Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly, on June 13 - 19, 2016.

EMPLOYEES Provident Fund (EPF) members will soon have the choice of converting their retirement savings from the existing conventional fund to shariah-compliant EPF-i, which is slated for launch in January next year with a fund size of about RM100 billion.

As members who choose to switch to EPF-i will have to do so in full and will not be allowed to convert back to the conventional fund, EPF CEO Datuk Shahril Ridza Ridzuan’s advice to members who are not sure is to stick with the existing structure.

This is because EPF members who want to have exposure to both conventional and shariah-compliant funds can already do so by transferring some of their funds to a third-party shariah-compliant unit trust. There will be opportunities to switch to EPF-i at a later date when one is more comfortable with the fund’s performance after a track record is built.

According to Shahril, both the conventional and shariah funds are “designed to minimise the risk of failure and meet the inflation plus 2% target” over the long term. However, the actual yield performance of the two funds will differ, especially over the short term, because they have different assets.

“Over the short term, there will be volatility in returns between the two [funds]. We are not expecting it to be wide but you have to be comfortable with the idea that there will be a difference,” Shahril says, adding that he expects early adopters to be those who place more importance on shariah compliance than potential returns.

The performance of the financial sector, which tends to outperform during the good years and underperform during the lacklustre years, is expected to be a key differentiating factor between the two funds. Put another way, a shariah allocation can offer greater stability.

Even so, a well-managed conventional fund can still outperform during periods of uncertain growth.

“The view that Malaysia’s shariah equity index tends to outperform its conventional counterpart, especially during economic downturns, is mainly because Islamic funds cannot buy non-Islamic banks, which are a big component of conventional indices — for example, the financial sector accounts for about 30% of the FBM KLCI. During economic downturns, banks normally underperform the market.

“That said, fund managers buy [stocks] based on fundamentals. Even though most fund managers are benchmarked against an index, they are not compelled to buy an index stock if they do not like the fundamentals. As such, conventional funds may not necessarily underperform during a downturn if fund managers have also largely excluded financial stocks that they reckon would underperform,” says Jason Chong, the chief investment officer and managing director of Manulife Asset Management Services Bhd.

Gerald Ambrose, the CEO of Aberdeen Islamic Asset Management Sdn Bhd, also would not generalise but puts his weight behind a shariah option: “I’m not sure if you can categorically say that shariah funds do better during a slowdown.

“However, from our research and experience, shariah funds do tend to outperform during periods of uncertainty — particularly concerning the outlook for interest rates and the banking sector. As it happens, currently, there is a lot of uncertainty about the direction of interest rates, and the current low interest rates — or negative rates in a large part of the world — are crimping bank interest rate margins,” he says, adding that his firm’s two shariah-compliant unit trusts “have outperformed their conventional counterparts by a comfortable margin”. His company recently launched a third fund.

EPF’s Shahril rightly points out that shariah investing is not new in Malaysia but upon inception, EPF-i will be one of the largest shariah funds globally and will have a first-mover advantage in the burgeoning global shariah financial market.

To comply with Islamic principles, EPF-i will not have that statutory annual minimum dividend rate of 2.5%, as practised by the conventional fund. Since 1960, EPF dividends have been at least 4% a year. The EPF declared a dividend of 6.4% last year, below the 6.75% rate in 2014, but the amount needed to pay 1% dividend rose from RM5.43 million in 2014 to RM5.98 million last year. Total dividends for last year of RM38.24 billion was also more than the RM36.66 billion for 2014. 

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