Malaysia state funds can lift Bursa, but market discipline must rule

[SINGAPORE] Malaysia’s government-linked investment companies (GLICs) are not just big investors.

With their deep pockets and sprawling holdings across Bursa Malaysia – the country’s stock exchange – their heft makes them the obvious place to turn to whenever the market needs a lift, confidence needs shoring up or a national rerating agenda needs some muscle behind it.

After all, why not?

The country may not have the region’s largest sovereign wealth fund, but the spread and breadth of its dense network of state-linked funds give the domestic market a powerful – and, dare I say, indispensable – pool of institutional capital that exerts profound influence over Malaysia’s corporate and market landscape.

The GLIC roster is formidable. It spans:

• Employees Provident Fund (EPF), Malaysia’s national retirement savings fund;
• Permodalan Nasional Berhad (PNB), the state-backed fund manager behind the Amanah Saham unit trust schemes;
• Kumpulan Wang Persaraan (Kwap), which manages public-sector pension funds;
• Lembaga Tabung Haji, the pilgrims’ savings fund;
• and Lembaga Tabung Angkatan Tentera, the armed forces’ retirement fund.

Then, there is Khazanah Nasional, Malaysia’s sovereign wealth fund.

Each has its own mandate and constituency, and each guards a different pool of funds. But the common thread is clear: They are custodians of Malaysians’ capital and are expected to preserve and grow it.

So it was hardly surprising when Malaysia’s Deputy Prime Minister Ahmad Zahid said on Jun 9 that the government-linked funds, namely PNB, EPF and Kwap, would throw their weight behind the country’s MY Value Up programme, by backing Bursa-listed companies that embrace value creation, transparency and good corporate governance.

He was signalling that Malaysia wanted Bursa-listed companies to be better governed, more transparent and more disciplined in capital allocation – and that those which adopt MY Value Up principles could be rewarded not just by the market, but by the country’s largest institutional investors.

The gaps between successful companies and those that lag behind are not insignificant. Securities Commission executive chairman Mohammad Faiz Azmi noted that only about 200 of Malaysia’s 1,100 listed companies generated return on equity of more than 8 per cent.

The significance of that announcement should not be dismissed. These three funds, taken together, command some RM2 trillion (S$625.3 billion) in assets – a sum that is nearly equal to the country’s entire annual gross domestic product.

Collectively, they own a whopping RM430 billion worth of shares in the 88 companies targeted under MY Value Up, or some 26 per cent of these companies’ combined market capitalisation.

But, it also raises the question: When it comes to pushing a rerating on Bursa, when should market discipline end and state-directed capital allocation begin?

The initiative is aimed at pushing the companies that collectively make up around 80 per cent of Bursa Malaysia’s total market capitalisation to spell out how they intend to create value, raise disclosure quality and forge stronger dialogue with investors.

None of this is novel from an investment standpoint.

These are basic parameters that institutional investors already use, by and large, to decide whether a company deserves their capital.

For GLICs, whose capital is ultimately tied to Malaysians’ savings and welfare, those principles should be the starting point, not a policy prompt.

The issue is not that government-linked funds are being asked to support better-run companies.

It is whether such support needs to be publicly framed as part of a national rerating agenda. If the market is working as it should, companies that show better returns, disclosures and capital discipline will be rewarded by the market anyway.

The signalling could be construed – rightly or wrongly – as pressure.