Amid the scrutiny over its investments in the United States following Prime Minister Datuk Seri Najib Tun Razak’s announcement that the Employees Provident Fund (EPF) is going to increase its investments there, the fund sheds light on the issue. Below are the EPF’s replies to StarBizWeek’s queries.
Q: Why does the EPF need to invest overseas? Are there not enough opportunities in Malaysia?
A: EPF’s assets have been growing at about 10%-11% annually, which is much faster than the domestic capital market growth of 4%-5%. In order to achieve its investment objectives as well as to mitigate concentration risk in the domestic market, the fund has to diversify its investments into foreign markets through various asset classes. The overseas market, such as those in developed countries, provides greater opportunities to invest in high quality matured investments that also gives greater liquidity for the EPF to effectively execute its investment strategies.
The domestic market still remains an integral part of the EPF investment portfolio and as at Q2’17, represents 71% of total assets. In absolute amounts, current domestic investments have consistently registered healthy growth of 7% to 8% annually. The EPF is continually looking for opportunities to invest in the right domestic assets and projects which would contribute to the overall performance of its funds.
Q: What are the EPF criteria and process in making overseas investments?
A: The EPF practices a disciplined and prudent investment process in line with Section 26 of the EPF Act 1991. All investment decisions require the approval by the Investment Panel, whose members are appointed based on extensive knowledge and professional experience in financial matters.
The members comprise representatives from the EPF, Bank Negara Malaysia, independent industry experts and the Government. The overall investment governance framework is further reinforced with the existence of the Investment Panel Risk Committee, Management Investment Committee and Management Risk Committee. The respective committees oversee and are responsible for the establishment and execution of investment policies and strategies as well as monitoring of investment decisions, execution and performance.
The EPF’s investments are further scrutinised by a quarterly audit process done internally, followed by the Auditor-General yearly. The EPF’s overall asset position and performance are announced quarterly and accounts are reported in accordance with global accounting standards, FRS 139.
Finally, the audited accounts are then tabled in Parliament for approval and is subject to scrutiny by the Parliamentary Accounting Committee (PAC). As a statutory body, the EPF is governed by an inclusive board, whose members include representatives from employees, employers, industry professionals and the Government. Collectively, the board will ensure that the EPF carries out its prime responsibility to safeguard the interest of its 14 million members.
Q: Why would it be good for the EPF to expand its investments in the US considering it already has US$7.9bil there?
A: Currently, the majority of the EPF’s investments in the US market are in public listed equities and bonds. The US economy has been on an uptrend in recent years, and appears to be fully recovered from the Global Financial Crisis to the point that the authorities are withdrawing their unconventional stimulus measures.
The labour market is near full employment, and consumer spending and business investment has been picking up. In addition to the cyclical upturn, infrastructure investment opportunities in the US are expected to increase, as this has been lagging for some decades.
Globally, the EPF is looking to increase its investments in real estate and infrastructure. These asset classes deliver competitive returns with lower volatility risks compared to equities in the medium to long-term horizon. This is in line with the EPF’s strategy to increase overall exposure in this asset class, which as at Q2 2017 only makes up 4% of the total investments as opposed to its Strategic Asset Allocation target of 10%.
Q: How do overseas investments add value to EPF’s overall investments and returns? How would this benefit the members?
A: Aside from the benefits of diversification, overseas investments have enhanced the EPF’s overall investment return. For the past three years, the overseas portfolio has recorded double digit annualised return of 11.1%, boosting the overall return by 1.39%. This translates into higher investment income that is distributed as dividend to the members on an annual basis, in line with the EPF’s objectives of not only preserving but also enhancing members’ retirement savings.