Malaysia's largest retirement fund is raising allocations to alternatives and cash to better navigate a gathering storm of economic and political challenges.
Mohamad-Nasir Ab. Latif, deputy CEO of Malaysia's Employees Provident Fund, said the 689.7 billion ringgit ($166.7 billion) Kuala Lumpur-based plan will likely hike its 10% target to real estate, infrastructure and private equity in pursuit of steady long-term returns in a challenging market environment.
On the tactical front, Mr. Mohamad-Nasir, in a Sept. 26 interview, said his investment team boosted the EPF's cash holdings in the first half of 2016 in anticipation of heightened volatility that could leave equity markets around the globe giving back some of their strong gains of recent years.
More than 10% of the EPF's allocation to public equities, which accounted for 41% of the fund's portfolio as of June 30, is in cash now. That's way above the typical level of 5% in recent years, the EPF executive said.
Even as a long-term investor, in the current market environment where equities remain relatively attractive compared to bonds while volatility is becoming more pronounced, the EPF “can't just sit there,” said Mr. Mohamad-Nasir. With the uncertainties haunting markets now, from the continued Brexit fallout to the timing of the Federal Reserve's resumption of interest rate hikes, “if there's any sharp fall” in equity markets globally, “we're in a position to take advantage” of opportunities, he added.
For the near term, the EPF's cash stockpile could rise further if Republican nominee Donald J. Trump looks set to win the U.S. presidential election, the EPF executive said. Given campaign statements that have raised the specter of protectionism and a U.S. move toward isolationism, markets could well retreat if Mr. Trump appears to take a commanding lead before the election, making it the better part of valor to “take profits and wait and see what happens after that,” said Mr. Mohamad-Nasir.
Amid those uncertainties, the EPF sold profitable equity positions in the first quarter of 2016 and has continued that course as equity markets pushed higher in recent months, said Lim Tze Seong, head of the EPF investment division's international equity department, in the same interview.
For the defined contribution backbone of Malaysia's retirement system, taking profits on some of the portfolio's strongest-performing holdings is central to the EPF's ability to annually credit a dividend to the system's 14.6 million members — perhaps the country's most closely followed financial announcement.
On Feb. 20, the EPF credited member accounts with a 6.4% dividend payout for 2015, down from 6.75% the year before but still the second-highest since 2000.