Many large institutional investors are responding to the prevailing low-return environment by seeking greater allocations to offshore assets and strengthening their overseas teams.
But Malaysia’s RM136 billion ($33 billion) sovereign wealth fund is paring its international capabilities, even as it aims to increase its foreign exposure beyond the current 15%.
After suffering a 13.4% fall in the value of its investment portfolio in 2018 (see graph below), Khazanah Nasional has closed its office in London and is scaling back its presence in Turkey, which have been place since 2016 and 2013, respectively.
It was also reported in February that the fund plans to reduce headcount in Mumbai and San Francisco and to scale back non-strategic international investments including some foreign property and technology assets.
The moves in London and Istanbul are part of the revised investment strategy that Khazanah announced early last month, which is set to see a complete rebalancing of the portfolio, a spokesman told AsianInvestor. But it is not cutting headcount i n Mumbai or San Francisco, he said, though it will be selling some foreign assets and divesting in others.
“We are closing our London office and the process should be completed soon,” he said. “This is in line with our efforts to improve our overall operating cost efficiency, which is one of our key transitional priorities that we are executing over the next five years.”
Khazanah aims to reduce its cost-to-realisable-asset ratio from 50 basis points to 30-35bp, a level it sees as in line with other funds.
It seems the uncertainty related to the UK’s decision to leave the European Union may have also been a factor in the London shutdown – though not the main one.
“The closure is less to do with Brexit than with our overall plans to deliver on our investment objectives under the refreshed mandate,” the spokesman said.
Some of the 10 London-based staff will be leaving the fund, while others will be relocated to Malaysia, he added.
Khazanah chief executive Shahril Ridza Ridzuan – brought in in August last year by new prime minister Mahatir Mohamad – had mooted the move last month. He was quoted as saying that high-cost-base operations “may not go well with our plans for the near future, so we are looking at closing London”.
The institution is also making cuts in Turkey “because we don’t require such a big presence there”, the spokesman said. Ridzuan had also said last month that Khazanah had started to exit investments it has in the country.
However, the fund is ultimately looking to increase its investment in international assets as it looks to bounce back from a difficult 2018.
“Essentially, we need to rebalance our overall portfolio towards being more global,” the spokesman said.
A source familiar with Khazanah said the fund is believed to be weighing up its portfolio composition with a view to changing the balance between its overseas and domestic exposure, and between its liquid and illiquid assets.
Khazanah plans to raise its overseas allocation from 15%, with a planned foreign asset breakdown of 60% in public equity, 30% in private equity and 10% in real assets, said the spokesman. He declined to provide the current breakdown.
Moreover, he said Khazanah’s “ability to efficiently pursue global opportunities ... is not diminished by the closing of the London office”.
This is despite the fact that other asset owners – such as Korea’s National Pension Service, Malaysia’s Employees Provident Fund and North American retirement schemes CPPIB, Ontario Teachers, PSP Investments and Texas Teachers – are moving to ramp up their overseas capabilities.
KHAZANAH'S 10-YEAR PERFORMANCE TO END-2018
Khazanah has not yet gone into much detail about its rebalancing plans, but Shahril has indicated that it will be a seven- to 10-year process. He also said in February that the fund is considering what to do with various underperforming assets and that it aims to be more disciplined in cutting losses early.
A source familiar with the fund told AsianInvestor said one possible change is that the overseas illiquid market portfolio – which accounts for a big chunk of its foreign assets – will be reduced. In addition, he said, Khazanah may increase the foreign holdings in its public market portfolio, most of which is sitting in domestic assets.
The spokesman confirmed that rebalancing the portfolio would involve divestment of some assets and reinvesting some of the proceeds into new assets. He added that some of the proceeds would go towards reducing Khazanah's debt and some towards dividends to be paid to the government.
The fund will work through various strategies to decide what is most suitable, Elliot Hentov, head of policy research at State Street Global Advisors, told AsianInvestor. It’s in the early stages at present, having been under way for less than a year, he added.
That follows a government review of the entire sovereign balance sheet after Mahatir took power last year, Hentov said. “This includes Khazanah and involves looking at assets and liabilities and how they can get a better mix between the two.”
“The Malaysians are being very smart in taking a holistic view of all their state assets, not just one of the portfolios,” he said.
While Khazanah’s closure in London is specifically linked to what is happening at the fund and in Malaysia, Hentov said, its cutbacks in Turkey are in line with a broader trend.
“A few years ago there were perhaps a dozen sovereign funds investing a fair amount in Turkey,” he told AsianInvestor. “But now there are very few – really only those that have a particularly strong relationship with the government there.”
Sovereign funds believed to have – or have had – interests in Turkey include several in the Middle Eastern, as well as Chinese and Singaporean players, such as Temasek.
However, against the backdrop of the increasingly dictatorial approach taken by President Recep Tayyip Erdogan, Turkey posted just 2.6% economic growth last year as the country’s credit-fed economic bubble burst and the lira collapsed. It also faces very high inflation and interest rates.
“The macroeconomic environment in Turkey is very unappealing now,” said Hentov, with the growth rate expected to be structurally lower for the next few years. “That will affect the profile of all deals that have been planned.”
And on top of low growth, the high level of inflation and elevated currency risk provide a double whammy, he added. “That has scared away a lot of investors.”