Malaysia’s Employees Pension Fund (EPF) is reviewing its strategic asset allocation and expects to raise its allocation to alternative assets by 2-3 percentage points starting next year, AsianInvestor has learned. Separately, it is planning to reduce the number of external fund managers it uses.

This means the state retirement fund may put another $5 billion or more into alternatives as a result of the review, with a focus on private-market assets, in line with the rising regional trend.

EPF currently has 50% of its RM675 billion ($161 billion) in fixed income, 40% in equities (including private equity) and the remaining 10% in cash and alternatives, mainly real estate and infrastructure.

Private asset focus

The fund plans mainly to increase its exposure to private equity, real estate and infrastructure, targeting consistent return and lower volatility, said Mohamad Nasir ab Latif, EPF’s deputy chief executive. He was speaking yesterday on the sidelines of the AsianInvestor’s Southeast Asian Institutional Investment Forum in Singapore.

“Real estate and logistics investments tend to have nice long leases and are something we lag in the portfolio [in terms of allocaiton level],” he noted. And private equity, if you pick the right funds for the right strategy, can provide superb returns.”

However, EPF does not use hedge funds as they do not fit with its long-term buy-and-hold approach, Latif told AsianInvestor earlier this year. “We feel no need to have a hedge fund, absolute-return kind of mandate, and they have not performed that well either over the last few years.”

The SAA review – being done in conjunction with consultancy Mercer – is likely to be completed in the first half of next year.

EPF will consider all markets for its increased alternatives allocation, but Latif (pictured below) reckoned there are more options in developed markets. There are good opportunities in Asia, given the region’s growth story, he said, but certain regulatory challenges to deal with. Still, the fund will balance investments across developed and emerging markets.

Quizzed on the outcome of the US presidential election, Latif said it would not have any impact on EPF’s strategic asset allocation. But it did take a cautious position in the run up to the vote.

“All these are cycles; we are not looking at the short-term,” he explained. “We do dynamic asset allocation and had taken money off the table in US markets in the third quarter. But we play long term.”

Manager consolidation

Meanwhile, EPF aims to reduce its current roster of 50 external managers. “Going forward we don’t want too many,” said Latif. “We would look to have bigger contracts for each fund manager.”

This should benefit private equity funds whose managers give priority to larger mandates when it comes to co-investments, he added.

EPF achieved higher returns in 2015 than in 2014 despite high volatility in its local market and a weakening ringgit, mainly driven by investments in equities. Last year’s dividend – effectively, EPF's investment return – was 6.4% (4.3% in real terms) and the rolling three-year real dividend 4.05%. The 2014 numbers were 3.59% and 4.11%, respectively. 

The performance exceeded market expectations given the economic downturn, noted Latif. He attributed this to diversification across asset classes, countries and currencies.

* In an exclusive interview in the April issue of AsianInvestor this year, Latif spoke about EPF’s asset allocation and how it uses external managers, among other things.