Malaysia’s $160 billion state retirement fund, the Employees Provident Fund (EPF), is seeing strong early demand from members to have their assets managed in a specially created sharia-compliant portfolio, but it is unlikely to go 100% sharia.
In the first week since the new ‘simpanan shariah’ fund was opened to contributions (on August 8), RM25 billion ($6.2 billion) of the initial allocation of RM100 billion has been used.
An accumulated total of 208,795 registrations have been recorded for the fund. This averages to more than 40,000 registrations per day, for the first week. At the end of March 2016, EPF had a total membership of 14,688,066, of which 6,822,551 are actively contributing.
EPF chief executive Shahril Ridza Ridzuan said: “The take-up rate has been extremely encouraging this first week, and we believe that members will continue to come to our counters to register for simpanan shariah 2017.”
If demand continues at the current pace, the registration office will close long before the cut-off date of December 23. Shahril assured members that this was not a one-off event and that the scope of the fund would be increased by RM20 billion to RM30 billion annually.
The portfolio will operate on a segregated basis within the main pension fund and start operating in 2017. As this is the first time EPF has run a formalised sharia portfolio, it will be managed in-house, but the board may look at external mandates as it grows.
Shahril said the goal was to target the same returns in the long-term across both conventional and sharia portfolios, though investors should not expect to see the same performance each year.
The main difference between the conventional and sharia portfolios is that the latter cannot invest in banks and insurance companies. Over the long term, this would mean a variance between the two in annual performance in the range of 50 basis points, said Shahril.
Even for its conventional strategies, EPF does not invest in companies involved in gambling, alcohol, military weapons or adult entertainment.
The plan for a segregated sharia fund was originally outlined by EPF’s deputy chief investment officer, Mohamad Nasir Ab Latif, in an interview in the April edition of AsianInvestor magazine.
Nasir said at the time that EPF that RM100 billion to RM150 billion of the portfolio would be run according to sharia principles.
Shahril noted that EPF would make a second tranche available at a later date “once we know the demand and availability of funds”.
However the fund is unlikely to become fully sharia-compliant – as is set to take place with Kwap, Malaysia’s $30 billion state pension fund for civil servants – because of the likely concentration risk and lack of depth in the sharia securities market.
Shahril said: “If the sharia fund is too big, we will have an issue in terms of having enough assets in certain asset classes that can give us the same kind of risk returns [return on risk] spread over the long term."
He said the sharia fund would still invest in Islamic banks and takaful insurers, many of which are listed on Bursa Malaysia, the country’s stock exchange. The bulk of listed equities are sharia-compliant already, Ridzuan noted, “so it is not so much of an issue”.