Malaysian Prime Minister Anwar Ibrahim’s decision to ask Employees Provident Fund (EPF) to raise its domestic investments to 70% this year could pose some asset allocation challenges for EPF as it tries to generate adequate returns for its members.
A significant chunk of its investment income is currently derived from overseas investments, so a pivot to domestic investments could affect returns negatively, according to some experts.
“EPF is already the largest investor in Malaysian markets and any additional investment risks crowding out the market to other players,” Geoffrey Williams, provost at the Malaysia University of Science and Technology, told AsianInvestor.
"It can also reflect badly on Malaysian markets if the only buyer is a pension fund forced to take up [local] stocks and bonds."
EPF’s overall investment assets totalled MYR1.04 trillion ($217 billion) at the end of March --overseas investments accounted for 37% of those assets.
Domestic investments accounted for 63% of total assets at the end of March -- mainly invested in held-to-maturity fixed income instruments.
Both of Malaysia's two largest funds -- EPF and KWAP, also known as Retirement Fund -- have said in recent years that they want to gradually raise overseas investments in a bid to enhance overall returns.
Those plans could now be on pause.
Science and Technology
Williams said an overreliance on Malaysia will hold down returns for EPF because local equities, in particular, have underperformed for several years.
“To maintain good dividends for members, EPF has to look at overseas markets where returns are higher,” he said.
EPF’s overseas investments, which were mainly in equities, outperformed in the quarter ended March, and accounted for 46% of the total investment income recorded, the fund said in a statement on June 9.
The fund said it would allocate more than 70% of its new investment allocation to the domestic market going forward.
It also said it would focus on industries and sectors that are expected to recover after three years of the pandemic.
TOUGH CHOICES AHEAD
Still, the going could be tough.
With slowing global growth prospects, Malaysia’s GDP is expected to moderate in 2023 due to slower external demand triggered by weakening global trade, the Ministry of Finance said in a May 12 statement.
The economy expanded by 5.6% in the first quarter of 2023. The Malaysian government is confident of achieving GDP growth of 4-5% in 2023.
“Most sectors in Malaysia are underperforming except oil and gas, palm oil and manufacturing but these are sectors not considered socially or environmentally responsible,” Williams said.
The market capitalisation of stocks on Bursa Malaysia dropped to $376 billion in 2022 from $386 billion, affected by the global turmoil in public stocks and bonds.
In the short to medium term, there are still some bright spots in Malaysia equities market, said Ernest Chew, portfolio manager for Southeast Asia equities at BNP Paribas Asset Management.
“Malaysia remains one of the key beneficiaries of US-China trade war. Global tech firms are re-allocating their productions to Malaysia and we see acceleration post-pandemic.
"Domestically, private consumption expenditure growth remains healthy with favorable government policies from subsidies and tax cut for low and mid-income earners."
FIDUCIARY OBLIGATIONS VERSUS STATE DIRECTIVE
Still, Williams believes it should be up to the pension fund to decide if it wants to capitalise on the growing local opportunities.
“The government should not interfere with EPF’s strategic asset allocation, it is none of its business. The funds belong to the members and EPF has a fiduciary duty to get back the best risk-adjusted returns for members wherever that comes from,” he said.
Williams said there are a few risks if the pension fund is driven to investing more in local markets: one, it could end up investing in underperforming sectors because of ESG considerations; two, it could be pushed into speculating in new and emerging products; or three, it could be pushed towards conservative strategies like buildings and construction.
“EPF has set up a small venture capital operation and this will help but if EPF has a larger operation, it could risk crowding out other players,” he said.
“Overall, it should be left alone to follow its own strategic asset allocation, which it has done successfully for decades.”
The topic remains quite sensitive, and most investment consultants approached by AsianInvestor declined to comment.
AsianInvestor was unable to reach EPF for comments.