the commercial side, it needs to be more balanced in order to provide the right risk-adjusted returns.

What kind of global assets are you looking at?

It will be in line with our risk-return profile. The difference from say, the EPF — which has capital stability as one of its core goals and has a fairly large allocation towards debt and fixed income — is that Khazanah’s focus is more on growth. We are much more heavily focused on equities, a mix of both public as well as private equities.

Our asset allocation going forward is roughly going to be about 60% public equities, 30% private equities and 10% real assets.

The reason for that is we don’t have individual accounts to worry about but we focus more on longer-term growth, so the right measure for a fund like Khazanah — for our commercial fund — is effectively an inflation plus strategy measured over a rolling, say, five-year period. That’s really the focus we are working on and that’s what we’re going with.

You say you are going to increase your overseas presence. Where is the ideal threshold?

That will come over time. It’s not as easy as saying we’re going to do it because the bulk of our assets are still Malaysia-focused.

When I mentioned that we need to rebalance the portfolio, essentially we need to rebalance it towards being more global. IHH Healthcare Bhd is a good example. A large portion of the money from the transaction will go towards our global exposures. We will rebalance gradually over time.

We think, honestly, from where our portfolio is and where the markets are, you’re probably looking at a seven to 10-year journey before we actually get to that ideal situation.

We are talking about a capital outflow over time?

Yeah, very gradual. Over a seven to 10-year period, it’s something that will allow that growth in global assets.

So right now, it is like 30%?

We are less than that actually, we are only about 15%.

So your contract is for five or 10 years?

No, CEO contracts should never be that long. My contract is only for three years from Aug 20, 2018.

Back to dividends. The number was RM1.5 billion last year and it’s RM1 billion this year. How does Khazanah decide on the amount? Petronas, for instance … there is their net income. If the oil price is above US$70 a barrel, people know Petronas is in a good position to pay more dividends. In Khazanah’s case, how do you assess whether you’re in a position to pay more?

As part of our strategic review, we have an internal dividend policy in place and that looks forward for the year. We already know what’s in our pipeline in terms of what we are planning to do or what is already on the way. We have a fairly decent idea of the kind of proceeds we will be generating and a percentage of that will be for dividends.

What’s the percentage?

It is roughly about 20% of the net proceeds from our transactions and the deals we’ve done.

You’re not under pressure from the government to declare higher dividends?

To be fair, I think the government understands there is always a trade-off between short-term dividends versus long-term portfolio rebalancing. There is a danger that if you try to extract too much money upfront, it leaves very little money for rebalancing the portfolio and that would then affect the long-term viability of Khazanah and the portfolio itself.

So, one of the things that we’ve been very eager to do is have that discussion and emphasise basically the fact that you do need to allow space for that rebalancing, which would then allow you to, in future years, have a better outcome as far as dividends are concerned. Otherwise, what happens when you’re too short-termish and try to extract money from the portfolio, you are basically jeopardising that ultimate objective.

The government understands the position?

Yes, and that’s why our projected dividends for this year is roughly RM1 billion.

The 20% is from disposal, or is it after it is in your books?

When we look at net proceeds, obviously we have a cost to run Khazanah as well, so while we focus on the proceeds portion, one of the key objectives that we will be looking at here is also making Khazanah more cost-efficient. When we look at that, we have to benchmark properly against other similar funds. The whole idea is that we should be running at roughly 30 basis points (bps) for AUM (assets under management). We were running at higher than that in the last few years.

How much higher?

Probably 15bps to 20bps higher. So, one of the key things we are focusing on this year is to drive down running costs.

Are you going to shut down some of the regional offices or downsize?

Obviously, we are reviewing a lot of our cost structure where it makes sense. It has to be appropriate to our objective as well, what we intend to do in terms of redeployment. So yes, in some instances, we will downsize our operations. That’s only natural. In certain areas, the cost may not justify what we’re trying to achieve.

It seems that the prime minister is not so happy that some officers, including those in Khazanah, were being paid at investment banker’s scale. Has there been any feedback from the Prime Minister’s Department on salaries and remuneration?

One of the key things when looking at remuneration is the fact that it has got to commensurate with the type of jobs and skills that we want to attract. From my point of view, you also have to be mindful that you’re expecting these people to generate value for you. You have to pay people appropriately.

I do agree that, basically, we shouldn’t have excessive remuneration. In any organisation, that just doesn’t make sense, but you need to pay people for the kind of value that they are bringing.

Generally, when we look at remuneration, it is in line with the financial industry. So, obviously, if you compare it to maybe a pure government-type agency, it would not be like that. But the whole idea is if you’re expecting people from investment banking or asset management to join you, then you have to basically provide them with a commensurating financial package. Otherwise, you’re not going to get them. It is the same for all fund managers, whether it is Khazanah, EPF and PNB. You are competing for a talent pool that is essentially mobile and that can go work in any investment bank or asset management house.

The key difference with an entity like Khazanah is that we also have the element of national pride and national duty. So that helps, I think, in attracting a different kind of talent, those who wants to contribute to the country, who may not be focusing on remuneration as the No 1 objective. But to be fair to these people, you still have to pay them. You may not pay them at the top quartile of the financial industry but you’ve got to pay them at the average for them to come in.

Did you have to take a pay cut to come in or are they banking on your love for country?

Let’s put it this way lah, I’ve been doing national service for the last don’t know how many years now and I personally quite enjoy working and contributing towards this kind of organisation. So I’m one of those guys who have never been particularly motivated by remuneration.

You’ve been here six months. Where is the fat in terms of cost?

When you look at cost as a whole, there are elements where quite clearly, you can do a lot better. To be fair to the team here, they’ve already initiated those measures in the past. We are in the midst of doing full cost review. We think we can get to about 35bps this year.

Is that coming from people or more [closing] offices?

It’s a combination of a number of things. Some of it is fixed cost, office cost as well as infrastructure or system cost. Second is basically variable cost or deal cost. There we just need to be smarter about how we execute deals in order to reduce cost. IHH is a prime example. For the IHH transaction, everything was effectively in-house. So, we effectively didn’t have to pay investment bankers to do the deal. That capability does exist.

Coming back to the issue of remuneration, it’s basically a balance between paying the right price to get the right people on board and then making sure that those people deliver value. In this case, the team basically in-housed the whole transaction, [the deal was done] without having to pay unnecessary investment banking fees.

An early statement from Tun Mahathir, when the new government took over, was that Khazanah has veered away from its original objective. Have you had a chance to meet with the prime minister to clarify?

Of course, he is the chairman of the board. He is fully involved in the discussion on the approval of the new strategy by the board. To be fair to him, he is correct. The Khazanah that was set up in the 1990s was a very different animal — it was effectively a holding company, holding shares for the government. But over the course of time, like all organisations, those objectives change over time.

In the 2000s right to the time I took over, that objective then became about enhancing the value of those assets, instead of being just a passive holder of those assets. It became more active in actually creating value by getting the right values, right systems, into those companies, and that has been a success. And the government has actually benefited from that. The government has actually reaped the value increase of companies like TM, Tenaga, CIMB and the rest.

Now, the new strategy reflects what Khazanah will become over the next few years. Khazanah has changed and, like all organisations, will continue to change as we develop and mature.

From the earlier statements, it seems that the prime minister wanted Khazanah to change back to its original purpose. Was that the indication?

The government has basically approved the strategy, the board has approved the strategy. That’s a reflection that Khazanah has got this new mandate and vision. We will execute this new mandate and vision. This vision is different from what it was two years ago, it is different from what it was 20 years ago, but I think it is the right vision and mandate for what Khazanah should be going forward for the country.

One of the largest impediments for Khazanah is the limited fund size of less than RM200 billion. When it is split to 60:30:10, the pool is even smaller and you already have a basket of things that you can’t really move. Are you using these three years to expand the pool? Is there a chance of getting more from the government by saying, we can get this much returns, give us the money?

One of the natural constraints, as you rightly pointed out, is unlike the more traditional sovereign wealth funds, we don’t have a ready pool of AUM [funds] coming into Khazanah. That’s why Khazanah, especially in the last 10 years, has grown through using some debt to fund new purchases and organically growing the value of those assets. That was the strategy that was put in place.

Going forward, we recognise the fact that government finances are currently a bit constrained. They are doing some restructuring of their finances. To expect the government to be able to commit new assets over the short-term would be difficult but obviously, as we put this [new] strategy in place, over the long term, we will be working with the government to see whether there are opportunities for us to manage more assets. But that is something that is not a short-term priority. Short-term priority really is the portfolio rebalancing and restructuring and we will move forward with that first.

On your new mandate, [one newswire] had the headline “More cash less control”.

More cash is generally a bad idea because cash gives you little returns. So while it is a catchy headline, it is very bad from an investment point of view, unless you’re willing to have a large cash drag on your portfolio.

We basically have two clear mandates. One is on the commercial side, which is on the bulk of our assets — it is really about long-term, inflation-adjusted growth for the country and that’s focused on delivering long-term asset growth for the nation.

On the strategic side … while focusing on commercial returns, it is [also] making sure that those assets continue to perform their role of strategically of helping the country to grow the economy as well as providing the right regulatory environment for other players to participate and compete.

In terms of cutting losses, do you find it easier to do in EPF or Khazanah?

The asset mixes and the concentration risks are very different. The EPF has been operating as a portfolio investor for a very long time. It is actually easier for them [EPF] because concentration are very small, amounts may be big, but concentration as a percentage of the entity is very small.

For Khazanah, because a lot of our assets are sticky or lumpy, even if you wanted to dispose, it is normally a much longer process because we have a lot more liquidity constraints, for instance.

Given how much share prices have come down, and you need to raise cash to do some of the portfolio restructuring, are you thinking [along the lines] of, say, a share-backed exchangeable bond?

Financial markets are very sophisticated now, there are many different ways we can monetise or generate the kind of liquidity that we need. We’re actually quite comfortable with where it is. Markets have come down and there is a significant loss in value, especially over the last one year, in a number of our core asset holdings for various reasons, sometimes due to very significant regulatory change, like in the case for TM, where values today basically reflect a very different regulatory and operating environment. So, when we look at the portfolio as a whole, there are some areas where we obviously have more leeway or latitude to try and do things. In some areas, a bit more constrained. We have to accept that. That’s why it is important to have a diversified portfolio, because that gives you more ability to adjust for market conditions. When a portfolio is overly concentrated, then you are a hostage to both the market as well as the operating environment.

It sounds like you’re reshaping Khazanah to be a portfolio investor. How do you rank this particular challenge compared to previous challenges in your previous roles?

Like I said, every role has different challenges. Here, I think the challenge is not so much one of size. Yes, size is a constraint. Actually, the biggest constraint is more liquidity and concentration of risk. That’s actually the biggest challenge. Not so much size.

And that is something which has to be addressed carefully because obviously, when you are the largest shareholder of an entity, any move that you make can be counterproductive to your value. And therefore, you have to do transactions or investments in a way which basically makes sense to your holdings as a whole.

IHH is a classic example. Before we did the IHH transaction, the IHH share price was languishing, due to various reasons, at a fairly low level. But as soon as we made that transaction, it was very clear to the market that it was one transaction we were going to do ... the share overhang disappeared, the transaction itself set a new benchmark in terms of where the market perceived value of IHH and the share price then rerated, which benefited the balance holdings that we have as well.

So you have to be careful, I think, in structuring this kind of transaction to make sure that you’re not shooting yourself in the foot.

So you’ll be looking for people or investors or strategic partners that would recognise value in your assets, right?

Obviously. Because I think if you adopt a strategy of just trying to dispose into the market, one, you create a massive share overhang, especially given the fact that in some of these companies, you are the largest shareholder. If we try to do a market disposal, once we just signal the intention into the market that you are a seller, suddenly people look at the shares and say no point buying, there’s a giant block of shares waiting to come into the market.

So, in some instances, you just have to be patient, you find the right deal, and then that right deal essentially addresses the share overhang issue, addresses the market valuation issue at the same time, and gives you basically the ability to monetise a portion.

Do you have another partner [like Mitsui for IHH] for your other assets?

Not at this time. Obviously, there are things we are looking at and some discussions we are having but like I said, we’ll make announcements as it happens.

Some news reports mentioned Japanese money coming into Khazanah.

I think maybe they drew from the fact that Mitsui had come in for IHH and kind of extended that line a bit further maybe.

When you say inflation-adjusted growth, would it be the country’s projected GDP growth for a particular year plus inflation?

What we’re looking at is basically average inflation over a rolling five year period plus 3%.

That seems conservative [low] for a fund that’s focused on growth

It reflects the fact that our current portfolio is constrained in terms of what we can do. So over time, as the portfolio is reshaped, those targets would be reviewed and relooked at again. Otherwise, there is no point in setting an unachievable or unrealistic target.

We have to be a realist. We have to work within the constraint of the portfolio today. Inflation plus 3%, I think, is a reasonable and achievable target, without necessitating us to take unnecessary risk, given the fact that we have constraints on how much we can actually move the portfolio at this point.

As you rebalance your portfolio, will the Bumiputera equity factor be one that will shape that rebalancing process?

There are always going to be opportunities for entrepreneurs or management teams to look at being part of the process. Khazanah has done that in the past as well, with Time dotCom and other companies. So we will always look at that as well. Part of the vision of Khazanah, in terms of national development as a whole is how we create the right entrepreneur class to participate in the economy. There will be opportunities but it would be dependent on what type of asset it is. Something that is very big, like an IHH, that’s going to be more difficult because that’s much more of an institutional-type asset. But I guess there are smaller pieces in our portfolio which may be sole businesses or solo line businesses, which we will give opportunities for entrepreneurs or maybe the management team to propose a buyout of those assets.

Your 60:30:10, that’s the target in seven to 10 years. What does it look like now?

Right now it’s very much public markets but within the public markets, it is very concentrated because the bulk of our assets are reflected in under 10 companies. So that’s why transactions like IHH are important. It allows us to derisk our portfolio a bit by taking some of the AUM out of a single company and reinvesting in a broader spectrum of stuff. So the whole idea, over the seven to 10 years, we need to restructure and do something that makes more sense in terms of achieving the objective.

The private equity part will be the 30%. What is it now?

10% or so.

Real assets?

Real assets are very small, about 5%.

Will you be looking at more real estate deals, when you talk about real assets? Is that going to be faster or longer-term when you get more assets to manage from the government?

No. As part of the portfolio restructuring, we will start to deploy money in the different areas. Certainly, over time, we will see a shift in that portfolio…

Do you count PLUS as a real asset?

PLUS is more of an infrastructure asset. It is kind of a hybrid, it sits somewhere between our private equity and real assets basket.

Would you say Khazanah internally is well-equipped for a much heavier foreign presence in terms of investments?

We have many good people here who are very focused on the investment part. We will do a bit of supplementing on that because, quite clearly, as we build capacity in things like public markets, we will build capacity there as well. We are pretty okay.

You come from EPF, which has RM800 billion and now you have a portfolio constraint. Would you count this as your toughest job ever [to date]?

Every job has its own challenges. So, obviously, managing RM800 billion has its own challenges, where do you find enough investments to fill that entire pot and do it in a way that you’re still managing risk and generating the right returns.

Here, it is a slightly different challenge. The biggest challenge to Khazanah at this point in time is how do we restructure and rebalance the portfolio while maintaining financial discipline in terms of making sure we get the right value for any divestment that we do and at the same time, recognising the fact that we have to be faster in either cutting losses out or disposing non-viable assets.

Skill-set wise, it is transferable. It is the same philosophies in terms of trying to make sure that people understand that risk and return needs to be managed.

That is why the first real thing that we needed to do here is clearly understand what is the right vision and mandate moving forward. Once that is set, then you can work on other things, what is your risk appetite, what is your philosophy, what is the asset allocation strategies because all that flows from that part. And that part really is about crystallising the idea that Khazanah really has two mandates, and these two mandates require separate consideration about what’s right and suitable.

Last year, during the annual review, Khazanah said you have a China portfolio and that made quite a bit of money. Are you going to dedicate more funds into something like that?

China, for instance, has been a big success for us. What is more important going forward is understanding how that fits into the overall larger portfolio, making sure that we have the right risk-return on the portfolio as a whole and within the individual portfolio is making sure that we are not overly weighted on tech and venture cap versus, say, consumers, versus financials … The whole idea is that when you start to think through these issues, you want to achieve a better overall portfolio return for the amount of risk we are taking.

How’s the staff morale since the change of guard?

Well, obviously, as in any organisation, when you have a sudden change of leadership, there’s always going to be anxiety as well as uncertainty over what’s going to happen.

Hopefully, I think with the new strategy in place, the board approvals have all been done and the fact that everybody in there is now working towards a strategy, at least the uncertainty as to where the firm is heading has been resolved. But like in any change of strategy, there is going to be some anxiety about whether the individuals themselves are capable of executing that strategy. But that’s something you can actually work on over time, so we’re just like, all the strategic changes that I’ve put into place, you have to focus on making sure that you’re also focused on the human capital part and the development part to make sure that people understand their role in the new strategy.

What was the first thing that your chairman said to you in the first meeting?

He just wanted assurance that I would be able to deliver, in terms of success, for Khazanah in the same way that I’ve done in the past for, say, EPF, in making sure that we can actually create the right strategy for the organisation, which will then deliver success for the organisation.

So, really, I think more along the lines of just getting assurance that the right strategy will be thought of and that management will be redirected in the right way. So I think, that’s the first part, which is basically, management and board on the same page as to where the firm should be going.

And that’s been done, so now I think there’s no more uncertainty or lack of clarity as to where the firm should be headed. It’s now all about execution.

So, given that the airport REIT was announced in the budget, is that the first big deal happening this year?

No, actually, on the airport side, I think — and this is something that you really have to discuss with Malaysia Airports more — but I would imagine that their focus really is on resolving the regulatory framework first.

Because without a clear regulatory framework in place, you can’t actually do any kind of asset monetisation because investors coming in want to have certainty about what their returns are going to be like. So that needs to happen first.

TM is in your strategic portfolio. Have you got clarity on what the government actually wants to do?

Yes. TM and the ministry, I think, have been sitting down a lot to really narrow the gap on expectations and in terms of where the regulatory framework is going to go.

As a shareholder, we will also engage with the ministry to make sure that they understand and appreciate the fact that for the right investment to happen in any industry, whether it’s telco or anything else, you need to have clarity on your regulatory side because investors need to know how much you’re going to make from the investments that you’re putting in.

And if the regulations or regulatory framework is not conducive, then nobody’s going to fund anymore expansion, because from a calculation point of view, why would I fund a billion ringgit of capital into that industry if I’m not going to get the same kind of return as I would expect putting it somewhere else.

So you’re not expected to do national service in terms of TM?

No, you have to be very careful about that because I think these are all public-listed companies and there’s a very big market implication, as you’ve seen with TM, if investors lose confidence in the regulatory framework. And then what will happen is it becomes very hard to raise new money for the industry.

Has this been communicated to the respective ministries?

Yes, I think that ongoing engagement is happening all the time and, to be fair, obviously government will have its own policy objectives. I think the job of the companies operating in those spaces is to properly advise the regulators on what are the financial or market implications of the various options that they’re looking at.

Ultimately, it rests with the government. And if the government decides that it wants to implement a particular policy direction, it’s really their prerogative, but they need to do so, I think, in full knowledge of all the financial and market implications.

Ultimately, the regulators have the right to set a policy direction. But they need to be very aware of the implications.

So, what can the market expect from Khazanah this year? Because when you announce last year’s results (on Feb 28), the numbers are probably not going to look so good.

Yes we’re planning to do our annual announcement, probably at the end of the month or so, and generally speaking … the market’s been performing very badly and some of our companies, TM in particular, and Axiata, for instance, and the telco industry as a whole have been very badly hit by regulatory uncertainty. So that, of course, will have a very big negative impact on results, clearly, because the market itself was difficult last year. The number of transactions that Khazanah could execute last year was also very limited.

So you’ll probably not see a great result from Khazanah, and you’re going to have to accept that it’s just market reality. But the whole point, I think, is that we’ll refocus on the rebalancing and the portfolio reconstruction and we’ll be looking forward to see what we can do. So we accept that 2018 was a difficult year and that’s only natural.

One of the things that you probably know from my time at EPF is that I’m perfectly happy to be as transparent as possible on financial numbers and results. So, when the time comes at the end of the month, we’ll be as transparent as we can, and in terms of the results, it is what it is.

M+S, what is the latest news?

As you would have seen from various news reports, M+S is engaging in a process on its Duo assets and that process is ongoing right now, so I’m not really at liberty to talk too much about what’s happening in that process, but effectively if that process concludes, they’ll make the right announcements.

Sounds like all possibilities are still relatively open for Malaysia Airlines if they can come up with a plan that convinces Khazanah. But if they continue to struggle, like you said a lot of national carriers are struggling around the world, if they continue to struggle and cannot find the right plan, can or will Khazanah eventually draw a line somewhere?

Well, ultimately, I think the right question to ask — and this ultimately is a policy decision that will be made by the government — is how valuable are the intangible benefits that a national airline provides to the country. And to what extent are you willing to keep investing in a company to enjoy those intangible benefits, even the company itself, the airline itself may not enjoy the commercial benefits.

Because the reality is that for every dollar of tourist spend or business spend that Malaysia Airlines can bring into the country, that’s a dollar for the country but not necessarily a benefit for the airline itself. So there’s a multiplier of roughly eight to 10 times in terms of spend to the country. The issue for the government, at some point, will be to ask that question.

So the government has to decide lah.

Yes, ultimately it’s a question that the government has to decide because that affects the commitment of Khazanah towards the airline itself.

If we only take one thing away from this interview, what should it be?

Essentially, if we execute the [new] strategy correctly, then Khazanah really will become that guardian of the nation’s wealth and would be the guardian in terms of that future growth. And that’s important because I think what the country needs is basically a pool of assets that is focused on long-term growth, because over time, you need that pool of assets to contribute back to the national budget in a way that will help to relieve the pressure on other sources of income.

Otherwise the country as a whole, our national budget, is overly dependent on just a few sources of income. You pointed out the Singapore example and that’s correct, you should have more diversification [on the sources of income] on the national budget.

How long before Khazanah can play that role?

The way I look at the portfolio today, it’s easily about seven to 10 years to fully restructure. But this has always been a long-term goal. Most sovereign wealth funds think about 30 years as their time horizon, and that’s why, like I said, what is the right balance or trade-off between short-term cash requirements versus a long-term generation of growth. I think that’s something that needs to be balanced.

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