The retirement fund announced on Friday the Q2 investment income was up 36.36% from RM8.44bil a year ago but it dipped from the RM11.79bil in the first quarter ended March 31, 2017.
The lower quarter-on-quarter income was due to a decline in contribution in equities and EPF chief executive officer Datuk Shahril Ridza Ridzuan said he expected a moderation in income growth for upcoming quarters.
Commenting on the outlook for the second half of the year, he said with the ringgit showing signs of improved stability, global investments would remain one of EPF’s significant revenue drivers going forward.
“Domestically, while GDP growth continues to improve, the EPF will be vigilant of other external factors which may create uncertainty, including the possibility of global rate hikes, and rising geopolitical tensions,” he said.
Elaborating on the Q2 2017 results, he said market conditions had improved from a year ago.
“All asset classes in our portfolio have recorded healthy year-on-year growth, with equities continuing as the main profit driver for the quarter under review,” he said.
In accordance with Malaysian Financial Reporting Standards (MFRS 139), the EPF recorded lower net impairment of RM1.34bil in Q2 2017, up RM2.28bil or 62.98% from RM3.63bil in line with the better performance of the equities market.
Of the RM11.51bil investment income in Q2 2017, fixed income instruments contributed 37.29%, equities contributed 53.72%, while real estate & infrastructure and money market instruments contributed 6.23% and 2.64% respectively.
“While we recorded significant improvements in year-on-year performance in both the preceding and current quarters, there is a slowdown in momentum which saw corporate profits normalising in Q2 2017. We, therefore, expect a moderation in income growth for upcoming quarters,” added Shahril.
Equities accounted for 41.96% of EPF’s total investment assets as at Q2 2017. They contributed RM6.18bil of income, or 61.45% higher than RM3.83bil a year ago. However, the investment income was slightly lower as income from equities fell to RM6.181bil from RM7.097bil in Q1FY17.
The EPF also benefited from diversification into other asset classes that provide stable streams of income, including fixed income instruments and Real Estate & Infrastructure investments through its subsidiaries.
A total of RM820.71mil out of the total investment income of RM11.51bil was generated for Simpanan Shariah, while RM10.69bil was generated for Simpanan Konvensional.
Simpanan Shariah derives its income solely from its portion of the Shariah assets. Income for Simpanan Konvensional is generated by its share of both Shariah and non-Shariah assets.
“In Equities, the banking sector has been outperforming since the beginning of the year while the bulk of our impairments recorded for the quarter came from the telecommunications and oil and gas sectors.
“If this continues, we expect that Simpanan Konvensional will benefit from the former and outperform in the short term.”
The value of EPF investment assets rose 3.92% to RM759.78bil from RM731.11 billion as at Dec 31, 2016. Out of the total investment assets, RM362.50bil, or 47.71%, were in Shariah-compliant investments and the balance were invested in non-Shariah assets.
As June 30, 2017, the EPF’s overseas investments, or 29% of its total investment asset, contributed 32.5% to the total investment income in Q2 2017.
“Our foreign investments have proved to be a significant revenue driver in recent years, despite making up less than 30 per cent of total investment portfolio as at Q2 2017. The increase in global asset values mitigated the negative effect from the strengthening of the ringgit, providing opportunities for us to realise profit,” Shahril said.
“As at end 2016, the EPF delivered a three-year rolling return of 3.83% above inflation, a significant premium over its 2% above inflation strategic target, thus ensuring that members’ savings are not only preserved, but also enhanced.
“The outperformance was mainly driven by its overseas portfolios, which recorded a three-year annualised return on investment (ROI) of 11.10% as at June 2017, enhancing the value of EPF’s return.
“While the domestic market remains integral to EPF’s investments, we need to diversify our portfolio into broader markets with better investment opportunities and greater liquidity to enable the EPF to execute our strategies in line with our mandate. Doing so would equip the EPF with the agility and resilience to anticipate and rise above future market challenges,” said Shahril.
Due to regulatory constraints, the EPF’s exposure to overseas investment stood lower than the strategic asset allocation of 32%, specifically in real estate & infrastructure.
“These gaps could potentially result in lower than expected return for the EPF in the years to come.
“As at June 30, 2017, the EPF’s exposure to real estate & infrastructure asset class remains at about 4% against its strategic asset allocation of 10%.
“In addition to being an inflation hedge, real estate & infrastructure has also delivered competitive return with lower risk compared to Equities in the medium to long-term horizon.
“Despite recording significant annualised return on investment of 8.8% over the past three years, the contribution of income from real estate & infrastructure remains small as the exposure to the asset class is significantly lower than the targeted asset allocation,” he said.