THE move to create a new RM3bil fund made up of commitments by our government-linked investment funds needs to be executed with caution.
The monies are meant to be invested in small and mid-sized listed companies. The rationale is appreciated. These companies, at least the ones that deliver on their promises, are part of an important eco-system from which larger successful Malaysian listed companies are created. But investment funds tend to shy away from investing in these small and mid caps.
Recall that Federal Budget 2017 recommended a dedicated small and mid-cap research scheme to be introduced to provide independent analyst coverage on these companies.
That move is a good one and it is understood that this scheme will be better funded, and this time not requiring the companies being covered to cover any expenses. Budget 2017 also recommended that a special fund with a RM3bil allocation from government-linked investment funds be channelled towards this segment. It is understood that the government-linked investment funds will be free to put their small and mid-cap allocations directly into stocks or invest in specialised small-cap funds.
If they are investing directly, then caution ought to be applied.
For one, the risk profile of small and mid caps is generally higher than the big caps due to the lack of an earnings track record, among other things. There are also liquidity risks – the free float of these companies tend to be smaller due to major shareholders and friendly parties holding large amounts of the total equity of these companies.
Managing these investments for the government-linked investment funds will also be a drain on resources, as the government-linked investment funds would have to cast their net wide over this asset class in order to have a meaningful exposure.
If a government-linked investment fund has, say, RM100mil to invest in small and mid caps, they would need to invest in maybe 10 to 15 companies to fill up the allocation instead of, say, one to two for the large caps.
By doing so, it will be a tedious process to manage these investments, and the government-linked investment funds will have to figure out if the returns will outweigh the costs.
Furthermore, there have been past cases where government-linked investment funds have bought into smaller companies with painful results. The often-cited case is the millions of ringgit that Lembaga Tabung Haji (LTH) pumped into Ramunia Holdings Bhd, subsequently renamed TH Heavy Engineering Bhd. LTH is still saddled with this investment and a few more small and mid-sized companies that it is invested in without getting a decent return.
Wouldn’t it have been better to have invested all those millions in established blue-chip companies that have sufficient liquidity and provide a decent dividend yield?
The counter argument to any government-initiated move to set up dedicated funds for certain sectors is that the initiative goes against the free market. If a company has a promising story and is showing signs of performing well, then investment monies will find its way to such companies.
More so in a country like Malaysia, where we have a relatively high savings rate and a vibrant retail investment market. And not to mention many high-net-worths who are able to take sizeable placements of these small and mid caps.
The Malaysian market has its fair share of astute investment bankers who are able to successfully match small companies with these high-net-worth individuals.
There are also dedicated small and mid-cap funds in the market and by themselves, government-linked investment funds such as Retirement Fund Inc have started investing in small and mid caps directly, following their own set of criteria.
And perhaps a sign that the market is already functioning well is this: Malaysian small caps are valued the highest in the region.
The MSCI Malaysia Small-Cap Index is trading at a historical price earnings multiple of 29.2 times with a dividend yield of 2.8%.
This compares with the MSCI Singapore Small-Cap Index of 20.4 times and yield of 5.3%; the Thailand PE of 18.3 times and yield of 3%; and Indonesia’s PE of 17.7 times and yield of 1.5%. Perhaps, the GLICs should also be looking at investing some of that RM3bil in these cheaper markets?
Source : http://www.thestar.com.my/business/business-news/2017/05/24/is-rm3bil-for-small-and-mid-caps-justified/#J1MMhSULrfB7yPBG.99