LTAT & EPF

Many people have been wondering how and why LTAT can post such enviable earnings and dividends to its members for the past few years. Why can't EPF even come close to it? The Lembaga Tabung Angkatan Tentera (LTAT) group posted a 45.1% rise in pre-tax profit to RM1.5 billion for its financial year ended Dec 31, 2007, on the back of a record gross income of RM616.9 million.

In a statement yesterday, LTAT which is the Malaysian Armed Forces Fund Board, said the gross income was its highest in a decade and represented a significant 31.6% jump over the figure in FY06. Pre-tax profit stood at RM1 billion in FY06.

LTAT declared a total dividend and bonus payout of 16% for FY07, totalling RM552.2 million, an increase of 15.3% over FY07. As at Dec 31, 2007, LTAT’s total assets at cost stood at RM6.7 billion compared with RM6 billion a year earlier. Meanwhile, the group’s total assets stood at RM47.8 billion compared with RM44 billion in FY06.

LTAT has announced a high dividend and bonus payment rates of 7% and 3% respectively for the financial year ending 31 Dec 2006. Total amount to be paid out could be approx. RM471.6 million. From these figures, their total investment could be in the region of RM4.72 billion.

To be fair, there is no way for EPF to even come close to LTAT's performance because the mandate is very different, and EPF is also very much hampered by its sheer size. Most of EPF funds are in bonds and that will anchor the performance a lot. Whereas LTAT is managing around RM5bn only.

We will get a better idea on LTAT by looking at their policies. From its website: On the investment front, it has always been LTAT's policy to adopt investment strategies whereby investments are spread out in as many sectors and industries as possible to ensure stability of returns in whatever type of economic environment, and to provide steady growth in investments in the long term.

As part of its long term strategy, LTAT has substantial investment in the plantation industry to take advantage of good prospects of the agricultural sector. LTAT has also taken up investments in property development and participated in companies involved in the manufacturing of building materials. To further enhance its income in property development, LTAT has entered into joint ventures with foreign and local investors to undertake industrial, residential and new township development.

In the financial services sector, LTAT has controlling interest in a number of financial institutions including a commercial bank, a merchant bank, a finance company, a general insurance company, a discount house, a money broking house, a stockbroking company and an asset management company.

In the medium and heavy industries sector, LTAT has acquired substantial interest in a number of prominent companies involved in steel miling, and the manufacture of industrial gas and electrical cables.

LTAT also has interests in a number of companies in the transportation sector in particular those dealing in the assembling and distribution of motor vehicles and heavy equipment and the manufacture of automotive component parts.

In the telecommunications industry, LTAT is involved in the supply and installation of fixed and mobile telecommunication equipment, exchanges and infrastructure network.

Under the superannuation scheme, serving members of the other ranks in the Armed Forces are required to contribute 10% of their monthly salary to LTAT with the government as employer contributing 15%. For officers, participation is voluntary and the contributions are a minimum of RM 25 with a maximum of RM750 monthly.

Looking at LTAT's portfolio, they include Asiatic, Boustead, Affin and BP. Like it or not, by sheer luck or good planning, almost every single exposure had a wonderful run over the last 4 years (yes, Affin had it difficult for a long time). Oil, plantations, property and financials - is it any wonder why they did not do well. Not to mention building materials as well. However all businesses are cyclical and they will not always be that good. There will come a time where these sectors will be on a down cycle, and we will see dividends of LTAT being pulled back to the mean. Still, they have manged to set very good returns over the last 4 years and deserve a pat on their backs.

But let's be clear here, LTAT had a good run, their portfolio were in the right sectors. If you run a business and the sector had a strong upcycle, was it due to you or to macro factors? You can buy and select the business, call it that you made the top-down macro view work for you.

I would be more severe on LTAT's performance before they start congratulating each other. I would do peer-to-peer reviews on their companies especially since most are controlled vehicles and long term core holdings. Boustead Plantations is no hero when it comes to yield management. Affin is no leader in finance, in fact most performance metrics would be pretty unimpressive. You can do that to each business. Yes, their performance was good, but if they had improved in each business segment to be in the top quartile for their sector, they would have been looking at maybe 20% return for each of the last 4 years!

This should never be compared to EPF, they don't have the flexibility to just invest in just a handful of stocks owing to their size. End of story.

p/s photos: Joyce Sialni