Malaysian pension fund Employees Provident Fund (EPF) is allocating an initial fund size of MYR100 billion ($24.64 billion), or 14.67 per cent, from its total investment asset of MYR681.71 billion ($167.99 billion) as at March 2016, for shariah investments.
At MYR100 billion, the shariah-compliant fund will be largest such in the world. EPF is the seventh largest pension fund in the world.
EPF announced on Monday that its new retirement savings option ‘Simpanan Shariah’, a shariah-compliant option, will be launched beginning 2017.
Members of the fund will have the option of converting their current conventional pension savings to one that is managed and invested following shariah principles. Once converted, there is no option to revert.
Chief executive officer Shahril Ridza Ridzuan said, the fund’s venture into Islamic investments was not new as more than 45 per cent, or MYR295 billion ($72.69 billion), of EPF’s total investment assets were already shariah-compliant.
“We expect to grow our investment in shariah assets by at least MYR25 billion to MYR35 billion per year on average, or in tandem with the total asset growth in order to maintain a minimum of 45 to 50 per cent split between conventional and shariah assets,” he said.
With an initial MYR100 billion, he added that the fund size will be “more than ample”.
“It is big enough to provide diversification, but small enough to not have concentration risk under any asset class,” he commented.
EPF will set the same target returns for the shariah funds as its conventional fund, as both funds are constructed to have similar asset class breakdowns.
“The reason why the shariah fund is MY100 billion out of the MYR681.71 billion is to make sure we have the same risk return profile, and the same broad strategic asset allocation across both portfolios,” Ridzuan said.
In accordance with shariah principles, EPF will distribute a dividend rate based on portfolio performance of the shariah fund, and will not have any guaranteed minimum dividend.
He noted that members can look to EPF’s track record managing funds in the past 50 years.
“The EPF has consistently outperformed its target; in the past years we have achieved consumer price index plus 3.5 to 4 per cent, driven by a combination of both conventional and shariah assets. From our point of view, the shariah assets have been performing just as well as the conventional assets,” he told reporters.
The conventional savings has a minimum dividend guarantee of 2.5 per cent, which Ridzuan noted the fund has never fallen below.
Although investing in non-shariah compliant assets, investments in the conventional portfolio will adhere to environmental, social and governance (ESG) principles.