Returns from EPF’s conventional and upcoming syariah schemes differ in the short term but are similar over the long term
PETALING JAYA: While the actual returns from the Employees Provident Fund’s (EPF) conventional and soon-to-be-implemented syariah-compliant investment schemes may differ from year to year, the overall performance of both funds over the long term will be relatively similar, according to chief executive officer Datuk Shahril Ridza Ridzuan.
“There will be two dividend rates – one for the conventional fund and the other for the syariah-compliant scheme – with their returns expected to vary from one year to another year, depending on their investment performance,” Shahril said.
“But we expect both the schemes to perform fairly similarly over the long run, with the difference in terms of overall returns expected to be a marginal plus/minus 0.5%,” he told a packed audience at the Star Media Group’s PowerTalk: Business Series on Saturday.
EPF’s fully syariah-compliant investment scheme will kick in by January 2017, with an initial fund size of RM100bil.
According to Shahril, at present, close to 100% of EPF’s funds were already ESG (environmental, social and governance) compliant, and out of that, 45% were already syariah-compliant.
He said the main difference between the conventional and syariah-compliant schemes under the EPF was that the latter would exclude conventional banking from its investment portfolio.
So, how the conventional and syariah-compliant investment schemes would perform in the short term would depend on how the conventional banking sector perform.
“The relative performance between the two funds (over the short term) will be driven by how conventional banking and financial instruments perform,” Shahril said.
“In times of high growth, the conventional fund will give better returns. Conversely, when things become difficult like how it is now, the syariah-compliant fund will be able to generate more stable returns,” he explained, noting that the banking sector was a close proxy to the country’s economic growth.
Nevertheless, Shahril stressed that both schemes would have the same risk-return objective, that is, a targeted dividend rate of 2% above inflation on an annual basis for its contributors.
Application for the syariah-compliant scheme would be open to all EPF contributors who want their returns to be fully derived from Islamic-based principles.
But the option to participate would be granted on a first-come-first-served basis due to the limited fund size at inception stages.
According to Shahril, the fund size of EPF’s syariah-compliant investment scheme would likely grow by about RM25bil to RM35bil a year.
In addition, he said the introduction of a syariah-compliant investment scheme was in line with the future direction of the EPF.
“We are moving away from the one-size-fits-all approach towards offering more tailored products for our society; the syariah-compliant scheme is the first step in that direction,” Shahril said.
“Ten years down the road, we want to be able to provide even more investment-scheme options for our members, such as aggressive, balanced or defensive portfolio, to suit their respective risk-return appetite,” he added.
The EPF, which currently had assets under management worth RM680bil, declared a dividend rate of 6.4% for 2015, compared with 6.75% for 2014.
The biggest pension fund in Malaysia had last week warned stakeholders to brace for a difficult 2016 amid the prevailing gloomy investment climate and poor corporate results.
For the first quarter ended March 31, 2016, EPF already saw a 36.2% decline year-on-year in investment income to RM6.78bil from RM10.63bil in the corresponding period last year.
But Shahril reiterated that the EPF would maintain its target of generating a dividend rate of 2% above inflation regardless of the prevailing market condition.
During the quarter in review, equities made up 41.43% of the EPF’s total investment asset and contributed RM2.55bil or 37.56% of the total income.
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 results.
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.