Why PNB’s offshore diversification drive has fallen behind

Permodalan Nasional Berhad’s latest annual report shows that its gradual increase in exposure to foreign assets does not appear sufficient to meet a stated end-2022 target.
Why PNB’s offshore diversification drive has fallen behind

In a media briefing announcing its 2020 annual report on April 8, Permodalan Nasional Berhad (PNB) was eager to highlight its growth in assets under management, increase in unit holders and continued strides towards diversification.

However, the state-affiliated asset manager made no mention of the target it had set itself last year: to increase global assets to 30% of its investment portfolio by 2022.

Observers believe the omission was down to a mixture of conflicting internal priorities and a change in leadership in the middle of last year. But it leaves the question: does PNB still want to reach the 30% target, and if so, over what period?

To be sure, the manager increased its exposure to foreign assets during 2020 – but only from 8.5% to 12% of its portfolio. Considering PNB had RM322.6 billion ($78 billion) in assets under management at the end of 2020, it would need to shift approximately $7 billion into foreign instruments both this year and next to reach its target.

PNB chair Zeti Aziz

The appeal of adding foreign assets is obvious. Their contribution to PNB’s income increased to 25.5% in 2020 from 11.6% in 2019.

The fund manager appears to fully understand their importance to its results. In October last year, PNB confirmed it was seeking external asset managers to help diversification and internationalisation efforts.

At the media briefing, Zeti Aziz, PNB chair and revered former head of Malaysia’s central bank, explained the fund manager was pursuing diversification “to avoid an over concentration of risk...and build a portfolio that can withstand the cyclical the economic and financial cycle, thereby creating resilience to the portfolio”.

Chief executive officer Zulqarnain Onn had similar views: “I think [diversification] is the most important work that we're doing right now,” he said, also at the briefing. “Over the long term, we will continue to increase our exposure in global markets from where we are right now, which is 12%.”

However, Onn stopped short of offering a firm goal. AsianInvestor asked PNB to clarify its commitment to last year’s target; the organisation declined to directly address this. Instead, it stated: "We do not share our internal asset allocation target as a matter of policy, but we are confident that we will continue to diversify internationally at a similar pace over the next 24 months."

Observers believe the fund manager would be wise to keep raising the proportion of offshore assets in its portfolio.

A senior executive at a Malaysian asset manager told AsianInvestor, “increasing their overseas allocation seems to be the sensible thing to do for diversification and institutionalisation of their investment programme. [This is] something PNB's previous predecessors have attempted to do”.


Given PNB’s stated desire to diversify, why is it seemingly falling behind the pace it needs to meet its self-imposed target? Peter Ryan-Kane, founder of investment adviser PeRK Advisory, believes a lack of focus and a strong domestic orientation as an organisation could be to blame.

“The [investment] process tries to combine a set of "national" goals with "investment" goals, leading to a set of inevitable compromises and lack of focus, leading in turn to inaction as competing goals require trade-offs,” he told AsianInvestor.

“The process is further hindered by a strong "home bias” and requiring very strong stakeholder management to orient the portfolio. Put more plainly, the age-old tension of taking money out of the home market and helping companies in other countries – [it’s] always a loaded political problem.”

Senior personnel changes may also play a role, according to an investment industry executive familiar with the government-linked investment corporation (GLIC). Onn replaced Jalil Rasheed as CEO in June 2020, after the latter reportedly had disagreements with the new administration that took over earlier in the year following the 2020 Malaysian political crisis.

“The impact of the top-down forces – government turbulence and leadership changes within PNB, ranging from senior leadership through to the investment teams – will have had significant impact. I suspect the internal impacts have far outweighed the external investment market factors,” said the executive.

The question PNB has to internally weigh is whether it will stick to the 30% target it previously set itself. Ryan-Kane believes it can still attain it by the end of 2022, but not without risk: “Their portfolio is not huge and global markets have plenty of liquidity for their size. However, they would be taking a lot of timing risk if they were to do so.”

Timing risk refers to when investors make large portfolio changes in a short period of time, causing a sizeable chunk of the portfolio (both the assets it sells and those it buys) to be re-priced, he explained.


Permodalan Nasional Berhad (PNB) posted a 3.4% growth in assets under management to RM322.6 billion ($78 billion) at the end of 2020. Most of the 15 funds it manages it enjoyed far higher returns than Maybank's 12-month fixed deposit rate, its benchmark. Three yielded double-digit returns.

However, PNB's gross income dropped by 5% to RM14.5 billion, largely due to its 66.4% exposure to domestic equities (32.3% of which is in so-called ‘strategic companies’).

PNB’s global public equity investments grew to 8.7% in 2020, up from 5.9% the previous year and 2.3% in 2017. Its income from global equities increased 18-fold to RM3.7 billion in 2020.

Questioned by media on why peer GLIC Employees Provident Fund (EPF) achieved better results, chair Zeti Aziz said EPF has a higher holding of fixed income in its portfolio, which she says tends to perform better relative to equities in a downcycle. 

PNB asset allocation by asset class, 2020 versus 2019


For the immediate future, PNB appears to be focusing on industry areas where it sees investment opportunity.

Onn highlighted renewable energy, infrastructure and 5G technology for public equities, saying PNB would look gain exposure in these sectors through initial public offering (IPO) participations, external fund managers, and securities like exchange-traded funds.

Meanwhile, it will continue to trade government bonds, tactical trading, and expand into emerging markets in the fixed income space, while it wants to grow its real estate investments in into data centres globally. In addition, the fund manager looks set to continue a strategy of buyouts, private equity secondaries and co-investments in the private assets space, as well as seeking opportunities in the local consumer discretionary sector.

Asked to elaborate on particular foreign markets it was eyeing, a spokesperson for PNB said: "We have been active in the US, European and North and Southeast Asian equity markets this year," adding it had co-invested with private equity general partners in North America, Europe and North Asia, and deployed real estate investments across Western and Central Europe, Japan, Australia and the UK.

"We also achieve exposure to a number of geographies through our private funds investment programme," the spokesperson added.

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