EPF should limit exposure to risky assets

The retirement fund has been recalibrating its portfolio in preparation for the i-Lestari and i-Sinar schemes


THE Employees Provident Fund’s (EPF) move to high-yield assets to raise funds for withdrawals under the government stimulus plan will need to be tampered with caution.

Analysts say the retirement fund should minimise exposure to risky assets even as it provisions to pay the billions in withdrawals allowed under the economic recovery measures.

The retirement fund, which manages over RM1.02 trillion in assets as at end-2020, has been recalibrating its portfolio in preparation for the i-Lestari and i-Sinar schemes, while expanding its investments abroad for higher gains.

The move seems to have paid off so far, with the EPF announcing it had achieved a record gross income of RM60.98 billion last year.

As the fund continues to re-strategise its portfolio to maximise gain, analysts say EPF ought to be cautious in investing in riskier assets.

iFAST Capital Sdn Bhd research analyst Shawn Low Tian Hao said overexposure to high-risk assets could have a negative impact on EPF as its immediate commitments to depositors could push the fund to sell its holdings at a loss.

“While investing in such assets benefits EPF and its contributors, we are unlikely to see an increase in allocation to assets in the space,” Low told The Malaysian Reserve (TMR).

EPF has gradually looked towards global markets to diversify its investment returns in recent years given the growth of assets under management. As at December 2020, about 33% of its investment assets were placed overseas.

Equities, particularly foreign stocks, remained as the fund’s main driver of returns with a total income of RM28.71 billion or 47% of its gross investment income for 2020. The EPF’s private equity (PE) portfolio had also performed strongly by offering a consistent income distribution.

The money market portfolio contributed RM1.19 billion (2%) in income for 2020, while fixed income instruments added RM25.42 billion (42%) to the annual income. Its real estate and infrastructure portfolio recorded an income of RM5.66 billion. Low said the pension fund has begun exploring investments into the PE space in search of higher investment returns, though its exposure remains limited.

EPF recently launched a US$600 million (RM2.4 billion) Shariah PE fund — the first and largest shariah PE direct/co-investment separate managed account fund in the world — with a global mandate focusing on direct and co-investment strategies into growth and buyout transactions.

Low said retirement funds such as the EPF have a long-term investment horizon that could benefit investee companies, allowing them to focus on long-term wealth creation rather than being pressured to adopt short-term exit strategies.

Thus, he said the EPF’s investments into higher-risk assets would grow over time in proportion to total assets via a combination of capital gains and higher additional investments as expertise in the higher-risk space strengthens.

However, he said such a strategy will only make sense up to a certain limit.

Putra Business School Assoc Prof Dr Ahmed Razman Abdul Latiff told TMR EPF can consider venturing into the technology sector and start-ups, but it must have a dedicated team managed by professionals and good research capabilities to manage the associated risks when investing in such ventures.

He said EPF can continue diversifying its portfolio towards a higher return assets class to rely less on its fixed-income investments. However, it must be done gradually and in stages.

Williams Business Consultancy Sdn Bhd founder and director Dr Geoffrey Williams said investments in start-ups, scale-ups and survival funds will be important in the post-Covid-19 period though these typically involve micro, small and medium enterprises, which fall outside of EPF’s scope.

“As for technology, higher returns are more likely overseas rather than in Malaysia because the technology and innovation ecosystem here is still underdeveloped,” Williams told TMR.

It is estimated EPF will need about RM8.25 billion to pay out every 1% dividend for conventional saving and RM972 million for every 1% dividend for the Shariah saving in 2020.

Read our previous report here

EPF withdrawals trend raises call for retirement reform