EPF trapped in a small pond

THE Employees Provident Fund’s (EPF) total investment assets are expected to hit RM2 trillion by 2030.

This means from its current base of RM1.37 trillion, the fifth largest pension fund in Asia will add roughly RM600bil to its coffers within the next five years.

And because 60% to 70% of that growth will need to be invested domestically, Malaysia’s capital markets must be ready to absorb additional EPF-driven liquidity of RM300bil to RM400bil by the end of the decade.

The uncomfortable question is: Does Malaysia’s domestic market – both public and private – have the depth, dynamism and deal flow to take that money without distorting asset prices or weakening long-term returns?

It’s a structural issue that has been quietly discussed in fund manager circles for years. Now, with the EPF entering its next phase of growth, the concern is shifting from theoretical to unavoidable.

A wall of money meets a narrow pipeline

The EPF’s asset expansion is the direct result of stronger contributions, wage growth and rising investment income.

While the fund’s financial engine is growing, can the domestic marketplace it operates in keep pace? This is an important question as the bulk of EPF assets locally are invested in equities.

To be fair, Malaysia’s stock market has not stopped growing. Corporate earnings have been rising, although not by an enviable scale. The stock exchange’s market capitalisation has also increased.

From RM1.65 trillion by end-2014, the market value of all securities listed on Bursa Malaysia reached RM2.1 trillion in 2024.

This represents a compounded annual growth rate of 2.4% over a decade. Again, not an enviable growth – although it should be noted that there were Covid-19 disruptions several years ago.

The numbers get less convincing as market activities are dissected further.

For example, the Malaysian stock market’s average daily trading value (ADV) for on-market trades in the first nine months of 2025 was reported at RM2.5bil.

This is not far off from pre-pandemic levels. In 2017 and 2018, the ADV was RM2.31bil and RM2.39bil, respectively, while in 2019, it was RM1.93bil.

A growing average trading value is crucial because it signals deeper liquidity, better price discovery and stronger investor participation.

With higher liquidity, the bid-ask spreads tend to be tighter and large orders, including by institutions like the EPF, Permodalan Nasional Bhd (PNB) and foreign funds, can be executed more easily. However, the caveat is that a high ADV is only truly healthy when the turnover is broad-based and anchored to fundamentals, rather than just speculative froth in a handful of names.

Now, let’s look at the number of listed companies. Bursa Malaysia has been enjoying a hot initial public offering (IPO) market in recent years and this means more companies are being listed.

That said, the IPOs are largely concentrated in the smaller ACE Market, and not to mention the dearth of mega IPOs. So far this year, of the 51 IPOs seen, only seven went to the Main Market.

In 2024, of the total 55 IPOs, the Main Market received 11.

Not only that, delistings and privatisations have also outnumbered sizeable new listings.

Hence, this is why the number of companies on the Main Market currently stands at 808, almost similar to 2017’s 806 companies.

With all these developments, the EPF is left with a limited universe of liquid, high-quality assets in the local equities space.

Banks, utilities, telcos and plantations still dominate the top of the market, but these sectors are mature and offer limited room for outsized growth.

If the EPF increases its allocation too aggressively, price distortions become a real risk.

The private market shortfall

In theory, Malaysia’s private markets – venture capital, private equity (PE) and infrastructure funds – should offer the EPF the depth it needs. In practice, the ecosystem remains small and uneven.

Many local PE funds operate with relatively modest fund sizes, and deal flow tends to cluster around familiar, low-volatility sectors such as consumer goods, healthcare, education and mid-sized industrial businesses.

Mega-deals above RM1bil are rare, which limits the EPF’s ability to deploy large capital blocks efficiently.

The venture ecosystem, while vibrant, is too small to meaningfully move the needle. Malaysia produces innovative startups, but few scale into regional giants capable of absorbing hundreds of millions in institutional funding.

The mismatch is stark.

A senior PE expert recently told the author, the problem in Malaysia is not the lack of money. It is rather the lack of quality, high-growth and innovative companies to invest in.

This is the same predicament the EPF is in, especially if the government continues to restrain its offshore investments.

Also, private market investments generally carry more risk than listed equities – they are less liquid, less transparent, more concentrated and often more leveraged.

Therefore, whatever extra return they promise is really compensation for bearing those additional risks.

Overcrowding and compressed returns

The imbalance in local capital markets sets up a long-term risk, which is overcrowding.

When multiple large players such as the EPF, PNB, Retirement Fund Inc, Tabung Haji and Khazanah Nasional compete for a limited pool of investable assets, returns inevitably compress.

This is already evident in parts of the bond market. Government securities are the safest to park long-term funds in, but heavy demand from government-linked companies (GLCs) and institutional funds has kept yields lower than they might otherwise be.

In corporate bonds, supply has been inconsistent, with most issuances coming from a handful of large issuers.

If the EPF adds another RM300bil to RM400bil to its domestic portfolio over five years, crowding could intensify across equities, bonds and alternative assets.

With the government already reducing its new debt annually, thereby lowering bond issuances, the competition for safe fixed-income instruments will only grow.

A market that needs to grow faster

In order to avoid excess liquidity chasing too few growth engines, Malaysia needs meaningful market deepening.

That means it is necessary to attract foreign listings to Bursa Malaysia; create regulatory conditions that encourage more large IPOs; accelerate the digital economy, semiconductor and green-tech investments; make policy environments more predictable to draw long-term capital; and more importantly, encourage more corporate formation outside the GLC ecosystem.

In other words, Malaysia must expand the “pond”. If not, the EPF will be forced into a position where it accumulates capital faster than the economy generates investable opportunities.

A strategic tightrope

The headline is not that the EPF will hit RM2 trillion by 2030 but what that figure implies.

Malaysia needs to grow faster, innovate faster and produce more world-class companies – because the EPF has outgrown the ecosystem it is expected to invest in.

Unless the domestic market expands in depth and sophistication, Malaysia risks having one of the region’s largest pension funds operating in one of the region’s smallest capital markets.

And more importantly, the EPF should not be restricted in expanding its foreign investments, which have delivered greater returns historically compared to domestic assets.

Prime Minister Datuk Seri Anwar Ibrahim should reconsider his “instruction” to the EPF to increase its domestic investments to 70% of total assets.