Dear Prudence: Is EPF Purchase of RHB Scandalous?

Dear Prudence, won't you come out to play
Dear Prudence, greet the brand new day
The sun is up, the sky is blue
It's beautiful and so are you
Dear Prudence won't you come out to play

Dear Prudence open up your eyes
Dear Prudence see the sunny skies
The wind is low the birds will sing
that you are part of everything
Dear Prudence won't you open up your eyes?

Look around round
Look around round round
Look around

Dear Prudence let me see you smile
Dear Prudence like a little child
The clouds will be a daisy chain
So let me see you smile again
Dear Prudence won't you let me see you smile?

Dear Prudence, won't you come out to play
Dear Prudence, greet the brand new day
The sun is up, the sky is blue
It's beautiful and so are you
Dear Prudence won't you come out to play

-- The Beatles, White Album (1968)


My first impression to the accusation by Tony Pua, the new Economic Adviser to DAP Secretary General, on EPF purchase of RHB as scandalous seemed alarming (Read in FreeLunch 2020 here). For one with no or limited experiential knowledge in portfolio management and banking, his political statement seemed commendable.

While his headline got me to sit up, I am not easily taken-in in the wake of strange headlines like our RM1 trillion "good" economy these days. Mind you, scandal is synonymous with offense. As I surgically read his statement, I fail to see any conclusive offense made under law or abnormality in industry practise, be it in a professional or regulatory role.

And, to simply prefer EON Capital or Kuwait Finance House to takeover RHB, just because both are financial institutions, is certainly a naïve remark.

Let not nit pick like a lawyer enlisting troubling issues from some textbook checklist.

Fallacy of the Accusation

Behind those liberal uses of technical jargon and numbers, the seven issues are inconclusive, arguable and speculative. Allow me to elaborate below:

1. EPF has humbly recognised their lack of expertise in managing Bank. The management provided by Khazanah. This will assist their process of building expertise within the organisation. As one who attended the courtroom proceeding in the trial against Dato Ismail Zakaria, the presumption of Sime Bank's failure is way of mark.

2. While the 18% exposure of its total equity investment seemed large, it is still a mere 3.5% of total fund under management. Do the scenarios and do the math. Will it significantly impact EPF return? The way the Capital-asset Adequacy Ratio risk is presented, it seemed only a Bank with no loans activity is satisfactory to DAP. And, to apply gearing practise of other business to Banking, it is a serious flaw.

3. For big organisation like EPF, it is within their means to create the structure to manage their investment. Lets not create hearsay that EPF will be distracted away from their decades old core business of Fund Management.

4. On the speculation that EPF is average down investing on RHB, is it not a common investing methodology? Sieving through his arguments that EPF is "throwing good money after bad money" and void of proper judgement, strangely there is too many "if"s. Does that warrant an offensive scandal label? If any, barking at the past does not move one to the future.

5. Regulatory uncertainty occurs when there is no precedent. As it is, there is no Malaysian law limiting ownership of Banks beyond 20%, only Bank Negara Malaysia (BNM) policy regulation. There is a precedent to allow certain Institutions of national interest like PNB to own majority stake in a Bank. And, there has been leeway of time for divestment of shares to Tan Sri Azman Hashim dan Tan Sri Teh Hiong Piow. Where is the regulatory uncertainty?

6. The raising of doubts on the unanimity of the Boards' decision on this acquisition differs wildly from positive remark by Bloggers BigDog on the existence of 3 professional Bankers on the Board (Read here). If there is confirmed inside information on the Board divergence view, it should certainly be shared. Otherwise, it is too speculative to call for an offensive scandal. As all Boardroom practise, decisions are made collectively.

The Bigger Perspective

Right up to the late 80s, the bulk of EPF investment is in long-term Government Bonds of 15-20 years with gorgeous coupon rates of 7.5 - 8.5%. Since the recession of 1986, the Government have progressively reduce deficit and consequently lesser amount of Bond are issued.

Come the 90s as Government was on a balance budget policy, Government Bonds have a much reduced rates commensurting with the shorter tenure. That explains for EPF declining return. For EPF to sustain a growing fundsize and limited choices of investment to meet its fund objective for capital preservation and modest return, and the terms in the deed of trust, investing its funds is a formidable and daunting task.

One investment model that has proven well in Malaysia is PNB, Tabung Haji, and LTAT. These institutions manage their Fund well and manage their invested companies. Even the legendary Investment Guru Warren Buffet of Berkshire Hathaway has his hand on main investment, GEICO. So does, Ross Perot.

Managing your major invested company helps reduce the risk of being railroad by other managing shareholders. This certainly applies in the ruthless Malaysian corporate scene and EPF has fall victim to many such situation.

I certainly welcome EPF move to "take the bull by the horn", should it be the direction it is taking. As compared to investing PFI and Corporate Bonds, it promises a better control on its return. EPF is certainly not without Boardroom experience in control and monitoring of strategic investment, particularly in Banks. In fact, EPF have been managing MBSB from time immemorial.

This acquisition can be bring about many possibilities and opportunities, even cooperating with with the other bidders. The whole sequences of corporate exercises are still not known publicly but it must be made known to BNM. Hold on to your horses.

In the nutshell, this is the dilemma of investment decision - investing or divesting or do nothing. Whatever it is, investment can never be risk free and risk avoidance is impractical. Just balance the risk with expected return.

Here's to responsible bogging and gentlemen agreement to disagree.

The sun is not that gloomy.

Dear Prudence won't you come out to play

A Voice
Kuala Lumpur
March 11th, 2007 4:00 p.m.