My NS Strategy Advice For Valuecap

The Edge Daily wrote a good piece on Valuecap. Here are the main points:

a) Valuecap Sdn Bhd, the asset management company owned by Khazanah Nasional Bhd, Permodalan Nasional Bhd and the Pensions Trust Fund Council, will receive an injection of RM5 billion to invest in undervalued companies on the Kuala Lumpur Stock Exchange. The money, which doubles the size of Valuecap’s capital, is on loan from the Employees Provident Fund (EPF). Valuecap, which was set up in 2002 to add liquidity and volume to the market, has met these objectives.

b) Is Valuecap’s record of its return on investment matches the EPF’s benchmark. However, currently, Valuecap is believed to have about RM4.9 billion worth of investments in 70 companies. And it has been reported that since its inception to September 2007, Valuecap has paid out a total of RM135 million in dividends. Better public disclosure will help to ascertain whether this passes the standard tests for financial performance.

c) A check with the registrar of companies shows that it is in the black and has assets of RM7.5 billion. So Valuecap has some value. But what is the return that EPF will get on the RM5 billion?

d) Since it involves two government-related entities, disclosures must be made every year on the returns. Also, Valuecap should detail the stocks it has in its portfolio just like some of the listed small-cap funds. At the moment, nobody really knows the stocks in Valuecap’s portfolio.

e) The Valuecap story illustrates the importance of transparency in financial reporting to boost investor confidence and the need for clarity about the correct economic stimulus package to move the market sentiments in the right direction.

The blogging community has tried to capture more information on Valuecap's Holdings: copied from http://bursa-chat.blogspot.com/

UAC Bhd 3,222,700 4.33 %

Amway(M) Holdings Bhd 6,958,100 4.23 %

MBM Resources Bhd 10,010,200 4.14 %

Hume Industries Bhd 6,596,400 3.45 %

PPB Group Bhd 40,452,900 3.41 %

IOI Property Bhd 28,267,500 3.4%

KLCC Property Holdings Bhd 30,957,800 3.31 %

Petronas Dagangan Bhd 32,436,400 3.27 %

YTL Cement bhd 14,955,092 3.05 %

Uchi Technologies Bhd 11,318,200 3.03 %

Chintek Plantations Bhd 2,646,000 2.9 %

United Plantations Bhd 5,975,800 2.87 %

Star Publications (M) Bhd 21,148,500 2.86 %

JTI International Bhd 7,144,400 2.73 %

Boustead Properties Bhd 6,672,150 261 %

Bintulu Port Holdings Bhd 10,121,100 2.53 %

Shell Refining Company Bhd 7,589,300 2.53 %

British American Tobacco Bhd 6,505,200 2.28 %

Axis REIT 5,400,000 2.11 %

Quill Capital Trust 4,302,000 1.1%

OSK highlighted 11 potential targets on the Kuala Lumpur Composite Index (KLCI) that Valuecap may go for — MISC, Petronas Gas, DiGi, British American Tobacco, Petronas Dagangan, MAS, Sime Darby, Maybank, IOI, AMMB and MMC.

Comments: From available information, Valuecap performed well. From the list of portfolio companies, it appears that the financial decision making is above-board (i.e. free from being "forced" to invest in "linked or influential" companies). Hence all the more reason to be totally transparent in their undertakings, staffing and investing policies. Its EPF money, hence its the public's money, NOT the government's. If you lend money to someone, you have a right to know how it is going to be spent on.

We also need to know the terms of the agreement between Valuecap and EPF on the disbursement of loan. Are there minimum performance criteria? How are dividends treated or repatriated? What is the time frame for the loan? Can EPF recall the loan at its own discretion, just like EPF can redeem funds mandated to other fund managers. We must have clear arms-length terms. If the government has learnt anything from what the people want over the past 12 months, its more transparency, clarity, stewardship and purpose in policies and management of resources.

In my view, the establishment of Valuecap is OK and justifiable. It is very much in the same platform as HKMA's massive Tracker Fund (although it did not start off as a tracker fund or ETF). When there are massive volatility and imbalances in global capital flows, the establishment of such funds are justifiable and forward looking. You do not want the broader economy to be affected disastrously by such vagaries.

We have to acknowledge that for economies that are highly correlated to fortunes of their own stockmarkets, the establishment of such vehicles are justifiable and proper. Malaysia has one of the highest GDP that is listed among all capital markets. Hence the correlation and flow on effects of the stockmarket is extremely high for the local economy. If that figure is much lower, like many European developed countries, the need to intervene with such vehicles may not be deem as necessary.

My final point is what is the "exit strategy" or "long term strategy" for Valuecap. What happens when you dissolve the fund? You get the same amount of scrips being flooded back into the market. Yes, you can argue that 5 years down the road, when the KLCI is at 1,800 or higher and sentiment has improved, Valuecap may be able to selldown its positions gradually. But that strategy is defeatist in every sense. You will still have to restart another Valuecap the next time a similar situation were to occur in the future - its not a solid strategy.

My advice (and this is worth millions in fees, which I am waiving) is to list Valuecap as an ETF. The strategy should be to break it up into 3 equal tranches. Assuming the portfolio value reaches RM15 billion in a few years time, thats three very sizable ETF. I would recommend to list one in Nasdaq, where the bulk of global ETFs are traded. The other ETF should be listed in Tokyo, while the final one in Malaysia. Do not be blinkered in trying to list all on Bursa on the basis of misplaced pride alone.

The strategy would basically "take the free float" out of the stockmarket, thus ensuring long term sustainability and investing interest. By listing in Tokyo and Nasdaq, you are basically selling all the shares to foreign investors, but the shares do not get back to the market place at all. An ETF will hold the same amount of shares throughout its life, investors will buy and sell the ETF like a share but shares held inside the ETFs would not flow back to the market place.

The strategy basically makes it possible to "trade" Malaysian shares like an index almost 24 hours a day. From Bursa trading hours to US trading hours and then Tokyo trading hours.

Sigh, if I was a Binafikir partner, I would at least get a few million in advisory fees for this.

p/s photo: Christine Mendoza