This article first appeared in The Edge Malaysia Weekly on October 7, 2019 - October 13, 2019

AS Lembaga Tabung Angkatan Tentera (LTAT) declared the lowest dividend in its 46-year history, it was a nightmare for its chief executive Nik Amlizan Mohamed, who joined the pension fund in October 2018.

“I’ve been dreading this day for a long, long time — to be the face to announce that it is 2%. Not 6%, not 8%, and not 12.5%,” she tells The Edge in an exclusive interview.

A 2% dividend means members’ savings barely outpaced inflation in 2018, which was at a nine-year low of 1%. It shocked members as well as the public, who are used to regular dividends of above 7% annually since 1973, barring the 6% declared from 2015 to 2017.

One year into the job, the heat has now been turned up a few notches for Nik Amlizan and her team to resuscitate returns to a healthier level at a politically important pension fund.

Corporate watchers would not expect this year to be much better for LTAT, or the Armed Forces Fund. Up to June 30, the five key listed companies under the Boustead group banner had collectively yielded just RM5.2 million in dividends to LTAT (see table). It remains to be seen whether the dividends will pick up pace in the coming months (see Page 78).

As a comparison, the same five companies contributed RM119.5 million in dividend income to LTAT in the financial year ended Dec 31, 2018 (FY2018), comprising 54.1% of the fund’s profit for the year. Even then, the FY2018 dividend contribution was 46% lower than FY2017.

Nik Amlizan does not deny the bleak outlook for 2019 so far and stresses that “we are working very hard” to bridge the gap. Among others, LTAT is looking to close pending land sales that were previously prematurely recognised, leading to a restatement of its 2016 and 2017 accounts.

Recall that LTAT prematurely recognised RM238.8 million in income in FY2016 from two uncompleted land sales and another RM202.7 million from another two uncompleted land sales in FY2017.

“We need to complete those [sales]. But those two in 2016 were at 2016 prices and my preference is to sell at 2019 prices,” says Nik Amlizan. “I don’t know whether we are going to complete them this year, but we are doing whatever is necessary to do so.”

Even then, the proceeds from the intended land sales may not come in time to lift FY2019 dividends for LTAT members. Another avenue is equity trading, says Nik Amlizan, but even that offers limited manoeuvring room.

For perspective, about 60% of LTAT’s RM9.4 billion in assets under management (AUM) at present are in equities. However, most lie in its shareholding of the listed Boustead group of companies, leaving just about 5% of its AUM to play with in the market.

“Every little bit helps,” Nik Amlizan responds when The Edge pointed out that trading gains are unlikely to bridge the dividend gap.

“We are actively managing the 5% (trading portfolio) so we have income to announce for this year,” she says.

As for the current market, Nik Amlizan is generally bullish and feels there is much value still in the local stock market.

“The FBMKLCI is now below 1,600 points, at the peak we were above 1,800. Is there negative earnings growth for our stock market? No. It’s positive. So eventually it will catch up.”

That said, does LTAT have enough liquidity to take advantage of the deep value she is seeing in the market?

“Enough is very subjective. Do I wish I had more? Yes. But we have to do what we need to do within whatever parameters we are given,” she responds, adding that approximately 2% of LTAT’s AUM is in cash.

She does not deny that in the near term, the 50% proportion of AUM exposed to the Boustead entities are stuck — the investments are chunky and prices are depressed to levels far lower than during the heyday of the respective stocks.

Plus, liquidating now would send the wrong signal to the market, given that many of the Boustead entities are in the midst of their own turnaround efforts.

“Yes, but at the same time, I don’t want us to rush into making short-term decisions and without taking into consideration the long-term impact that would have,” says Nik Amlizan. “I’m actually quite optimistic {about the turnaround] and there is a lot of work happening on the ground, trying to add value.”

Inside LTAT, Nik Amlizan is driving reform that seeks to rebuild the fund, including putting in place governance structures that have been the norm in other pension funds for many years.

Among others, she is working to unwind the concentration of authority in her chair, which requires her to even sign leave forms and approve claims amounting to as little as RM200.

Much of the blame for the current state of affairs at LTAT is being placed on the previous leadership. Days before the FY2018 dividend announcement, LTAT pulled the trigger on an explosive revelation of seven key weaknesses and irregularities left behind by the previous management.

Among others, it was revealed that LTAT had been paying more dividends than it had earned in returns, dipping into retained earnings in the process and recognising income that had not come in to justify dividend payouts.

To be fair, people familiar with the previous management’s thinking point to the political pressures that come with the fund’s demographics as a reason for consistently high dividends. In addition, soldiers who leave military service before completing 21 years do not receive pension, hence there was also a desire to provide the best possible return to them and maximise their retirement savings.

These considerations necessitated a different business and investment model than other funds, according to sources familiar with the previous leadership’s perspective.

For Nik Amlizan, among the underlying issues is that LTAT did not seem to have adapted to changing times to build on its high-return heyday.

“People always say success breeds complacency if you don’t have that review often. We all looked up to LTAT in the 1990s — they were ‘it’. But I think because it was so successful, the processes of the 20th century remained and now, it is already the 21st century.”

In any case, having a clearer picture of LTAT’s condition now enables the fund to look forward with more certainty.

Crucially, in mid-August, LTAT welcomed Haniz Nazlan as its first ever chief investment officer. Haniz is known for having played a major role in drafting the strategic asset allocation (SAA) for Malaysia’s largest fund manager, Permodalan Nasional Bhd (PNB), amid the latter’s five-year transformation programme that began in 2017.

Creating an SAA for LTAT is the next major milestone to achieve now that the EY assessment is concluded, says Nik Amlizan. “That is the single most crucial factor for us to build sustainable returns going forward.”

“I was from KWAP and Haniz was from PNB, and combined, I think we can create a good SAA for LTAT. A new chief financial officer is coming in too,” she adds, noting LTAT has never had a CFO before.

The question then is how conservative LTAT should be as a pension fund safeguarding the retirement savings of its members, who are serving members of the armed forces. That is for the board to consider and decide on, Nik Amlizan says. That said, being conservative does not necessarily entail reducing LTAT’s exposure to equities at 60% of AUM, she adds. The key is to manage concentration risk, according to her.

“Many pension funds globally have high equity exposure — the only big difference is liquidity. If it’s liquid, no issue. I think 60%, I can get good returns actually.”

Concentration risk is an immediate issue for LTAT, with about a fifth of its AUM locked up in Boustead Holdings Bhd shares.

When asked on best practices, Nik Amlizan says many funds generally cap exposure to a single stock to 10% of equity exposure. As an illustration, a rough calculation shows that adhering to that yardstick means LTAT’s exposure to Boustead Holdings should not exceed 6% of its AUM.

While FY2019 looks bleak, FY2020 looks a little brighter for LTAT. For one, it is looking forward to unlocking some liquidity currently locked up in ongoing property development, says the CEO.

The developments, including undeveloped landbank, account for 10% of AUM. Note that the undeveloped landbank in its portfolio is also chunky: five parcels (four in Bukit Jalil) spanning 78.85 acres  overall and worth RM580 million — a little over 6% of AUM. Most of the projects will be completed in 2020 and LTAT will be able to start selling the properties and redeploy the money. Armed with the released liquidity, LTAT’s immediate priority is to establish a true fixed-income exposure. While fixed income accounts for 7% of AUM now, there is zero exposure to Malaysian Government Securities (MGS), which is a staple for many local funds.

“Right now, our fixed income exposure is 7% but in reality, it’s not really fixed income because we don’t have any MGS ... it’s mainly loans to our own group of companies. Typically, pension funds would have 15% to 20% in MGS and we have zero,” says Nik Amlizan.

So when can LTAT members expect dividends to normalise again, with FY2019 a clear write-off? It is difficult to say as the SAA needs to be in place first, the CEO responds.

“Even then, it will take time. I’m hoping (to normalise returns) within, say, three years but right now, we are working very hard and I’m trying to make the changes as soon as possible,” she says.

“For the SAA, I would imagine maybe we will hit the end-state of it in maybe 5 to 10 years. That is, the end-state of the SAA. For example, EPF has 30% of AUM invested overseas. I don’t think we can get to that level in five years ... it depends,” she adds.

In the near term, LTAT has made necessary adjustments following the assessment finding and does not expect further “chunky adjustments” ahead. “So we expect to pay better dividends in FY2020,” she says.

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