IN recent years, Malaysia’s government-linked investment companies (GLICs) have been actively looking to acquire more foreign assets, especially equities.
Among such GLICs are the Employees Provident Fund (EPF), Permodalan Nasional Bhd (PNB) and the Armed Forces Fund Board (LTAT).
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The need to diversify investment portfolios beyond Malaysia is a no-brainer, coming at a time when the local stock market is deemed lacklustre compared with other foreign markets.
Take the US stock market as an example. Except for a few brief selloffs, the Dow Jones Industrial Average gained 18.7% in 2021, while the Nasdaq Composite rose by 21.4%.
In contrast, Malaysia’s benchmark index – FBM KLCI – fell by 3.7%. Ironically, key stock exchange indices of Thailand, Singapore and Indonesia all chalked a double-digit return in the same year.
Unsurprisingly, such lucrative returns abroad have been enticing for the GLICs.
However, with many of the foreign markets performing badly this year, how will this affect the GLICs’ potential return?
Could EPF’s dividend for 2022, for example, fall below its 6.1% rate in 2021?
Analysts believe that profits from equities held by the GLICs would likely take a hit this year, but the severity of losses depends on how long the market meltdown is prolonged.
MSCI USA Index, which measures the performance of the large- and mid-cap segments of the US market, has dropped by over 19% this year alone.
Fears of recession and inflationary pressures have dampened sentiment and pushed investors to the sidelines.
Some analysts believe that the worst of the stock market crash is yet to come.
Amid such market conditions, there are questions on whether the GLICs are increasing their foreign exposure at the right time.
As their fund size grows, GLICs are seeing increased pressure to expand their investment assets, not only for risk mitigation but also for better returns.
The EPF, for instance, had to provide a payout of RM8.25bil for every 1% dividend rate for conventional savings in 2020. As for syariah savings, the payout amount required was RM972mil.
The Malaysian market alone cannot offer the EPF the potential to generate such a payout.
Back in 2018, the EPF said it wanted to increase the amount it invests overseas, especially in private assets.
Today, foreign investments are a key driver of EPF’s performance. In 2021, 58% of its overall returns were thanks to overseas investments.
This is despite the fact that only about 37% of its assets as at end-Dec 2021 are invested abroad.
PNB, which is one of the largest fund management companies in Malaysia, also began diversifying overseas in 2018.
In the past, PNB was known for its “over-concentrated” investments that were mainly in the local stock market.
However, in comparison to the EPF, PNB has lesser value of foreign assets.
As at end-2020, international investments represent 12% of PNB’s overall portfolio. In particular, foreign public equities accounted for 8.7% of PNB’s total assets.
Meanwhile, LTAT is also eyeing to have a presence in the international investment landscape.
Last week, LTAT CEO Datuk Ahmad Nazim Abdul Rahman said the fund intends to increase its public equity exposure to 50%, with 20% to be dedicated for foreign investments.
It appears that the global market selldown has not hampered the GLICs’ interest to increase overseas investments.
Speaking with StarBizWeek, investment analyst Pankaj C. Kumar agrees that the current equities selldown would cause some losses, looking at current values.
“But it also allows the GLICs to reposition and enhance their portfolio based on a cheaper entry cost.
“After all, these investments should not be looked upon based on a one-year horizon but over a longer period of time,” he says.
Pankaj further notes that the foreign investments were made in order to diversify away from a single market and to have a more balanced portfolio, both in terms of asset class as well as geographical markets.
“It is still the right strategy as far as diversification is concerned,” he adds.
Meanwhile, Trident Analytics chief research officer Peter Lim Tze Cheng opines that GLICs may not be significantly affected by the massive selldown in the US market.
“The foreign equities portion of the GLICs’ assets is not very big. GLICs have bigger exposure in fixed-income assets that are stable and secure,” he says.
When asked whether it was right for the GLICs to expand their exposure overseas, Lim says: “They have no choice.”
He notes that the GLICs’ assets under management have grown over the years and that the “small” Malaysian stock market size could not cater to these GLICs.
The EPF, for example, has total assets under management of RM1.01 trillion as at end-2021, while PNB’s assets under management as at end-October 2021 stood at RM337bil.
LTAT, on the other hand, manages RM9.7bil in assets as at end-2021.
“GLICs already own 30% of local equities, how would it be if they acquire more local stocks? This is why they need to diversify overseas where the market size is bigger,” according to Lim.
Commenting on the current global market selldown, Lim believes that the markets are “close to the bottom or already hit the bottom”.
“While there are fears in the economy, this is the right time for investors to enter the market. The focus should be on the recovery-play stocks,” he adds.