The share of foreign assets in Employees Provident Fund’s overall portfolio has dropped by 2.5 percentage points 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.

EPF did not respond to our queries but market specialists attributed the change to a possible variety of factors such as valuation declines, adverse currency conversion effects and a more cautious mood in the wake of Malaysia's new government. 

The $196 billion fund said in its earnings statement released on Wednesday that 26.5% of its total investment assets were in overseas investments as of end-June, compared with 29% at the mid-way point of 2017.

“It is possible that given the ringgit has been highly volatile over the past 12 to 18 months, some institutional investors [in Malaysia] may have been hit by unfavourable hedging situations, which could have had an impact on foreign asset values when converted into local ringgits,” Paul Colwell, head of the portfolio advisory group for Asia at consultancy Willis Towers Watson, told AsianInvestor. 

The Malaysian ringgit has see-sawed between RM4.4 and RM3.88 to the US dollar since January 2017, and now stands at RM4.12. 

NEW GOVERNMENT

Another possible explanation is that Malaysian institutions may have hit the brakes on raising overseas exposures due to the uncertainty swirling around the new government’s stance on foreign investments following the shock ousting in May of the previous government.

“With the big political change in Malaysia, many large institutional investors may have made limited attempts to make significant overseas allocations, especially since some of the top executives at some of these organisations are political appointments [who need to toe the government line],” the Apac head of an asset manager who declined to be named told AsianInvestor.

Mahathir Mohamad

Since 92-year-old Mahathir Mohamad was sworn in as prime minister, 15 years after he stepped down from power, there has been a concerted review of economic projects partnered with foreign nations, including several China-backed infrastructure projects and a widely publicised Kuala Lumpur-Singapore high-speed rail link. 

That could have sapped the foreign investing appetite of institutions like EPF, whose former chief executive, Shahril Ridza Ridzuan, had declared a desire to raise the amount the pension fund invested overseas to 30% to 34% of its total assets, subject to where the ringgit was trading. He also said the fund wanted a greater share of alternative investments, such as private equity and real estate, in its overseas allocation.

Ridzuan stepped down as EPF’s CEO in August to become managing director of troubled state-owned fund Khazanah and was replaced by the former deputy CEO for strategy, Tunku Alizakri Alias.

DIVERSIFICATION BENEFITS
 
Moreover, dampening institutional interest in US stocks, specifically, is the fear that they are nearing the top of their bull run, although there are other potential pockets of opportunity such as Japan that could help them to rebalance their overseas exposures, WTW’s Colwell said. 
 
Even so, one year's data doesn't make for a long-term trend or provide proof of a real change of heart at EPF. And that's partly because the diversification case for allocating more investment funds abroad remains intact, investment experts said.

“I don’t think the appetite for internationalisation has gone away at all," Simon England-Brammer, head of Asia Pacific at US asset manager Nuveen, told AsianInvestor. "Most institutional investors still want to go international and they recognise the benefits of diversification and the opportunity set.” 

Nevertheless, rumbling trade tensions between the US and the rest of the world, along with expected interest rate hikes by the Federal Reserve, are casting some doubt over the prospects for global growth.

So while Malaysian interest in foreign markets will continue, it is possible the timing of further investments could be delayed.

Such a hiatus could even last two or three years if the global economy is gripped by recessionary forces, Colwell said, as "that could prompt some asset owners to look at local markets, which could offer more value and also be a safe haven”.

WEAKER RETURNS

EPF’s deputy chief executive, Mohamad Latif, blamed a weaker global environment for the fund’s lower investment gains (7.6% year-on-year in the June-ended quarter versus 9.2% in the previous quarter).

Mohamad Latif

In a statement, he noted that the escalating US-China trade tensions and tighter American monetary policy had contributed to capital outflows from several emerging markets, including Malaysia. “While some developed markets, including the US and eurozone, posted equity gains, emerging markets including Asia, recorded negative returns.”

"Malaysia was not excluded from the market downturn,” the statement added.

Nevertheless, equity investments (both local and foreign), which accounted for 40.5% of the fund, brought in the lion’s share (64%) of the RM12.39 billion ($3 billion) in investment income for the quarter to June 30.

In addition, EPF revealed that allocations to local government securities and their equivalent accounted for 28.5% of total assets in the same quarter, up from 26.3% a year earlier.

Malaysian ringgit-denominated debt has been one of the best performers in Asia this year, according to a Standard Chartered report issued on August 17.

This story has been updated to correct Mahathir's age.