Top management: (from left) EPF deputy CEO (strategy) Tunku Alizakri Raja Muhammad Alias, Shahril, deputy CEO (operation) Datuk Mohd Naim Daruwish, and CFO Sazaliza Zainuddin at the briefing.
KUALA LUMPUR: The Employees Provident Fund (EPF) could break out of its two straight years of declaring lower dividends this year if Bursa Malaysia continues its uptrend movement.
In the financial year 2015 (FY15) and FY16, the EPF’s dividend had been on a declining trend after having paid out a high of 6.75% for FY14. The reason for the lower dividends was due to impairments in the value investments that the EPF had to make for the 12% decline of Bursa Malaysia over the past three years.
The EPF’s chief executive officer Datuk Shahril Ridza Ridzuan said that he was comforted that Bursa was already up by between 6% and 7% this year.
“It is already up by 6%-7% for the year, giving us some comfort that Bursa has reversed course, and hopefully, we won’t have a fourth straight year of declines on Bursa,” Shahril said at a briefing on the EPF’s 2016 annual report.
He said that while markets had done well, they were also volatile.
“There is nothing to say that things may not turn in the opposite direction, but it’s just that at this point of time, we can see clearly now that the economic recovery is slowly taking root. If the markets do well for the rest of the year, then generally, we should do well as well,” he said.
Shahril said the EPF’s portfolio showed that the biggest volatility in its holdings were from its investments in equities due to impairments, and the most stable investments were from the fixed-income and private investment segments.
“The income from rental yields, bonds and sukuk is stable. However, investments in the equities market add value to our portfolio despite the volatility. Without returns from the equities market, our total portfolio return would only be in the region of 4%,” Shahril said.
The EPF, which had declared a dividend of 5.7% for 2016, had recognised a net impairment amounting to RM8.17bil, which is more than double the RM3bil of 2015 largely due to the weaker equities market.
Shahril said the retirement fund took a conservative and strict view on impairments or writebacks.
“When the prices of equities fall below our cost, we write-down the value of these assets on our balance sheet. But when prices move up, we don’t do writebacks as we don’t allow unrealised profits to enter the profit and loss statement. It will still be on the balance sheet until we actually sell these assets,” he said.
“When prices rise, the value on our books will actually go up and will carry a higher unrealised profit on our balance sheet until we trade out our positions. It is a very conservative way.”
On its investment plans, moving forward, Shahril said the EPF has been diversifying from purely holding fixed income or equities into the real estate and infrastructure space recently.
“In areas like infrastructure in Malaysia, we do like the long-term returns of the asset. Moving forward, we would like to look into how we can have more direct exposure in the natural resources sector. We are already today one of the larger investors in palm oil production, and we are also investors in palm oil companies,” he said.
“We are looking at a potentially more direct exposure, with direct control and holdings of these assets. The global trend is also that a lot have been investing into the renewable forest space such as farmlands,” Shahril added.
He said the EPF would like to have a portfolio of very long-term assets, which can provide steady cashflow and some landed assets, given the scarcity.
“This is why we have acquired very large stakes in pieces of land before. This underpins our belief that we have assets that provide income and assets that provide an inflation hedge against future costs,” Shahril said.
He said typically, the EPF measured its returns against the inflation rate and usually paid out about 2%-3% above the inflation rate.
On its holding company Malaysia Building Society Bhd (MBSB), Shahril said the EPF supported MBSB’s strategy to eventually become a full-fledged bank.
“We get fairly high dividends from MBSB. If there is a compelling offer (to sell down our stake), then we may look at it, but it is hard to say at this point in time,” he said.