Malaysian sovereign wealth fund Khazanah suffered a financial blow from the pandemic in 2020, according to its latest financial report, but ongoing restructuring has ensured it remains profitable and debt is being steadily cut even as dividends to the government grow. Nevertheless, the CEO looks set to be replaced and cost-cutting measures could see the San Francisco office close, following the closures of the London and Istanbul offices.
Khazanah reported a dismal performance today with 2020 annual profits slumping by 61% to MYR2.9 billion (US$715 million) as its domestic assets – comprising two-thirds of its portfolio – faced the impact of the economic thrashing in the wake of the pandemic.
Malaysia’s GDP fell 5.6% in 2020, compared to the global economy’s decline of 3.5%, helping to drag down performance. Khazanah’s domestic positions are heavily exposed to sectors that were most impacted by the pandemic, resulting in heavy losses and impairments. A notable example is Malaysia Airlines, which now represents 23% of the fund’s total AUM. The flag carrier remains a ball and chain on the fund.
The two-year rolling basis rate of return for Khazanah’s commercial fund was just 1.5%, following 8.3% reported in the previous year – a disappointing result that undershoots the inter-generational long-term investment pool target. The main source of weakness came from domestic public markets, representing half the fund, which reported a negative return of 7.8%, while Malaysian private equity also declined by 6.4%. This was offset by growth in global public markets of 26.2%.
Khazanah's commercial fund divested MYR13.2 billion in assets – far higher than the MYR5.6 billion of investments – as the fund sought to increase liquidity in its portfolio. Indeed, the allocation to cash in the commercial fund grew from 1% in 2018 of AUM to 7% in 2020 while public equity in foreign markets grew from 12% to 17%, in line with the rebalancing and diversification of the portfolio to improve risk-adjusted returns.
Contributions to government rose from MYR700 million in 2017 to MYR2.2 billion in 2020 as Malaysia has sought to fiscal pump prime the struggling economy. However, since the end of 2020, Khazanah has injected MYR3.6 billion into Malaysia Airlines
Despite the fall in profitability, Khazanah is still performing better than the MYR6.3 billion loss reported in 2018 before it began its portfolio restructuring. It also reduced debt by 6% to MYR43.1 billion.
Nevertheless, the government has placed its subsidiaries under increased scrutiny with a recent change of CEOs at the public pension fund KWSP and the electricity utility Tenaga. Khazanah CEO Shahril Ridza Ridzuan’s future at the fund now looks in doubt.
We expect a lot of cost cutting measures in the fund to continue to reduce debt and improve performance. This could see more overseas offices closed. Khazanah has already shut its London and Istanbul offices, but San Francisco could be next.
Even as the pandemic subsides, the Malaysian economy continues to face significant risks, notably the unwinding of the household credit boom, which has the potential to lead to a collapse in domestic demand.