PETALING JAYA: The call to the Employees Provident Fund (EPF) to raise its domestic asset allocation to 70% by year-end from 63% will add liquidity to the local capital market but pose some challenge for its returns.
The move could bring about RM60bil into the local capital market as the provident fund downsizes its foreign asset allocation to the 30% level from about 36% of its RM1 trillion in assets under management.
Tradeview Capital’s chief investment officer Nixon Wong told StarBiz the move could potentially lift market sentiment on Bursa Malaysia and be more supportive of the ringgit’s exchange rate.
“The 6% rise in allocation could work out to about RM60bil cash and based on EPF’s current 40% portfolio allocation to equity, could amount to RM24bil of inflows into the local market.
“The inflows will also strengthen the ringgit and may lead to changes in local corporate dividend policy to undertake higher payout to the EPF in exchange for the opportunity cost of lowering its allocation abroad,” he said.
The money will be more than the RM51.14bil payout it made to contributors in 2022.
Prime Minister and Finance Minister Datuk Seri Anwer Ibrahim had called on the fund to make necessary and strategic investments for the nation and help in the upskill of the young.
His call for more direct investments instead of portfolio investments is likely driven by the strategic goal of making the economy more developed and self-sufficient post the Covid-19 pandemic and the evolving geopolitical environment.
Anwar also assured that there would be no interference in the EPF’s investment affairs under his leadership and despite it being a statutory body under the purview of the Finance Ministry.
Apart from the EPF he also named sovereign wealth fund Khazanah Nasional Bhd to do the same. The concern, however, for the 15.7 million members would be on how such a move would impact the risk profile and returns the fund would make in the future.
“EPF has been very well managed over the years. The average annual dividend of 5% and above over the past 10 years has been nothing short of spectacular.
“It is highly likely that the outperformance is from its offshore investments. While I understand the rationale of the Prime Minister wanting the EPF to invest a higher amount domestically, it will be an uphill task for EPF to maintain its superb performance,” said Ian Yoong Kah Yin, a high net worth investor and former investment banker.
The flattish returns domestically and prospect of higher returns abroad as well as the need to lower concentration risk, has led other government-linked investment companies (GLICs) like Permodalan Nasional Bhd, Khazanah and Retirement Fund (incorporated) or KWAP to join EPF in investing abroad.
If the EPF works towards the 70% call by the Prime Minister, Wong said the fund could look for strategic assets like road infrastructure and the 5G rollout for opportunities to invest while in the equity space, it could consider smaller mid-cap companies which offer earning growth or companies that offer stable returns.
While the Prime Minister may want to see more direct investments by the GLICs, Yoong said it would be best for the EPF to focus on corporate bonds with good ratings such as Proton Holdings Bhd which offers a net yield of 4.6% and Affin Bank Bhd with net yield of 4%.
“These are fairly liquid but still below 5%. Corporate bonds of a few property developers are yielding 6% to 7% but deemed lower quality.
“The EPF could fund infrastructure projects such as highways, ports and airports. It is best for the EPF to invest in large and mid-cap stocks as these are fairly liquid for a massive fund like the EPF,” he said.
He added the fund could also expand into the private market by funding privatisations of the many small mid caps on Bursa Malaysia.
“There are a few attractive candidates for privatisation as their value is not appreciated by fund managers who mainly focus on well promoted stocks,’ he said.
EPF’s investment portfolio is anchored by the fixed income investments which account for some 52% of its total investment assets, while equities make up 40% of the portfolio and the remaining is invested in real estate and infrastructure, according to its media releases.
The domestic allocation news did little to excite investors in the local market yesterday with the benchmark FBM KLCI closing 2.7 points higher at 1,433.7 points
The higher domestic allocation call also came shortly after the Union Network International-Malaysia Labour Centre proposed for the employers contribution rate to the EPF to be raised to 20% from 13% for workers earning RM4,000 a month and below.
