Domestic Portfolio

The domestic fixed interest allocation, or the Domestic Fixed Interest Portfolio, consists of short and long term bonds. As at 31 December 2020, the Fund’s allocation to this asset class was 49.1% of the total portfolio, a significant increase from the prior year due to the Trustees of the Fund and KFM’s conscious effort to improved overall yields of domestic fixed income by moving excess cash and reinvesting maturities back into the (higher yielding) asset class.

Domestic Fixed Income – Short Term

The Fund’s domestic short term fixed income allocation comprises PNG Government Treasury Bills (TBills), Interest Bearing Deposits (IBD) with approved PNG Banks and Financial Institutions, loans in PNG Kina and other PGK interest-earning investments with a fixed rate of return, and term to maturity of more than one day, and less than or equal to 365 days at inception.

 As at 31 December 2020, the Fund held 24.7% of the portfolio in domestic short term fixed income. This compares with the SAA target of 8%, a significantly overweight investment in this asset class. This is explained by ongoing systemic constraints in accessing foreign currency to meet the SAA target, together with less long-term government securities being offered during the year.

 Short term government securities offered during the year had favourable yield and the Fund remains a regular participant in TBill auctions conducted by BPNG. During the 2020 calendar year, the Fund sold K150.0m worth of TBills through the PNG Government’s Quantitative Easing (QE) program, and reinvested the proceeds in longer-term, higher yielding fixed income securities. The effect of these transactions was to improve the overall yield of the portfolio. The Trustees of the Fund, in consultation with KFM, actively managed the Fund’s TBill holdings during the year.

Domestic Fixed Income – Long Term

The Fund’s domestic long-term fixed interest allocation, comprises of PNG Government Inscribed Stock (GIS) and loans with Investee Companies together with other PGK interest-earning investments with a fixed rate of return and term to maturity of more than one year at inception. During the 2020 calendar year, the State conducted three GIS auctions under its COVID 19 Bond program, issuing K2.21billion in securities. In the second of these auctions, as noted above, NSL sold TBills under the QE program back to the State, and combined with other cash holdings, purchased longer-term bonds for ~K518.0m. The value of Fund’s long-term fixed interest investments increased, to 24.4% of the portfolio at 31 December 2020.

 The Fund remains an active participant in GIS auctions, and continues to develop secondary market trading in GIS with other market participants to improve the liquidity of the portfolio.

The domestic equities allocation consists of listed and unlisted equities, with exposure to some of PNG’s most well-known brands and companies. The Fund’s allocation to this asset class was 19.1%, a significant decrease from the prior year due to downward revaluations of a number of the unlisted equities, consistent with the challenging domestic market environment, together with the impact of the COVID-19 pandemic

Listed Equity

As at 31 December 2020, domestic listed equity comprised 9.9% of the Fund. The value of domestic equities decreased as the net effect of losses in share price value from City Pharmacy Limited (CPL), more than offset gains from Credit Corporation Limited (CCP) and Bank South Pacific Limited (BSP), for a negative result overall. Again, BSP continued to provide strong returns, while distress to CCP’s Pacific businesses hindered performance and dividends. During 2020, the Fund made a modest reduction in its exposure to BSP, as part of a long term strategy to move to compliance with BPNG’s 5% single asset exposure limit.

The domestic listed equities of the Fund are shown in the table below.

Unlisted Equity

As at 31 December 2020, domestic unlisted equity holdings comprised 9.2% of the Fund’s portfolio, a significant decrease from the prior year. This was the result of losses incurred from the revaluation of a number of the Fund’s significant holdings, and is consistent with the challenging domestic market environment, together with impact of the COVID 19 pandemic. Foreign currency shortage remains a key hindrance to the performance of domestic unlisted companies, disrupting supply chains and delaying the delivery of goods and services. This has impacted operating performance, the payment of dividends and valuation for the Fund’s major unlisted equities.

 During 2020, the Fund sold its shares in Alotau International Hotel, as the Convid-19 pandemic impacted earnings significantly. The pandemic has also triggered a need for shareholder financing in a handful of the companies in which the Fund has a shareholding. The Fund, together with KFM, will continue to monitor business conditions and look to support investee companies when it is in the interests of the Fund. In consultation with the KFM, the Fund assessed a number of investment proposals in private companies during the year. There are also a number of domestic unlisted equity investments that are currently being considered, as well as capital investment opportunities in existing holdings. The Fund will continue to work towards lifting the Fund’s exposure towards its SAA target, as a means of preserving and increasing value for its Members. The domestic unlisted equities for the Fund is captured in the table below.

Domestic Unlisted Equities as at 31 December 2019

The Fund’s property holdings are concentrated entirely in the domestic market with a mixed portfolio of commercial, residential, industrial properties, unimproved land, and property held through joint ventures and holding companies. As at 31 December 2020, Properties made up 13.7% of the portfolio, a decline from the prior year due to net falls in revaluation at year end, and the Fund’s sale of small, non-performing properties during the year.

 The Fund remains focused on optimising the profitability of its core property asset holdings. The Fund has concluded, or is currently finalising, the sale of number of properties from the 2020 financial year. These properties have been slated for disposal, generated little or no returns, and represented a drag on portfolio performance. These include undeveloped allotments, residential properties, industrial properties, and legacy holdings of institutional houses, together with the ageing Burns Haus, Era Rumana office buildings in Port Moresby town. The divestment initiative is expected to further streamline and improve the composition of the Fund’s property holdings, which is expected to lead to an improved risk-return profile for the Fund.

 The Rangeview Heights Limited (RHL) is a joint venture property development between the Fund, Lamana Development Limited, and the National Capital District Commission. RHL is located next to Port Moresby City Hall and in front of Savannah Heights, along Waigani Drive in Port Moresby. Significant progress has been made during the year despite challenges from the COVID- 19 pandemic and foreign currency shortages. Construction is progressing months ahead of schedule with a grand opening expected in the fourth quarter of 2021.

 The Fund, through its Moki No. 10 holding company, has finalised plans to build a multi-storey office building in the heart of the Waigani government precinct. Construction is expected to commence for Moki No. 10 in 2021.

Property Portfolio as at 31 December 2020