Khazanah's merging of funds more optics than substance

The consolidation of Khazanah's commercial and strategic funds will simplify the structure of the sovereign wealth fund but the verdict is out on whether reporting will be more transparent.
Khazanah's merging of funds more optics than substance

The move by Malaysia’s sovereign wealth fund Khazanah to merge its commercial and strategic funds is unlikely to have an impact on its performance but some experts hope it will mean more transparent reporting.

“To me, this re-organisation is kicking the can down the road, and trying to divert attention from the most concerning matters including the bailout of Malaysia Airlines and the increasing dividends given to the government,” Diego Lopez, managing director of US-based thinktank Global SWF, told AsianInvestor.

Diego Lopez
Global SWF

In 2020 and 2021, Khazanah declared a RM2 billion ($474 million) dividend payout to the government, up from RM1 billion in 2019, despite the drop in performance.

READ ALSO: Malaysia's Khazanah reports 77% drop in operating profit

Since 2019, the sovereign wealth fund has split its portfolio into a commercial fund (focused on commercial gains) and a strategic fund (dedicated to driving economic growth by investing in domestic companies), but it announced during its annual review in March that it would be merging the two.

The commercial fund posted a 19% time-weighted rate of return on its net asset value, compared to the strategic fund’s negative 11.4% returns.


Khazanah typically parks poor performing assets of national interest such as Malaysia Airlines under the strategic fund, but the merger might not necessarily mean that these assets will fall under the newly merged fund, Lopez said.

Under the new configuration, the merged investment portfolio amounts to RM120 billion (US$28.6 billion) in realisable asset value, representing 90% of the wealth fund’s total RM134 billion. 

But the remaining 10% will be split among three minority funds: the Dana Impak fund, which has RM6 billion allocated to “socioeconomic outcomes”; the developmental fund which has a longer-term focus; and the special situation fund of an undisclosed sum for distressed assets.

Khazanah's portfolio

A former senior Khazanah official speaking to AsianInvestor on condition of anonymity said the merger has more optics than substance, adding he does not expect a significant impact on its performance because of legacy issues.

“This has always been the struggle of Khazanah. There is a group of companies that are not profitable but remain key companies for Malaysia that cannot be sold,” he said, citing the loss-making national airline as an example.


Gary Smith
Sovereign Focus

However, Gary Smith, managing director of Sovereign Focus views the merger positively, saying it will result in cost savings and greater transparency.   

“Consolidation will obviously lead to a reduction in costs, and I would argue that this will be a significant benefit,” he told AsianInvestor.

He said any measures that lead to a simplification of the structure of state-owned investment vehicles are seen as a positive move, given the history of 1MDB – a state investment fund that is currently under investigation for corruption - where opaqueness was at the centre of the scandal.

Javier Capape Aguilar, director of sovereign wealth research at IE University in Spain, also expressed the hope that the merger will lead to improved performance reporting. 

Javier Aguilar
IE University

“It has been challenging to understand Khazanah's performance metrics over time,” he said.

Khazanah said in an email response to AsianInvestor that improved reporting was one of the aims of the merger. “The restructuring of Khazanah’s Commercial and Strategic funds into the Investment Portfolio is reflective of reporting refinement, where assets with commercial return expectations are streamlined into the investments portfolio,” it said.


The more critical task ahead for Khazanah is how it will take advantage of the merger and make sharp investment decisions to shore up its performance.

“One of the key elements for Khazanah is to decide on their international portfolio geographic exposure to China (currently 15%),” said Aguilar, adding that China still offers attractive opportunities.

“Whether Khazanah explores more in other geographies – the US and Europe account for just 7% and 2.8% of the commercial portfolio, respectively - or keeps China as their global main market, this can be reassessed with the new portfolio,” he said.

Khazanah's portfolio split by asset class and geography

Returns across all asset classes rose from a dismal 2020, with domestic assets outperforming.

Khazanah’s core domestic holdings such as CIMB, Axiata, Astro, and IHH had performed well in 2021, despite the local bourse being the worst performer among its Asean peers, according to a Malaysian fund manager who declined to be named.


Khazanah's 2021 commercial fund returns by asset class


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