PETALING JAYA: The Employees Provident Fund (EPF) sent a chilling note of caution to prepare for a tough year ahead, as the global and domestic markets continue to be roiled by uncertainties and volatility.
Giving a frank view that the pension fund with assets under management of some RM680bil has got off to a tough start, its chief executive officer Datuk Shahril Ridza Ridzuan said that it was bracing itself for a difficult year ahead, given the ongoing investment climate and poor corporate results.
“The uncertainties in the world economy, following prolonged slower growth in major economies and high volatility in the equity markets and commodity prices, are expected to remain throughout the year,” he said in a statement yesterday.
Global markets got off to a bad start this year, resulting in most funds chalking up a drop in their returns. In tandem with that, the EPF’s first quarter ended March 31, 2016 saw a 36.2% decline year-on-year in investment income to RM6.78bil from RM10.63bil in the same period last year.
Shahril said the investment climate in this quarter was significantly different from the first quarter last year, which benefited from better returns from its global investment, particularly from developed equity markets, which compensated for the weak domestic equity market.
“The first quarter of this year had almost all global equity markets, including the FTSE Bursa Malaysia KL Composite Index, recording declines, leading to lower income contribution from our total equity portfolio.
“Accordingly, the contribution of global assets to total income decreased to about 22% compared with 47% last year due to lower capital and foreign-exchange gains,” he said.
During the quarter, equities, which made up 41.43% of the EPF’s total investment asset, contributed RM2.55bil or 37.56% of the total income.
The EPF had earlier said that it 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.
However, the income generated was 59.98% lower compared to the RM6.36bil recorded in the same period in 2015.
While income deriving from dividend payouts has been stable and consistent with last year’s first quarter, the drop in share prices globally and domestically has led to fewer opportunities for the EPF to realise trading income during this year’s first quarter.
“The lower returns from our equity investments were mitigated by the income from our fixed income and inflation assets, which remained resilient and stable throughout the quarter.
“Our strategic asset allocation, which allocates more than half of our investment asset in fixed income, played its role in providing sustainable long-term returns for our investment,” he added.
As at end-March 2016, fixed income instruments, representing 51.72% of the EPF’s total investment size, emerged as the main contributor of income for its first quarter this year.
The asset class contributed a total of RM3.74bil of investment income or 55.15% of the quarterly income. Malaysian Government Securities generated RM1.87bil in income during the quarter under review, up 9.8% or RM166.74mil, compared with RM1.7bil in the first quarter last year.
Meanwhile, loans and bonds recorded an investment income of RM1.87bil compared with RM2.03bil in the same period last year.
The EPF’s investment in money market instruments, which currently stands at a healthy RM22.58bil, contributed RM110.25mil of income, while Real Estate and Infrastructure, which made up 3.54% of the total investment asset, yielded a total income of RM377.84mil in the first quarter, following income received from rentals and income recognised by its associate companies.
In an earlier report, Shahril had said that the fund continues to look for opportunities to increase its exposure in the “inflation assets” segment such as utilities and infrastructure.
“Our real estate exposure is relatively small at this point of time at less than 4%, but it is the fastest growing part of our business. The goal is for inflation-linked assets to reach about 10% of the total fund size in five to seven years,” he said.
Shahril had earlier said that the current economic condition presents some opportunities for the EPF to rebalance portfolios and simultaneously increase exposure to inflation asset classes, including real estate and infrastructure, which potentially are able to provide a stable and continuous stream of income.
Contrary to focusing on short-term returns, the EPF has always been focusing on sustainable long-term returns by targeting a 2% real dividend over a three-year rolling period.
The EPF boosted its annual dividend payout last year to 6.4%, or a total payout of RM38.24bil.
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.