EPF to send $3.2 billion offshore by 2007

It also seeds a new Southeast Asia resources fund with partners CIMB and Standard Bank.
Malaysia's mammoth M$260 billion ($70.4 billion) Employees Provident Fund has obtained the Finance Ministry's approval to allocate another M$925 million ($250 million) of funds to external fund managers for overseas investment û in just the first stage of a planned M$12 billion ($3.2 billion) offshoring by 2007.

The latest allocation, benchmarked against the recently launched FTSE/Asean 40 Index, is the first chunk of the M$2 billion ($541 million) pot the EPF plans to outsource this year. When allocated, it will take the EPF's offshore investments to more than $350 million. The EPF has just received permission to allocate this money abroad and has yet to choose an external fund manager or managers.

Separately, it is also seeding a new fund set up with CIMB and South Africa's Standard Bank to invest in resource stocks in Southeast Asia (see below).

Institutions in Malaysia û including the EPF û have been unable to fully utilise their growing assets piles in recent years as a result of strict capital controls imposed in the wake of the Asian financial crisis of 1997-98. In the meantime, the fund's assets are growing by around M$25 billion a year, and the returns it has been able to provide members have steadily fallen over the past several years.

This latest move is part of the EPF's strategy to diversify its investment to higher yielding markets and support the Government's aim of developing the local capital market, its chairman Tan Sri Abdul Halim Ali says: "We are committed to our target to outsource a total of M$12 billion of the EPF funds to external portfolio managers by 2007 but we will not compromise on the ability of these managers to deliver results."

The EPF has already invested M$560 million in equities markets overseas since early this year, through mandates for Asia ex-Japan equities to Aberdeen Asset Management and to Pheim Asset Management, both based in Singapore, as well as through domestic mutual funds with overseas exposure.

Halim says the EPF would continue to track the performance of external portfolio managers and would park larger amount of EPF funds with portfolio managers that enhance the value of the savings of its 11 million members.

"The EPF will allocate more funds to portfolio managers that continue to outperform their mandates but the fund will also not hesitate to terminate the services of under-performing managers who consistently fail to meet their mandates," he adds.

Last year the EPF appointed Aberdeen and Pheim as its overseas equity manager along with five domestic fund houses to handle international fixed-income strategies, and injected a total of M$750 million to these portfolio managers.

Pheim's CEO and founder, Tan Chong-Koay, declined to reveal the size of the current mandate, but welcomed the EPF's move. "Of course we'd be keen to take on additional funds," he says. "We have a strong track-record so far, so I hope Pheim will be considered again."

Until recently foreign fund managers have been unwilling to locate in Malaysia because the costs have outweighted potential earnings: the retail market is closed to them and institutional money has been unable to move offshore in significant quantities.

However Pheim's Tan says the numbers are now getting large enough that he expects a number of foreign houses to finally make the plunge and set up in Malaysia.

"It goes without saying that as the fund size increases, more foreign firms are going to be attracted, and weÆre getting to that stage now," he says. "But that is not bad for us, it has to be good for the local industry in Malaysia to have world-class fund managers bringing their knowledge and expertise here."

The EPF's Halim said he hoped the move would "encourage local fund managersàto extend their services to the EPF and help grow local expertise in managing overseas investment".

The EPF also announced it is to pay a 5% dividend for 2005, up from the previous year's 4.75%, but still well down on the 8%-plus it paid in the mid-1990s.

Halim adds that the income required to pay a 1% dividend to members increased to M$M2.38 billion last year compared with M$2.17 billion in 2004. The income required to pay a similar account for 2006 is expected to increase further as the EPF is expected to reach a fund size of M$288 billion by the end of the year.

Separately, the EPF is also to invest in a newly launched $250 million fund set up by CIMB and South Africa's Standard Bank.

CIMB chief executive Nazir Razak says the EPF was committed to putting in $50 million, with CIMB and Standard Bank contributing $30 million and $20 million respectively.

The fund will invest about 60% of its assets in Malaysia and Indonesia, with a secondary focus on other Southeast Asian countries, Nazir says, adding that it would invest in the infrastructure, energy and natural resource sectors.

"Through prudent investment selection and skillful financial engineering, (the fund) targets to achieve for its investors a US dollar-based internal rate of return of at least 20%, net of costs, over its life," Nazir said, adding that he expects the fund to reach its full $250-million size in about 18 months.

The fund will be headed by Vijay Sethu, who has previously worked in structured and project financing at ANZ Investment Bank in Singapore.

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