IN its second-quarter results, the Employees Provident Fund (EPF) sounded a major warning.
The provident fund, which endears itself to many above 55, warned that it may not be able to keep up with the current rate of dividends if there are continued restrictions on its efforts to invest outside Malaysia.
This coming from the EPF should rankle those responsible for shackling its investment strategies, especially when it comes to putting money overseas.
Chief executive officer Datuk Shahril Ridza Ridzuan said in a statement when the results were announced last month that the provident fund’s investments in overseas assets, particularly in the real estate and infrastructure sector, were below what it should be.
As at end-June this year, the EPF’s exposure to the overseas real estate and infrastructure asset class was 4%, way below its strategic asset allocation of 10%.
“These gaps could potentially result in lower-than-expected returns for the EPF in years to come,” Shahril stated.
Those who know Shahril would also know that he commands the respect of his counterparts in the international world of investment. Shahril is a man of few words. He hardly speaks on matters beyond investments.
The fact that he is stressing that the EPF should be allowed to put more money overseas is something that cannot be taken lightly.
In plain language, if the provident fund is not allowed to put money in areas where it feels would deliver the best returns, then contributors may suffer over the longer term. The dividends will drop.
This statement from the EPF is indeed a rare one.
It underlines the importance of removing the shackles that are preventing the fund from placing money where it feels can give the best returns.
This is to keep the dividend payouts at respectable levels.
Two-and-a-half years ago, when the ringgit was under pressure, the policy was for large investment funds such as the EPF and Kumpulan Wang Amanah Pencen to restrict their overseas investments.
Since then, the EPF has not been able to invest overseas as much as it would like to, especially in real estate and infrastructure.
But now the ringgit is stable. Reserves are at about US$100bil and short-term foreign money has gone out of the system.
The provident fund should be allowed to do what it feels is best for contributors.
As far as investment decisions are concerned, the EPF has an impressive track record. It has so far followed strictly its investment strategies of ensuring capital preservation and maximum returns.
Effectively, it means that the EPF puts money in investments that are backed by assets. It cannot be wiped out. For instance, the EPF does not invest in foreign exchange because there is no underlying asset.
The EPF has also given more than reasonable returns to contributors. The dividends far surpass the inflation rate and also the fixed deposit rates offered by banks.
Over the past 10 years, the lowest dividend declared was last year – 5.7%. On average, the provident fund pays out 6% or more, with the highest rate being 6.75% in 2014.
The EPF has been able to pay healthy dividends because of its investments overseas. If the EPF had depended on the local capital markets – be it equities, bonds or real estate – it would not have been able to declare dividends anywhere near those levels.
For instance, between the period of 2014 and 2016, the returns from Bursa Malaysia were generally down by 12%. For every RM1 invested in the local market, the returns averaged about 88 sen.
During this period, it was the EPF’s investments overseas in equities and real estate that helped the fund pay out respectable dividends.
The investments in real estate and infrastructure assets overseas have delivered an annualised 8.8% return over the last three years.
The EPF would have generated a bigger return from the real estate and infrastructure segment had it been allowed to put more money in that asset class.
In the equities market, Wall Street has been enjoying its longest bull run – since 2009. Compare this to the volatile swings on Bursa Malaysia.
The EPF started putting money in assets and equities overseas even before the 2008 crisis. It started putting money in bombed-out stocks five years ago and reaped the benefits.
The returns from its investments overseas outweigh the proportion of money allocated.
For instance, as at June 30 this year, the returns from overseas investments accounted for 32.5% of the EPF’s total investment income. This is despite overseas investments making up only 29% of the total investment assets of the fund.
The EPF has more than RM750bil under its belt to manage. And the amount is growing.
The Malaysian market is too small for the fund. The EPF should be allowed to place money according to its asset allocation strategy. If it means putting capital outside Malaysian shores, then so be it.
In the event that the EPF starts declaring lower dividends because it faced restrictions in its investment strategy, it would not go down well with contributors.
And that is something no government would like to see.
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