Global consulting firm Towers Watson recently revealed that alternative assets managed on behalf of pension funds globally by the top 100 managers totaled US$952 billion last year: a 16% increase from 2009.
Towers Watson also revealed that real estate remained the most popular asset class for pension funds investments, accounting for about 55% of assets, followed by private equity, infrastructure, fund of hedge funds and commodities.
While North America accounted for the largest amount of pension fund assets in alternatives, Asia became the fastest growing region in terms of proportion of alternative assets, making up 13% or US$123.76 billion of pension investments – which is a 60% increase from its 8% in 2009.
In the absence of any mention of Shariah compliant or Islamic products, it can be assumed that there is very little inclusion in the portfolio of Shariah compliant products.
Saudi Arabia, Malaysia, South Africa, Bahrain and Indonesia are some of the countries that have Shariah compliant products which have been included into the respective pension funds’ investment portfolios.
With Malaysia’s continued ambition to be a global Islamic financial center, it comes as no surprise that one of the leading pension funds to invest in Shariah compliant products is the Employee Provident Fund (EPF), which had funds under investment of RM440.52 billion (US$147.95 billion) as at the 31st December 2010.
By the end of 2010, EPF stated that its Sukuk portfolio is projected to increase to a staggering RM75 billion (US$25.19 billion), both in ringgit and US dollar issuances, which excludes the Sukuk holdings by asset management companies that manage its funds.
In its commitment to support the Malaysia International Islamic Finance Center (MIFC) initiative, EPF established a dedicated Islamic Investment Department in 2008, which then became the Islamic Investment Development Department a year later “to invest, manage and develop Islamic loans and corporate Sukuk” in line with the rapid growth of the industry.
In Saudi Arabia, the General Organization for Social Insurance (GOSI), which is the kingdom’s social security and pension agency and reportedly holds stakes in virtually every blue-chip Saudi firm, also has Shariah compliant investments in Islamic banks such as Al Rajhi Bank, Alinma Bank and Bank Albilad.
It is clear that both pension funds have had very little exposure to alternative Islamic funds, preferring to invest heavily in fixed income and equities.
Alternative Islamic funds have also been omitted by asset management companies in other countries such as Pakistan and South Africa, which have also expanded their fund offering in the retail segment to offer products to individuals or companies who are interested in investing in pension schemes for their employees.
Islamic pension funds managed by asset management companies in Pakistan are divided into three asset classes – equity, debt and money market – while asset management companies in South Africa are slowly moving away from the mainstream asset classes by introducing Islamic balanced funds.
Malaysia’s asset management companies do not have dedicated pension funds. Instead, retail investors who are members of the EPF are allowed to invest a portion of their savings in EPF approved funds. A closer look at these funds reveals an identical disposition to the two previously mentioned countries.
Mainstream asset classes will remain popular among investors even in pension funds. Some asset managers contend that since Shariah compliant funds are still in their infancy, it would take another 10 years for the industry to emerge as a reputable alternative financial system. But there are those who feel that alternative funds should be offered to investors who would be attracted such products, which can provide them with the best opportunities to realize their targeted returns.