Malaysia’s largest pension fund, Employee Provident Fund (EPF), on February 26, announced the launching of the largest Shariah-complianf fund and the first Shariah private equity (PE) direct/co-investment separately managed account (SMA) fund in the world with an allocation of US$600 million.

Within the allocation, the EPF will have three SMAs of US$200 million each to be managed by three private equity fund managers – BlackRock, HarbourVest Partners and Partners Group – with a global mandate that focuses on direct and co-investment strategies into growth and buyout transactions.

The investment period is from 2021 to 2025, while the fund term will run from 2021 to 2031, subject to further extension with EPF’s consent.

In announcing the fund, chief EPF officer Alizakri Alias says the EPF has been working on this initiative since 2018 as it seeks to diversify its investment portfolio to ensure it can provide sustainable returns to its members. “The EPF has great confidence in the three asset managers to carry out the direct and co-investment activities on the fund’s behalf as they have a long history of investing into private equity and several exposures in managing Shariah-compliant mandates,” he adds.

The EPF’s private equity arm has a global funds exposure with strategies covering growth, buyout, middle-market capitalized and large-market capitalized strategies totalling 106 active investments with a total commitment of US$12.05 billion.

As of the second quarter of 2020, the top three regions in which the EPF has invested under PE mandates are North America (42%), Europe (21%) and Greater China (12%).

The SMAs have appointed Amanie Advisors (Dubai) and ZICO Shariah Advisory Services as the Shariah advisers to ensure that all investments are Shariah-compliant. The SMAs are structured based on either a wakala or a combination of both wakala and murabaha structures, which will be subjected to Shariah investment guidelines.

The EPF’s overall investment assets rose 7.9% to 998 billion ringgit (US$246.42 billion) with a market value amounting to 1.02 trillion ringgit at the end of 2020. It had 33% of its investment assets outside of Malaysia across all asset classes. Equities, particularly foreign equities, continued to be the driver of returns with a total income of 28.71 billion ringgit. The PE portfolio also demonstrated strong performance with a consistent income distribution.

Almost half of the fund’s total asset allocation was in fixed-income instruments, comprising of Malaysian government securities and equivalent, and loans and bonds. As such, the EPF was able to maintain stable returns and, at the same time, capture opportunities to realize profit as interest rates declined. Income from the portfolio fetched 25.42 billion ringgit, or 42% of the fund’s total gross income.

The income from real estate and infrastructure portfolio amounted to 5.66 billion ringgit and faced challenges in 2020 with the lockdown measures and work-from-home schemes, resulting in lower income from certain segments of the real estate sector. However, the portfolio overall continued to play a role as a hedge against inflation with a spread of about 50 basis points above fixed-income instruments.