Pension fund topping up on equities as return from fixed income slows
THE Employees Provident Fund (EPF) has been gradually increasing its investments in equities in the past few years in order to maintain its growth momentum as yields from the fixed income division slow down.
Moreover, the fund manager is expecting the year’s global economy to experience a slow and uneven recovery, where it will be “increasingly challenging” for the EPF to manage its massive funds, according to its 2015 annual report.
“In anticipation of the ongoing weak economic conditions, we will continue to manage our investment portfolio prudently using a risk-based approach,” says chief executive officer Datuk Shahril Ridza Ridzuan.
The fund is seen to shift to buying and selling shares, where equities continue to be the main contributor of income with 58.8% amounting RM26bil, up 13.5% compared with RM22.9bil in 2014.
The EPF ended last year with RM44.23bil in total gross investment income.
The fixed income asset class, comprising Malaysian Government Securities (MGS) & equivalent and Loans & Bonds, in total contributed 35.4% of the RM44.23bil.
This is lower compared to 36% in 2014.
As of end 2015, the pension fund manages RM684.5bil worth of investment assets, where overseas investment makes up 25% of EPF’s total investment assets.
This works out to about RM171bil, which is invested mainly in equities, bonds and real estates.
Its foreign equity portfolio played a significant role last year by generating more than half of the income from equity investment.
As such, the higher income from investment has helped EPF boost its annual dividend payout last year to to 6.4%, or a total payout amounting to RM38.24bil.
The payout amount required for every one percent dividend rate for the year was RM5.98bil, which was a 10.13% higher compared with RM5.43bil in 2014.
Its highest dividend was from 1983-87 when it declared 8.5%.
Post Global Financial Crisis, the fund has credited dividends amounting to RM198.9bil, where last year’s payout was the most since the fund’s inception.
Shahril says the fund will continue to deliver real rate of return of at least 2% above the rate of inflation.
“In the first quarter of this year, the equity market performance was very tough not only for EPF but also for any investment fund manager around the world given the high volatility and low yield.
“So we expect, with all these challenges, to continue focusing on the inflation plus 2% to ensure that we can deliver real growth for our investors and members for a very long period of time,” he says.
Bank Negara Malaysia expects inflation to grow between 2.5% and 3.5% this year.
Shahril says the fund continues to look for opportunities to increase its exposure in the “inflation assets” segment such as utilities and infrastructure.
EPF joins other sovereign wealth funds looking to raise their global real estate investments
The inflation asset class, comprising Real Estate and Infrastructure, contributed RM1.7bil investment income last year with annual growth of 22.2% compared with 2014.
Most of EPF’s investments in the Real Estates and Infrastructure asset class are made through associate and subsidiary companies, of which dividend income from these companies made up the majority of the asset class’ gross investment income.
Within the asset class, the foreign investments, which were initiated in 2010, have shown encouraging performance over the years and began to generate significant income in 2015, the annual report says.
Its real estate exposure is less than 4% but it’s the fastest growing part of the EPF’s business, Shahril says in a report.
“The goal is for private market assets to take about 10% of the total fund size in five to seven years,” he had said.
He says that the EPF is a big investor in power plants, toll highways, which provide inflation adjustment return that the group is looking for.
“We were big subscribers of Tenaga Nasional Bhd’s new issuances to support the development of new power plants,” he says.
Last year, the total number of members increased to 14.5 million, out of which 6.7 million were active members.
Total number of employers contributing to the EPF has increased to 536,489.