EPF eyeing syariah-compliant stocks for its RM100bil fund

In terms of shareholding in the merged entity, banking sources said the EPF(pic) would emerge as the single-largest shareholder with a stake of between 35% and 40%, with DRB-Hicom likely to hold 20%

PETALING JAYA: Syariah-compliant counters may outperform non-compliant companies on Bursa Malaysia, thanks to the growth in demand for assets from institutions such as the Employees Provident Fund (EPF), according to JP Morgan Research.

In a report, the firm said that valuations for compliant stocks could stretch higher as more funds are directed towards Islamic-based investments.

An example of this is the EPF’s RM100bil fund that will exclusively invest in syariah assets.

“As it is, syariah-compliant sectors including construction, energy, healthcare, property, plantation and utilities have higher average earnings multiples. The EPF’s equity investments account for 29% of the total FBM KLCI market capitalisation. If other Government-linked funds follow suit, then the impact could be significant,” it said.

At present, 45% of the EPF’s investments are compliant with the fund expecting to grow its syariah asset base by RM25bil a year. The initial fund size of RM100bil represents 14.7% of the EPF’s total assets under management (AUM) of RM682bil.

With more of the pension fund’s members showing a preference for Islamic-based investing, it helps for companies to be syariah-compliant, as there is a high likelihood that the funds will grow, according to the research house.

EPF members can register to transfer their savings into the new syariah-compliant offshoot beginning Aug 8, with the fund commencing in 2017.

About RM282bil of the EPF’s AUM are invested in equities. Another sizeable Government-linked fund, Retirement Fund Inc (KWAP), invests RM39bil out of RM120bil in AUM into equities.

Five of the major Government-linked institutional investors – the EPF, KWAP, the Social Security Organisation, Lembaga Tabung Haji and Permodalan Nasional Bhd – hold RM347bil worth of equities, or about a third of the total AUM of RM1.15 trillion, according to JP Morgan.

With local institutions controlling a large share of equities available on Bursa Malaysia, syariah-compliant companies could see more buying attention in their shares.

“As the selection of investments become more syariah-focused, we would expect valuations between syariah and non-syariah-compliant sectors to diverge.”

According to JP Morgan, sectors that are trading at lower valuations include real estate investment trusts, gaming, media and banks.

Present valuations already indicate that syariah-compliant sectors are heavily favoured by investors. For example, the healthcare and telecommunications segments carry a one-year forward average earnings multiple of 24.8 times and 20 times, respectively.

In contrast, non-compliant sectors such as gaming command a valuation of just 14 times forward earnings, while banks are valued at 10.3 times.