In recent years, Malaysian government-linked investment companies (GLICs) have actively sought to acquire more foreign assets, particularly equities.
Among these 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 evident at a time when the local stock market is seen as lackluster compared to other overseas markets.
Take the example of the US stock market. Barring a few brief selloffs, the Dow Jones Industrial Average gained 18.7% in 2021, while the Nasdaq Composite rose 21.4%.
In contrast, Malaysia’s benchmark – FBM KLCI – fell 3.7%. Ironically, major equity indices in Thailand, Singapore and Indonesia all recorded double-digit returns in the same year.
Unsurprisingly, these lucrative overseas returns have been attractive to GLICs.
However, with the poor performance of many foreign markets this year, how will this affect the potential return of GLICs?
Could EPF’s dividend for 2022, for example, fall below its rate of 6.1% in 2021?
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Analysts say earnings from stocks held by GLICs would likely be hit this year, but the severity of the losses depends on how long the market slump lasts.
The MSCI USA index, which measures the performance of the large and mid-cap segments of the US market, has fallen more than 19% this year alone.
Recession fears and inflationary pressures dampened confidence and pushed investors away.
Some analysts believe the worst of the stock market crash is yet to come.
In these market conditions, one wonders if the GLICs are increasing their foreign exposure at the right time.
As the size of their funds grows, GLICs are under increased pressure to grow their investment assets, not only to mitigate risk, but also for better returns.
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EPF, for example, was to provide a payout of RM8.25 billion for every 1% dividend rate for conventional savings in 2020. For Syariah savings, the required payout amount was of RM972 million.
The Malaysian market alone cannot offer EPF the potential to generate such a payment.
In 2018, the EPF declared that it wanted to increase the amount of its investments abroad, particularly in private assets.
Today, foreign investment is a key driver of EPF’s performance. In 2021, 58% of its overall returns were due to overseas investments.
This despite the fact that only around 37% of its assets at the end of December 2021 are invested abroad.
PNB, which is one of the largest fund management companies in Malaysia, also started to diversify overseas in 2018.
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In the past, PNB was known for its “too concentrated” investments which were mainly in the local stock market.
However, compared to the EPF, the PNB has a lower value of foreign assets.
At the end of 2020, international investments represented 12% of the overall PNB portfolio. In particular, foreign public stocks accounted for 8.7% of total PNB assets.
Meanwhile, LTAT also plans to be present in the international investment landscape.
Last week, LTAT CEO Datuk Ahmad Nazim Abdul Rahman said the fund intended to increase its public equity exposure to 50%, of which 20% would go to foreign investment.
It seems that the decline in the world market has not hampered the interest of the GLICs in increasing investments abroad.
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Speaking to StarBizWeek, investment analyst Pankaj C. Kumar agrees that the current decline in stocks would lead to losses, given current values.
“But it also allows GLICs to reposition and enhance their portfolio based on a lower cost of entry.
“After all, these investments should not be considered over a one-year horizon, but over a longer period,” 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 and geographic markets.
“It’s still the right strategy when it comes to diversification,” he adds.
Meanwhile, Trident Analytics Director of Research Peter Lim Tze Cheng believes GLICs may not be significantly affected by the selloff in the US market.
“The share of foreign shares in the assets of the GLICs is not very important. GLICs have greater exposure to fixed income assets that are stable and secure,” he says.
When asked if it was right for GLIC to expand their exposure overseas, Lim replied, “They have no choice.”
He notes that the assets under management of GLICs have grown over the years and that the “small” size of the Malaysian stock market could not meet the needs of these GLICs.
EPF, for example, has total assets under management of RM1,010 billion at the end of 2021, while PNB’s assets under management at the end of October 2021 stood at RM337 billion.
LTAT, on the other hand, manages RM9.7 billion in assets at the end of 2021.
“The GLICs already hold 30% of the local shares, what if they acquired more local shares? That’s why they need to diversify overseas where the market size is bigger,” according to Lim.
Commenting on the current global market decline, Lim believes that the markets are “near bottom or have already bottomed”.
“Although there are fears in the economy, now is a good time for investors to enter the market. The focus should be on recovery stocks,” he adds.
