This article first appeared in The Edge Malaysia Weekly on June 8, 2020 - June 14, 2020
LEMBAGA Tabung Angkatan Tentera (LTAT) was once considered among the country’s best-managed pension funds, yielding a stable annual dividend of 6% to 8% and backed by a strong balance sheet for years. All of that changed last year when an investigative audit discovered financial mismanagement and irregularities at the armed forces pension fund. LTAT, it turned out, had been overstating its assets, fabricating transactions and was paying more dividends than it earned.
Eight months on, a new management has restructured the organisation, rebuilt the company’s values and culture, strengthened internal controls to ensure compliance with the law and regulations, and put in place a five-year strategic plan as it tries to move beyond the scandal. New chief executive Nik Amlizan Mohamed has worked quickly to get the fund back on track since taking over last October from Tan Sri Lodin Wok Kamaruddin, who stepped down as CEO. Still, it will take a while before results can be seen.
The audit has also exposed weaknesses in LTAT’s governance. Nik Amlizan tells The Edge that improvements to the fund’s investment policies and processes, risk management practices, investment infrastructure and management team are ongoing (see Q&A below).
Following a restatement of its 2016 and 2017 financial results, which now show that it made a lower net profit of RM356.3 million and RM459.5 million, instead of the RM595 million and RM662.2 million disclosed earlier, respectively, the trend of offering high-yielding dividend payouts has ended, at least for now.
Last month, the fund declared a dividend of 2.5% on the back of a lower net profit of RM91.7 million for FY2019, compared with a 2% dividend on net profit of RM221 million for FY2018.
Not helping matters is the Covid-19 pandemic, which has caused a sharp correction and volatility in the stock market. Haniz Nazlan, who joined LTAT in August last year in the newly created role of chief investment officer, and his team have been busy rebalancing its portfolio as LTAT is 57% exposed to companies listed on Bursa Malaysia.
“In all honesty, I did not have the luxury of time to settle down in my new surroundings. The investment team was made fully aware of the challenge at hand, especially in terms of our race against time,” he tells The Edge in an email interview.
For starters, Haniz succeeded in getting a turnaround plan approved by the fund’s board of directors towards end-2019. The plan is a culmination of various initiatives, combined to address targeted areas of the fund’s portfolio.
“The plan involves capitalising on low-hanging fruit and immediate high-impact initiatives as catalysts to address immediate gaps and create value towards achieving longer-term sustainability,” he says.
While full implementation of the initiatives under the turnaround plan would take a few years and continues to be a work in progress, Haniz says the investment team has, at the same time, been devising transformation initiatives for the longer term.
“There are now more than 30 investment-related initiatives lined up for 2020 alone and the list is growing. Many initiatives involve establishing the right framework and detailed investment plans, as well as enhancing existing policies and processes to guide the long-term transformation journey towards becoming a world-class pension fund,” he adds.
At the core of the turnaround plan is a strategic asset allocation (SAA) framework, which sets the long-term direction towards better diversification of the portfolio. “With this framework, LTAT will have a clearer idea of where to invest and how much to invest over the long term. Once in place, the SAA will be the backbone of our long-term investment strategy,” says Haniz, adding that the framework is expected to be completed by year end.
He cautions, however, that the SAA is a long-term journey that would require a big mindset shift across the entire organisation and putting in place key change management initiatives to ensure the successful implementation and rebalancing of the portfolio.
“Typically, large multi-asset funds would take anywhere between five and 10 years to fully rebalance the portfolio towards reaching the desired optimal state, with periodical reviews being undertaken throughout the process to adjust the deployment of capital in a dynamic manner,” he explains.
As the SAA is entirely new for LTAT, Haniz says the “crawl, walk, run” approach to adopting the framework is “critical to ensure LTAT’s portfolio is rebalanced progressively while our investment practices continue to evolve with each step being implemented in a judicious manner”.
While it is a bit too early to identify specific targets, he adds that the fund will most likely be looking to introduce new asset classes, namely, fixed income and investments in global markets. “We believe that fixed income would provide a solid stable base for the portfolio in terms of yields and lower volatility, while exposure in global markets would allow LTAT to benefit from geographical diversification and the various cycles of the international markets.”
‘The fund’s portfolio does not revolve around Boustead alone’
The Edge caught up with LTAT CEO Nik Amlizan Mohamed and chief investment officer (CIO) Haniz Nazlan, who joined the pension fund last year following the discovery of financial irregularities at the fund. The duo are no strangers to managing funds, as Nik Amlizan was CIO for Kumpulan Wang Persaraan (Diperbadankan) while Haniz was head of investment division at Permodalan Nasional Bhd previously. Here is an excerpt from The Edge’s email interview with them:
The Edge: What has LTAT done to prevent the financial irregularities that occurred for the period between 2015 and 2017 from happening again? Have governance structures been put in place?
Nik Amlizan Mohamed: We have strengthened investment governance and risk management practices through ongoing improvements to our investment policies and processes, risk management practices, investment infrastructure and management team. Among the initiatives that have been introduced is Pillar 2 (out of six pillars) of the LTAT transformation plan. This involves the setting up of risk board and anti-corruption committees, the appointment of one independent board member and one independent investment panel member, as well as a chief financial officer and the establishment of an investment committee at management level to ensure collective deliberation on all investment matters prior to tabling to the investment panel and the board, to name a few.
Haniz Nazlan: It is also critical for the organisation and portfolio to survive any particular individual or employee, hence we have increased the practice of collective decision-making. As an example, all investment proposals are deliberated at the management-level investment committee before it is escalated to the investment panel and board. Although it is still early days at this stage, there are already internal conversations around our longer-term aspirations to incorporate environmental, social and governance investing.
Regardless, it is highly critical for LTAT to be smart in terms of its investment choices and approach, particularly given the fact that LTAT is a relatively small fund compared with other government-linked investment companies. Hence our small size should also allow us to be more agile. As an example, certain desired exposures might be best outsourced as separate mandates to leading external fund managers.
These irregularities took place under the watch of Tan Sri Lodin Wok Kamaruddin as its CEO. Will anyone be held accountable for what happened?
Nik Amlizan: Should there be any irregularities that warrant further action, LTAT will refer the matter to the relevant authorities.
It has been about eight months since the audit of LTAT exposed the group’s financial irregularities. How would you describe staff morale and the confidence of its members towards the group today?
Nik Amlizan: We are encouraged by the strong teamwork demonstrated across the board. Morale has been good and it is clear that the LTAT team is focused on achieving our strategic goal of strengthening LTAT for the benefit of our members. We have implemented change management and transformation initiatives to inculcate a more dynamic and high-performing culture, including implementing year-long team building group-driven initiatives that promote integrity, health and happiness, professionalism, [an] innovative culture, [a] caring mindset as well as environmental sustainability.
We also set up engagement and communication platforms for LTAT staff, currently implemented mainly through virtual means, including monthly town halls, department engagement sessions with the chief executive, labour union engagement as well as through the implementation of an open-door policy. We have also put in place periodical team building and transformation events.
Our members can be assured that we are putting our hand to the plough to deliver sustainable returns for the long term. We are committed to ensuring a more structured and sustainable earnings framework. Moreover, we have six representatives related to the armed forces on the board to ensure the interest of our contributors is well-protected. LTAT undertakes regular engagements with the members at military camps all over the country.
The findings of the investigative audit of LTAT showed it had reportedly not received dividends declared in 2017 by several subsidiaries. Do they remain outstanding to date?
Nik Amlizan: Perbadanan Perwira Harta Malaysia (PPHM) and Perbadanan Perwira Niaga Malaysia (Pernama) did indeed fail to pay dividends announced in 2017. However, at this juncture, PPHM has fully paid all outstanding dividends in FY2019. We have also introduced a restructured payment schedule for 10 years until FY2028 for Pernama. Pernama has been paying all outstanding dividends according to the restructured payment schedule.
In addition, both PPHM and Pernama are profitable for FY2019 and are envisaged to be profitable for FY2020. Both entities also continue to pay current dividends as per their financial performance and in line with their respective dividend policies.
There were 88 condominium units worth RM45 million in Bukit Jalil, Kuala Lumpur, which remained unsold as at December 2018, which LTAT was looking to sell. What is the latest status?
Nik Amlizan: The old marketing strategy for this property was clearly not working. Hence, we have established a new marketing strategy. To this end, we are in the midst of appointing agents to sell the property and we expect sales to start picking up by the end of 2020 and target to complete in 2021.
In an October 2019 interview with The Edge, you said that the group was looking to close pending land sales that were previously prematurely recognised in its FY2016 and FY2017 accounts. What is the status of the land sales?
Nik Amlizan: There were four land transactions involved in FY2016 and FY2017, whereby income from these incomplete land sales was prematurely recognised. One of the land sales was concluded in 4QFY2018 and another transaction was concluded in 1QFY2020. The other two land sales were aborted.
LTAT was able to announce better dividends in FY2019 compared with FY2018 as a result of a waiver of liabilities that were due to the government. Is the exemption a once-off?
Nik Amlizan: Based on provisions in the Tabung Angkatan Tentera Act 1973 (Act 101), the government has granted LTAT an exemption from paying dividends on the government’s contribution for FY2019 in order to assist LTAT to pay dividends to members for FY2019. This approval is only applicable for FY2019.
FY2019 is the second year where LTAT declared low dividends, of 2.5%. Under the turnaround plan, when does it expect to see a return to 6%-8% dividend levels?
Haniz: Looking at the performance of the stock market and with 47% of our portfolio concentrated in Boustead Holdings Bhd and Affin Bank Bhd, our performance was clearly impacted, particularly given the fact that both listed companies did not pay any dividends in 2019. We are cognisant that the fund’s portfolio is highly concentrated and requires better diversification. As we move forward, the focus remains on implementing key initiatives identified as part of our transformation journey towards becoming a world-class pension fund.
A case in point is Pillar 3 of the LTAT transformation plan, which pertains to enhancing sustainable investment returns. This includes the establishment of LTAT’s strategic asset allocation (SAA) framework, which is currently in progress and is expected to be completed by year end.
The intent is to ensure the portfolio is set on the right path towards long-term sustainability. To do this, we are conscious of the need to realign our investment strategies with our overall long-term investment objectives and philosophy. The SAA will allow LTAT to clearly determine the investment objectives of its fund including setting the right return targets and risk tolerance levels, which are in line with the retirement objectives of the members.
It would be presumptuous to indicate future dividend targets at this juncture, given the fact that LTAT’s portfolio requires time to be restructured amid the unprecedented challenging investment environment, with the current pandemic certainly having an impact on some of our plans.
How has LTAT been impacted by the Covid-19 crisis? Has it changed any of the group’s transformation plans?
Haniz: We certainly have not been spared from the impact of the Covid-19 pandemic, much like other institutions. Since LTAT is 57% exposed to companies listed on Bursa Malaysia, with 47% of our portfolio comprising Boustead and Affin Bank, the drop in share prices has had a significant impact on LTAT. The FBM100 dropped to a low of 8,214.63 or 26.1% on March 19, from 11,114.55 at the beginning of the year. The overnight policy rate has also been cut to historically low levels and that has a significant impact on interest income.
Nevertheless, we believe that the current market weakness represents an opportunity for LTAT to tactically rebalance the portfolio towards undervalued defensive investments. Moreover, the Covid-19 crisis will also likely have a direct impact on the ability of most companies to pay dividends due to the standstill in terms of economic activities for a period during the Movement Control Order.
In previous interviews, LTAT has said that it planned to reduce its dependence on Boustead. How successful has this diversification been?
Haniz: Our controlling (59.44%) stake in Boustead brings about high concentration risks. We reiterate that unless a particular investment or asset has strategic importance to us in delivering our objectives as a pension fund, we will not be opposed to reducing our controlling stake, if it is in the best interest of the fund and members. We will not be shackled by the performance of any investee company. LTAT is always on the lookout for opportunities to create value within our portfolio.
Going back to our SAA framework, we are cognisant [of the fact] that issues go beyond just one investee company. It will take time to address the overconcentration on certain investments due to current market conditions. Again, the fund’s portfolio does not revolve around Boustead alone as LTAT has many other investments that would need to be further optimised. Any portfolio rebalancing would need to be done responsibly and judiciously to protect the interest of the members.
(On May 28, LTAT announced that it was considering a proposal to privatise Boustead at a proposed offer price of 80 sen per share, which would see it forking out around RM660 million. When asked about the rationale for the move, Haniz said they were not able to comment at this juncture as they were subject to regulatory requirements.)
What would you say are the things that LTAT is doing differently from before?
Haniz: LTAT is looking into different parts of the portfolio that could potentially be restructured or further streamlined to generate greater synergy. For instance, LTAT has a stable of investment properties including Surian Tower and Royale Chulan Kuala Lumpur. We are working on streamlining the ownership structure of these investments while looking into active strategies in managing these assets. This includes putting in place tailored asset enhancement initiatives towards improving rental yields, moving forward. It is important to also emphasise that creating value does not necessarily lead to disposal of assets, nor does it mean holding on to assets without having a clear exit strategy.
Where necessary, LTAT will not hesitate to unlock value from its investments from time to time and at the right price, should the disposal be in the best interest of the fund. At the end of the day, the fund needs liquidity and capital to reinvest in new opportunities in order to replenish the quality of assets in the portfolio.
Another thing is, technology is central to our future plans. Data is the heartbeat of our investment process. As a start, we intend to promote automation of processes, data management and data analytics. Improved reporting and analytics would provide us with a deeper understanding of the portfolio and drive better-informed investment decisions. Artificial intelligence and machine learning are at hand, hence why should we resist? LTAT will embrace it where it adds value to our processes.
We see adoption of technology as an investment for the future rather than a cost. While staying conscious of large capital expenditure outlays, incremental enhancements over time when done consistently make a huge difference. As an example, we have adopted electronic trading and automated trade order management by leveraging on underutilised functionalities of the existing trade platform. This has greatly improved efficiency — cutting short the time spent on manual management and monitoring of trades.
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