Can PNB sustain returns as size grows? from The Edge 11 Sept 2009
http://www.theedgemalaysia.com/component/c...cle/148523.htmlSince April this year, Permodalan Nasional Bhd (PNB) has raised more than RM15 billion to add to its funds under management which are estimated to be RM80 billion to RM120 million. The recent launch of the RM10 billion Amanah Saham 1Malaysia was by far the biggest by the government-backed PNB. In April this year, PNB reopened Amanah Saham Wawasan 2020 and Amanah Saham Malaysia to investors, which saw the sale of 5.3 million units at RM1 each.
All of PNB’s sales have received warm response from investors, particularly those who do not invest directly in the equities market. This is largely due to the fact that funds managed by PNB have on average returned yields of 5.5% to 7% in recent years, which are higher than the risk-free fixed deposit rate. At the same time, investors have the comfort of knowing the funds are backed by the government. Although not all the 10 funds that PNB manages are capital guaranteed, no investor who has put money in them can claim he is worst off.
The returns on PNB’s funds are higher than those the Employees Provident Fund (EPF) has given out to its contributors. Since 2002, the highest dividend the EPF has declared is 5.8% in 2007. Last year, when the equities market was badly hit, the EPF’s return was 4.5%.
While nobody complains about the returns on PNB’s funds, the question is, how does PNB do it? Every year, regardless of how the equities market is performing, the funds declared dividends.PNB is not known to invest outside Malaysia. Neither is it known to put large amounts of money in fixed-income instruments unlike the EPF. On average, each of its funds invests about 70% of its money in equities. PNB does not invest in high dividend paying sin stocks. It is the biggest shareholder in Malayan Banking Bhd, Sime Darby Bhd and UMW Bhd. It has, in recent months, taken up stakes in property companies such as S P Setia Bhd and Mah Sing Bhd. Most of these companies pay high dividends. Apart from dividends, there is a fair amount of activity by PNB’s funds in the market at any one time, whether sentiments are good or bad.
Although dividend income forms a substantial portion of the income distributed, a lot of its returns is also derived from realised gains from the disposal of equities. For instance, Skim Amanah Saham Bumiputera, which is said to be its biggest fund, paid out RM3.49 billion in 2006. Of the amount, almost 50% came from gains realised from the disposal of equities. In 2006 alone, the funds managed by PNB distributed RM4.2 billion to investors. Based on a fund size of RM70 billion, this works out to a return of 6%, which is higher than the EPF’s 5.15% for that year.
How the funds managed by PNB realise huge gains from the disposal of shares and dividend income is something that has continued to amaze industry players. One theory that often crops up is that PNB’s original cost of investment in some of its large portfolios, such as Sime Darby Bhd, UMW Holdings Bhd, Malayan Banking Bhd, Telekom Malaysia Bhd and Tenaga Nasional Bhd, was low. Which is why it is always able to realise hefty profits from the sale of these equities.
Also, when initial public offerings (IPOs) were a craze until the Asian financial crisis in 1997, PNB was allocated shares in listed companies at the listing price. But the IPO era has long fizzled out.
A more likely reason PNB has been able to consistently pay out dividends of at least 5.5% is that its funds do not distribute all their profit. Unlike the EPF, PNB is able to retain some of the returns. This is possibly why it is able to pay out above-average returns even when the bears overrun the stock market.But going forward, with a fund size that continues to grow, can PNB keep paying 6% dividends? With an investment strategy where about 70% of its money is put in the domestic equities market, can PNB generate sufficient returns to maintain its average payouts? Investing is not an easy task. It is an art and every serious investor will agree that most lose more money than they make. Identifying good investments is one thing, getting in and out at the right time is another.
The investments of sovereign wealth funds (SWFs), managed by well-paid investment bankers, are still under water despite the stock market having improved and fears of a recession having abated. Singapore’s Temasek Holdings and Government of Singapore Investment Corp (GSIC) had put money in troubled financial institutions such as Barclays, Merrill Lynch (which was taken over by Bank of America), Citigroup and UBS. The Singapore funds were not the only ones to invest in US and European financial institutions. Abu Dhabi Investment Authority, Kuwait Investment Authority, China Investment Corp and many other SWFs did the same. Some came out bruised but the startling fact is that the investments of very few of them is in the black.
Temasek, which is well known for its astute investment decisions, came out of Bank of America last month with a loss reported to be US$3 billion (RM10.5 billion), earning Temasek CEO Ho Ching some criticism. It was reported that Temasek had paid US$5.9 billion for a 14% stake in Merrill Lynch. It was also reported last month that American investor Warren Buffett was sitting on a US$2 billion paper gain from Goldman Sachs preferred shares which he had bought in September last year. GSIC is in UBS and Citigroup for the long haul. In February this year, it announced that it was converting its convertible preferred notes to shares at US$3.25 each, a much lower conversion than US$26.35. The conversion will leave GSIC with an 11.1% stake in Citigroup.
Having mistimed their entry into the financial institutions, the SWFs are now eyeing non-financial assets. For instance, Qatar Investment Authority will be the third largest shareholder in the merged Porsche-Volkswagen outfit. On hindsight, anybody can claim that the timing of Temasek’s entry into Merrill Lynch was too early. Many can now deduce that the SWFs did not understand the extent of the problems faced by these financial institutions. But then again, at the time, nobody thought that Merrill Lynch or Lehman Brothers would buckle under the weight of the US subprime crisis. In fact, many saw the entry of the SWFs into the US and European financial institutions as seizing an opportunity that would not come by very often.
In a nutshell, investing in the stock market is an art. It is a tough business but PNB has been doing it well with consistent returns so far. But how long can it invest and declare consistent returns of more than 5.5% by just putting its money in local stocks? PNB already has sizeable stakes in some of the big caps. Unless there is new money in the form of foreign portfolio investors buying up shares sold by PNB, it will be a tough challenge for the ever-growing fund.
This post has been edited by cheahcw2003: Oct 8 2009, 08:45 PM 
Oct 2 2009, 03:55 PM
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Thank you
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