EPF pays highest dividend in 16 years with overseas boost

EPF chief executive officer Datuk Shahril Ridza Ridzuan speak to the media during the Media briefing on investment performance and the 2014 Divident in Kuala Lumpur, yesterday.

KUALA LUMPUR: Overseas equity investments were a major contributor to the Employees Provident Fund’s (EPF) stellar 2014 financial results, which saw the fund declaring its highest dividend rate since 1999 of 6.75%, amounting to a total payout of RM36.66bil.

Unveiling the details of its results, chief executive officer Datuk Shahril Ridza Ridzuan (pic) said it aimed to expand its global investments to 26% over the next three years from 23%, or RM149.56bil, currently.

He said that the fund had been aggressively expanding its global investments from a mere 6% in 2009, noting that its efforts had paid off based on its 2014 performance.

“We have been very active in global markets and have built up our position because we felt this was the right time, given the depressed conditions, to pick up all the assets and equities at very good valuations,” he said yesterday.

The EPF’s global investments contributed 33% or RM13.01bil towards its total income despite comprising just 23% of its total assets.

The bulk of the income came from the pension fund’s investments in the equities market, which amounted to RM10.32bil for 2014.

The EPF’s sterling performance in the overseas markets comes on the back of the Government’s call to government-linked companies to reduce their investments overseas.

A fund manager said the EPF had put money in stocks in the markets in the United States and Germany very early on. Among the sectors where the fund had invested in was in technology stocks that had ridden a strong wave last year.

For 2014, the EPF posted RM39.08bil in gross investment income, which was an 11.66% increase from RM35bil in 2013.

Shahril said its equity investments performed much better than in 2013 in terms of the growth rate of the income generated both internally as well as externally.

While the external equities income came up to RM10.32bil, the domestic equity investments reaped RM12.52bil or 55% of the total equities income.

Its equity investments recorded an investment income of RM22.9bil last year, up 17.37% compared with RM19.52bil in 2013, and contributed 58.63% to its total gross investment income.

Shahril noted that the EPF was not just a passive holder of equities but a very big trader as well, so a lot of its strategies revolved around timing its entries and exits on its stocks.

“This is because the EPF only declares dividends on our realised income. We do not recognise unrealised income,” he said. This means that the EPF only regards as income on investments that it has liquidated and not based on revaluation or mark-to-market gains.

Being a “very long-term investor”, Shahril said it tended to take less notice of very short-term volatility other than viewing it as trading opportunities to acquire a bigger position in its stocks or sell off its position.

Adding that the EPF was sometimes a bit of a contrarian investor, he said it could be a very active seller when there were many buyers in the market, as it wanted to take advantage of the market liquidity that would not otherwise be present.

“So, if you look at the strategies we have employed, it’s mostly about building up long-term strategic positions in markets or industries in which we feel have a long-term future for us,” he said.

As for any changes in its strategic asset allocation in view of a possible interest rate hike in the United States, he said the EPF did not tend to make “very big dramatic shifts”, but noted it could shift its investments within a particular asset class if there was a need.

Shahril also stressed that its fixed-income holdings were its bedrock, as these investments provided capital preservation and stability to its members’ funds.

He said it would always hold a percentage of its assets in fixed-income instruments to ensure it had enough income in the event of a market downturn to generate its target of a 2.5% nominal dividend on a yearly basis.

However, he noted that the average yields on its fixed-income portfolio have been trending downwards, as the older papers it held at higher rates were maturing. On this score, the average yields have trended down to about 4% compared to up to 8% a few years ago.

“As we re-invest the money, we have to re-invest at lower rates. What we are seeing is that for fixed income, returns for yields are very low. But the corollary to that is that inflation is trending lower and is basically in line with global interest rates,” he said.

On his outlook for 2015, Shahril said a lot hinged on its domestic investments, adding that a lack of liquidity there would impact its ability to generate returns from Bursa Malaysia.

He said the biggest swing factors were its equity portfolio, adding that its income growth would be affected if there was a big downturn in the volatile global and domestic equity markets and shrinking liquidity.

“But the bulk of it – fixed income, property and construction – tend to be very certain in terms of stable returns. It’s important that our contributors get stable dividends and that it can grow in future,” he said.