FOR a sovereign wealth fund (SWF) whose operating profits have been declining in the past two years, Khazanah Nasional Bhd definitely has a lot on its plate moving forward.

       It has to juggle between its roles to generate strong commercial returns as well as help in advancing Malaysia in terms of business activities and socio-economic resilience.

       Most importantly, Khazanah needs to bring its airline and tourism businesses to a better shape, if it wants to grow its operating profits once again.

       After all, the businesses were the ones that dragged down the SWF’s performance in recent years.

       In 2020, Khazanah’s profit from operations slumped by 61% to RM2.9bil as it made bigger impairments worth RM6bil. Of the impairments, RM3.1bil was for Malaysia Aviation Group (MAG).

       Meanwhile, in 2021, Khazanah’s operating profit dropped by a further 77% to RM670mil due to continuing financial assistance to Khazanah’s airlines and tourism companies that are still weathering headwinds from the Covid-19 pandemic.

       Profit was also impacted by lower fair value gains and lower dividend income from investee companies on the back of subdued 2020 earnings.

       Khazanah undertakes its tourism operations via Themed Attractions Resorts & Hotels Sdn Bhd, according to its website.

       To get the airline and tourism businesses up and running as they used to, the borders need to reopen and individuals must regain confidence to travel once again.

       Managing director Datuk Amirul Feisal Wan Zahir says the SWF is focused on improving Malaysia Airlines’ operations to ensure yields are maintained and that the airline remains profitable.

       “The amount of support that the airline will have depends on whether it can resume its activities; it can only resume its activities if people are allowed to travel and we are really hoping that international borders would reopen, the sooner, the better,” he said during his first annual briefing on Khazanah Annual Review 2022 on March 2.

       At the start of MAG’s restructuring in 2021, Khazanah had committed to inject RM3.6bil over five years.

       A source close to the company says that between March and December 2021, about RM1.33bil has been injected.

       “The balance (from the committed injection of RM3.6bil) is available for drawdown up to 2025,” the source tells StarBizWeek.

       For now, Khazanah is focused on strengthening the long-term prospects of Malaysia Airlines, and as hinted by Amirul Feisal, the SWF is not actively looking for a buyer for the airline at the moment.

       With the disposal of the airline out of the picture for the near term, the resources needed to bring Malaysia Airlines back to its glory days will have to come from Khazanah as the sole owner.

       This would mean that financial assistance to the airline business may continue, especially in the worst-case scenario.

       The good news is that Khazanah has completed MAG’s restructuring process.

       As more countries, including Malaysia, are moving towards reopening their international borders, this could speed up the recovery of Khazanah’s airline and tourism businesses.

       A fund manager tells StarBizWeek that Khazanah may need to consider diversifying its portfolio further beyond Malaysia.

       “Khazanah does have a diversified portfolio at the moment and its global exposure has increased to an extent in the past several years. But, more can be done and Khazanah can have a larger presence in international equities.

       “The returns in the Malaysian market haven’t been very interesting in recent years, and if a large portion of Khazanah’s portfolio is in Malaysia, the potential returns would not be very exciting.

       “We can learn from Norway’s SWF which invests only in international assets, especially on how it diversifies its portfolio,” he says.

       In 2021, Khazanah’s Commercial Fund invested 54.1% in Malaysian public markets; 16.1% in global public markets; 14.5% in global private markets; 7.9% in real assets; and 7.4% in Malaysian private markets.

       About 90% of the fund portfolio, which has a realisable asset value of RM106bil, is invested within Asia, primarily Malaysia.

       The Commercial Fund’s three-year rolling returns from Malaysian public markets was only 4.1%, compared with 17.8% from global public markets.

       The fund generated a three-year rolling time-weighted rate of return (TWRR) of 7%.

       In contrast, Khazanah’s Strategic Fund delivered a three-year rolling TWRR of minus 21.4%.

       The Strategic Fund, which invests to deliver economic and societal returns for the nation, controls a realisable asset value of RM28bil as at end-2021.

       Moving forward, Khazanah will be consolidating its commercial and strategic funds into a single diversified portfolio, as part of its new “Advancing Malaysia” strategy.

       This is aimed at building the financial strength of the SWF.

       Nevertheless, despite the consolidation of funds, Amirul Feisal has said that Khazanah will still work with the government to decide on the sale of any assets with national interest.

       Maintaining a continued growth for Khazanah is important, considering the dividends it generates for the government. In 2020 and 2021, the SWF paid RM2bil in dividends annually, despite the lower profits.While a RM2bil dividend is only a fraction of the RM332.1bil Budget 2022, it goes a long way for a government whose fiscal space is already limited.

       A financially strong Khazanah is also vital for the development of the country.

       Over the next five years, Khazanah will be spending RM6bil via the Dana Impak initiative to catalyse new growth sectors.

       Aligned to the global megatrends, six themes have been identified for Dana Impak, namely, digital society and technology hub; quality health and education for all; decent work and social mobility; food and energy security; building climate resilience; and competing in global markets.

       Khazanah also seeks to facilitate flows of knowledge, networks and investment opportunities through its global investments and partnerships, in addition to building capacity and developing vibrant communities for the benefit of Malaysians.

       In addition, the SWF has also set its sights on becoming a more “active corporate player” in the Malaysian capital markets.

       As part of its Advancing Malaysia initiatives, Khazanah says it aims to reinvigorate the Malaysian market by crowding in new private investments, as well as future-proofing corporate Malaysia by bringing together the right partners, management team and owners for its investee companies.