KUALA LUMPUR: The Employees Provident Fund’s (EPF) strategy of diversifying into different asset classes, including private equity investment, will reduce the overall portfolio risks while delivering stable returns in the future.
Chief executive officer Datuk Shahril Ridza Ridzuan said EPF was putting more weight into real estate and infrastructure, money market as well as private equity asset classes in efforts to sustain its performance this year.
“Our key focus this year is on building our pipeline of private market assets, mainly in infrastructure, property and private equities.
“We feel that these (asset classes) will provide us with better inflation returns, which are always a core target for EPF,” he said at a media briefing, here, yesterday.
He added that EPF would still focus on market-driven asset classes such as equities this year.
Shahril said previously, the fund had focused on the highway, infrastructure and energy sectors.
EPF recorded higher income growth for its investments in real estate/infrastructure (45.97 per cent) and money market (14.45 per cent) last year, compared with 3.23 and 3.67 per cent growth, respectively, in equity and fixed-income in the same period.
In ringgit terms, EPF recorded gross investment income of RM2.49 billion in real estate/infrastructure and RM982.28 million in the money market last year.
Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said it made sense for EPF to search for new investments that had low cross-asset correlation, and this may include investments in real estate.
“Real estate investment gives the opportunity for the EPF to diversify its portfolio, which can reduce the overall portfolio risks.
“We understand that cross correlations among the assets have increased, especially during market uncertainty. This essentially would increase the portfolio risks,” he told NST Business.
“During market uncertainty, preserving capital/investment principle is of utmost important. Although money market rates tend to give lower returns relative to other traditional investment (bonds and equities), it at least gives EPF the certainty while at the same time allowing it to remain liquid throughout the year,” Afzanizam added.
An investment banking analyst said EPF, like any other pension fund in the world, was diversifying its investments by putting more weight into other asset classes to consistently find a more stable earnings stream.
“There is a limit as to the number of blue chip companies that EPF could invest in and, therefore, it needs to find alternative investments that could continue to provide and meet its obligation.
“Real estate and infrastructure investments would provide a steady income stream through the rental income or steady cash generation. At the very least, a certain portion of the dividends obligation can be satisfied through these means,” he said.
“Increasingly, pension funds have started going into private equity in search of higher returns. With returns higher than public equity returns, this would provide a potential source of income, albeit at a small exposure in view of managing the investment risk,” said the analyst.