WHILE the impact of the Employees Provident Fund (EPF) syariah fund, to be launched next year, will largely be neutral on the stock market, the challenge lies with the EPF to create a mechanism that will help the public to decide whether to go for the syariah fund or stick to the present conventional fund.
Areca Capital fund manager Danny Wong explains that the impact on the market will probably be neutral, as the EPF is likely to just split its current conventional portfolio into two so that there will be one conventional portfolio, and one syariah-compliant one.
“In other words, we don’t think that there will be any fresh buying of syariah-stocks, just some segregation of assets, which means not much fresh buying and therefore a neutral impact on the overall market, ” Wong says.
As at Dec 31, 2015, about 40% of the EPF’s total investments were already syariah-compliant.
Wong also opines that the EPF could face a challenge in managing the public’s expectations when it comes to expected returns, performance and the general managing of both portfolios.
“For example, if a good IPO comes into the market and it is syariah-compliant, it will be a disadvantage to the conventional portfolio if all of it goes to the syariah portfolio – how then will they split it?”
Notably a conventional fund can comprise both conventional and syariah-compliant stocks.
In terms of returns, Wong, who helps oversee over RM700mil in portfolio funds, believes that all things being equal, conventional portfolios have the opportunity to perform better given that they have more choices.
“In a dull market, a conventional portfolio manager can shift his focus to syariah stocks if he wishes but when the market and the economy are good, he can buy more of banks for example, which are a proxy to the economy and non-syariah compliant, in that way, conventional accounts have more leeway,” he says.
It is understood that once a EPF member chooses to convert his savings to full syariah compliant status, he cannot go back to a conventional account.
“A lot of the EPF contributors will probably be at the sidelines at the start, seeing how the new fund performs,” Wong says.
Fortress Capital Asset Management CEO Thomas Yong says while it is premature to comment on the potential investment returns of the fund given that the asset allocation structure and other parameters remain unclear, it is worth nothing that Syariah funds are characterised by a constrained investment universe and higher compliance costs.
“The impact on the market is unlikely to be too significant.
“It will be interesting to see whether this new fund account for members’ investment returns will be based on net asset values or black box style (predetermined) returns.”
Based on information on the Securities Commission’s website, as at Nov 23, 2015, 74% of the total local listed securities, both from the Main and ACE Markets, were syariah-compliant.
During the period, out of the total 901 securities, 667 were syariah-compliant.
To be a syariah-compliant stock, no more than 33% of its company’s liquid assets can be placed in conventional products. The liquid assets include short-term deposits, cash and bank balances.
On Thursday, EPF said it would launch a syariah-compliant fund in January next year to offer its members the chance to participate in such a fund.
EPF deputy CEO (Investment) Datuk Mohamad Nasir Ab Latif (pic) declined to comment on the exact mechanics of the new fund saying only that there will be a series of events to educate the public on it, nearer to the date of the launch.
The option to go for a portfolio based on Islamic principles is open to all and will be on a first come first served basis.
Meanwhile Mohamad Nasir notes that although the economic environment both here and globally will remain challenging, there are some sectors worth looking at.
“I think there are some very good sectors like consumer and healthcare..today, people are looking at consumer, banking and even oil and gas maybe because they see value there
“While we look at sectors, we also look at a company’s fundamentals as we are here for the long -term, if we see value, we will buy in, there are always opportunities in crises.”
Currently, the pension fund has over 40% of its funds invested in equities , with its largest exposure being to banks, followed by telcos, utilities and plantation stocks.
Its exposure to oil and gas is about 8% of its total equities portfolio.
“We invest in stocks that give us good dividends and we have a mix of growth stocks as well.”
Mohamad Nasir stresses that the pension fund, which has total investment assets of about RM685bil currently, is managed by professional people.
“We have good, professional people, including young talent and today we have already started moving into alternative investments like real estate - succession planning is also in place.
“I can assure you that the money at the EPF is managed with full care, my money is there too!”