Malaysia’s largest pension fund, the $200 billion Employees Provident Fund (EPF), has reiterated its commitment to increase the fund's exposure to overseas assets, including private equity and alternative investments.

This follows a robust performance from its equity allocation, as revealed in its annual results announced on Monday.

EPF declared a dividend rate of 6.15% for its conventional assets portfolio (Simpanan Konvensional) and 5.90% for its shariah portfolio (Simpanan Shariah). In total, these two portfolios paid out RM47.31 billion in 2018, a decrease of 1.7% from 2017.

With a real dividend of 3.93% for Simpanan Konvensional and 3.68% for Simpanan Shariah on a rolling three-year basis, respectively, the EPF has exceeded its mandate of delivering a dividend of at least 2.5% on a yearly basis and at least 2% real dividend on a rolling three-year basis.

EPF Chairman Tan Sri Samsudin Osman said the returns had been achieved despite 2018 being a difficult year, marked by greater volatility and a downward trend in global markets. “Our portfolio diversification has provided resiliency,” he said.

But while public equity returns have boosted the portfolio, contributing 58% of the overall investment return for 2018 (see chart below), Osman said the fund would need to find more diverse return drivers in the future. This includes increasing the fund's allocation to private markets and alternatives.

"EPF is always on the look-out for opportunities in private equities and alternative assets that meet its strict criteria and risk profile," he told AsianInvestor.

"As of the end of 2018, the EPF is still under-invested in alternative asset classes, especially real estate and infrastructure," Osman said.

The fund has repeatedly expressed interest in expanding its private equity holdings but has not managed to grow the allocation much above the 2% level demarcating its total strategic asset allocation. Osman said the fund would like to see that grow to around 5% in the next few years. 

For the time being, the fund remains committed to public equities and retains a 38% exposure to the asset class, with 50% allocated to fixed income securities.

Drawing comparisons with the stock market uptrend in 2017, Osman said 2018 had been wholly different, with the local equity index closing the year 6% lower and benchmark global equity indices losing as much as 16%.

Still, equities continued to be the main contributor of income with 57.5% of the total or RM29.28 billion ($7.2 billion) – about 7% less than in 2017. “This asset class remains integral in providing return enhancement to the EPF’s portfolio,” Osman said.

Tan Sri Samsudin Osman

The chairman noted that EPF's investment strategy remains guided by its strategic asset allocation: "Fluctuation in public equities valuation provides opportunities for EPF to capitalise during an uptrend period, while investing at attractive prices during a downturn. This allows the EPF to rebalance the portfolio and bring the allocation back within the tactical range."


 

Gross investment income for 2018 was RM50.88 billion, out of which a total of RM4.62 billion was attributed to Simpanan Shariah, while RM46.26 billion was attributed to Simpanan Konvensional.

Osman said the lower income for EPF’s shariah portfolio in 2018 was due to the underperformance of the telecommunications, construction and oil and gas sectors in the domestic portfolio.

Foreign investments across asset classes contributed 37.52% to EPF’s gross investment income, lower compared with previous years due to the decline in global and regional equity prices and volatility in foreign exchange rates. Foreign investments in 2018 nonetheless added value to the EPF’s overall portfolio and cushioned some of the market volatility seen throughout the year.

MARKET OUTLOOK

Commenting on the investment outlook, Osman said he expected the volatility in global markets to persist due to the long-standing US-China trade dispute.

“We are also bracing ourselves for other external factors such as the impending Brexit deadline, slowdown in global growth and further US interest rate hikes,” he said. “Nonetheless, we remain committed to our long-term global diversification as guided by our strategic asset allocation. This has time and again served us well, especially during times of market uncertainties, and equipped us with the ability to withstand short-term volatilities.”

The $200 billion pension fund has previously said it wants to increase the amount it invests overseas and, in particular, in private equity and alternative investments. However, the share of foreign assets in EPF’s overall portfolio has dropped by 2.5% over the past 12 months, despite the Malaysian state pension's stated aim to raise the allocation to up to one-third of its total portfolio.

Just over 26% of its total investment assets were in overseas investments by year's end, compared with 29% at the midway point of 2017.

Key Indicators

 
   

Total Members for EPF

               14.19m

Total Employers

507,114

One year return %

6.57

10 Year CAGR %

10.26

3 Year ROI %

7

Asset Breakdown

              

Externally Managed (Global) %

64

Externally Managed (Domestic) %

36

Equity allocation %

39

Fixed Income allocation %

50

Money Market allocation %

6

RE and Infrastructure %

5

Drivers of return

 

Equity %

58

Fixed Income %

36

RE and Infrastructure %

4

Money Market %

2

Source: EPF

*This story has been updated to include the AUM of EPF.