This article first appeared in The Edge Malaysia Weekly on March 25, 2019 - March 31, 2019

FOR decades, there had been an air of immutability about Permodalan Nasional Bhd (PNB). But Malaysia’s largest fund manager is now on the verge of a historic transformation.

Firmly in the driving seat is former Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz, who took over as PNB chairman on July 1 last year. She is the second chairman in three years. Before that, the previous chairmanship change was in 1996.

Speaking in her first interview since taking the role, it is evident that the septuagenarian is a woman on a mission, no less driven than she was during her 16-year stint as the head of the central bank.

In her own words, Zeti reveals that she had overseen three rounds of organisational transformation in her 16 years at the helm of Bank Negara. Clearly, the mission at PNB is to drive the same, although if Zeti has her say, it would take far less time this time around.

“So, in a way, PNB can leverage that [accumulated] knowledge and move faster and not take 16 years, certainly,” says Zeti with a hint of wry humour.

“The three things that I look to do is the diversification of our portfolio; the second is in terms of the risks that we are managing, and then also the liquidity management; and finally, the organisational transformation to create the capability to deliver these.”

On paper, the lifelong central banker may seem out of place in the corporate sector. But Zeti sees many similarities in the task ahead for her at PNB with what she did at Bank Negara.

She also draws heavily on her experience on the board of Pengurusan Danaharta Nasional Bhd, which was set up in the aftermath of the 1997/98 Asian financial crisis. Danaharta was tasked with buying non-performing loans from banks at the time and to recover as much value as possible from these distressed assets.

The first order of business, however, is to take stock of PNB and review an ongoing six-year transformation programme called STRIVE-15, slated to run from 2017 to 2022.

“It’s a good time to review it because it is at the mid-point. Secondly, the environment has changed significantly in terms of digitalisation, in terms of the uncertainty in the world now,” Zeti tells The Edge.

“So, with this environment change, the execution of many of the strategies in that framework has yet to be carried out significantly because you don’t want to be disruptive. So, it has to be a gradual adjustment.”

To recap, STRIVE-15 is broadly aimed at enhancing PNB’s sustainable returns, promoting effective investment management and driving operational excellence.

Among the key deliverables slated for 2022 is to have PNB’s assets under management (AUM) hit RM350 billion. As at Dec 21 last year, its AUM stood at RM295.2 billion. The programme was implemented by her predecessor, Tan Sri Abdul Wahid Omar.

Meanwhile, PNB’s flagship fund, Amanah Saham Bumiputera, had 9.6 million unitholders who owned 155 billion units at the last count.

It is worth noting that the dust had settled on much of the early thrusts of the six-year strategic plan well before Zeti came into the picture. These included the break-up of Sime Darby Bhd, UMW Holdings Bhd and Chemical Company of Malaysia Bhd; the injection of privately held developer I&P Group into S P Setia Bhd; and the RM380 million acquisition of Lingkaran-Lebuhraya Kajang Sdn Bhd.

New horizons

It is apparent that Zeti seeks to steer PNB into focusing firmly on its sole mandate of enhancing unitholders’ wealth. She also indicates that risk mitigation to protect unitholders’ wealth is a priority.

“At PNB, we always have to ask ourselves, ‘Does that enhance the wealth of our unitholders?’ And if it doesn’t, we should not be in that business because we are answerable to our unitholders,” she says.

There are already major structural changes underway for PNB in how it operates and invests its unitholders’ money. The first is a greater emphasis on diversifying its investments by gradually reducing its heavy exposure to the local stock market.

Zeti says that includes eyeing more recurring income investments as opposed to capital gains.

There is also much more gravity these days in how it discusses the need to broaden its investment horizons abroad. “Our results show that we have a focus or concentration on the [local] equity [market] and certainly, when the equity market is not performing, we will be significantly affected,” says Zeti.

“So, diversification is the other area, not only to go global but also in the domestic market and [going into] different asset classes like the bond market and other asset classes like REITs (real estate investment trusts) and so on.”

For PNB, the diversification agenda is a pivotal shift in direction. Turning 41 this year, PNB has long been a heavy domestic equities player that accounts for about a tenth of the local stock market’s capitalisation. In turn, much of that exposure lies in controlling stakes in a handful of “strategic” companies that make up the bulk of its dividend income — in other words, bulky investments.

It is part of a longstanding concern among investors on the outsize presence of institutional investors in the Malaysian market. While the heavy presence brings stability, liquidity suffers.

Even as PNB tried to invigorate its investment returns in the couple of years prior to Zeti’s appointment, the focus had remained mostly on enhancing returns from the local stock market.

For perspective, PNB’s domestic investments had reduced from 98.1% to 96.9% over the 12 months up to end-November 2018. Yet, the public equity proportion of its domestic investments had actually increased from 70.4% to 71.2% in that time.

In contrast, the Employees Provident Fund (EPF) had gone abroad much earlier in search of better returns. Last year, 26.7% of EPF’s assets were invested outside Malaysia and overseas income made up 37.52% of its gross investment income, down from a previous high of 48% back in 2015.

While PNB also wanted to increase its international exposure, there was much less urgency and much more cautiousness prior to Zeti’s tenure. She acknowledges that PNB had been a laggard when it comes to international diversification. However, she indicates that even as the fund manager strives to catch up, the process would be undertaken with care.

“We recognise that PNB has already reached a size that will make it too vulnerable being in the domestic market, so that is another reason for diversification,” says Zeti. “International diversification is important, but we have to look at the timing and then manage the currency exposure as well.”

While some may see the continuous growth of PNB’s AUM as putting pressure on stepping up the international diversification, Zeti points out that the incoming funds also help. It is easier to invest new funds than to redeploy existing investments.

That said, Zeti believes it remains useful for PNB to have majority stakes in a handful of companies for stable dividends. But she also feels it is unnecessary beyond a small group of core firms.

Another area of focus for her would be the ongoing reduction of PNB’s cash holdings, which were as high as 20% of its AUM not too long ago. As at Dec 21 last year, the proportion had fallen to 16.9%.

“In those days, it was appropriate, but now, there are many instruments to manage liquidity in the market and so on that generate returns. So, the other area that I hope to bring value-add is liquidity management,” says Zeti.

Managing risk

As PNB sets out to diversify its portfolio and better manage its liquidity, its risk management capabilities and framework are key areas that Zeti aims to enhance.

There are two layers to the approach. One is that PNB will adopt a more cautious mentality in its investments. Second, it will put more work into risk mitigation to protect its unitholders.

“It’s a great responsibility. They gave their savings and we have to remember that always, that we are answerable to our unitholders,” she stresses.

“And so, it’s not incumbent upon us to take very high risks. Every investment is a carefully calculated risk that we manage ... and make the careful assessment.”

As she reminisces about her experience in driving multiple transformations at Bank Negara, which included raising the bar on managing risks and liquidity, it is evident that the former central banker is in familiar territory. For example, much of the transformational agenda and objectives set for PNB are what she had accomplished over 16 years at the helm of Bank Negara.

According to Zeti, the state of risk management in PNB is “exactly where [Bank Negara] started” 16 years ago when she first became the central bank’s governor.

“PNB is developing its risk management because previously, the risks weren’t as great as they are today because financial markets are more volatile and we have to have a very rigorous and robust risk management framework,” she says.

She also takes care to emphasise that decisions at PNB will be made via a collaborative approach, echoing how she operated at Bank Negara. That includes, for example, how PNB’s asset allocation would be split between different asset classes as well as across the domestic and international markets.

When posed the question, Zeti says the fund manager’s asset allocation strategy is being developed by an investment committee. The key is “collaborative decision-making”, which emphasises input from frontline PNB staff who conduct the actual due diligence on investments and financial assets. The process also involves identifying risks and managing possible scenarios. “It’s important, if you recognise that something could go wrong, that you manage and mitigate those risks. So, risk management becomes very, very important, so that will be given great focus here by the board and the management,” says Zeti.

So, what foreign markets are on PNB’s radar? Zeti declines to single out specific markets of interest, but acknowledges that Asia — being closer to home — is more familiar.

“For the emerging world, I would imagine we would know Asia better than other parts of the world, but I wouldn’t rule [other parts] out,” she says.

“There could be investment opportunities like in countries in Latin America, Central Asia and Europe, and there could be emerging economies there that show tremendous potential.”

Getting the execution right

Having set ambitious goals for PNB, Zeti recognises that execution will make or break its aspirations.

She says there are 10 elements in the transformational agenda that need to be undertaken if the fund manager is to become a “world-class and distinctive investment management corporation”.

The elements were discussed during a senior management retreat that included about 80 of PNB’s top officials, she says. “I think the team was quite excited to embark on this and we’re going to take it forward. So, there will be a steering committee and the question that was put to me was, ‘Yes, it’s fine that we have these 10 areas that we hope to work on, but how is the execution process?’

“So, I gave it some thought and presented to them on how we can successfully execute the 10 areas because very often, we have these great ideas and frameworks and systems, even, but then, it’s all about being effective in executing.”

Key ingredients, though, are time, persistence and, most importantly, buy-in from the entire organisation, according to Zeti.

She reflects that a former minister had once opined that the transformation at Bank Negara was successful due to her leadership and that she disagrees. Instead, she says, it was successful because everyone had clarity on what the collective wanted to achieve and how they could contribute.

“Of course, we can’t transform our portfolio in a short period of time, especially in periods that are highly volatile and there’s real uncertainty, but we can gradually move in that direction.

“Again, the investment horizon is long term, and not short term, and with these kinds of strategies, I believe we can generate a steady rate of return,” she concludes.

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