EPF dividend payout poser

Last year was bad for both domestic and external markets. Neverthless, will the EPF pull off a surprise?

IT is that time of the year again when the Employees Provident Fund (EPF) declares its dividend to its 14.59 million contributors.

Over the past 10 years, the provident fund has generally been declaring dividends of more than 6%, irrespective of the performance of the local stock market. There have been only three occasions – 2009,2010 and 2016 – when the EPF’s dividends dipped below the 6% mark.

Even when the local stock market and economy were stuttering, the EPF paid out healthy dividends of more than 6%, to the joy of the many retirees. The retired community is so used to the 6% mark that anything less than 5.5% would be viewed as bad, even though the risk-free fixed deposit rates are only about 3%

Since 2014, the benchmark index of Bursa Malaysia has finished in negative territory in five of the six years. The only exception was in 2017 when the FBM KLCI, which is the leading index where most funds compare their performance with, ended the year higher compared to the previous year.

The highest dividend declared by the EPF in recent years was in 2017 when the rate was 6.9%. That payout, announced in February 2018, was just three months before the general election was called.

In February last year, the provident fund surprised many by declaring a dividend of 6.15%. This commendable performance came despite the local stock market reeling from the changes in government policy post-the May 2018 election and a trade war between China and the United States.

The EPF’s performance last year is said to be helped by a change in accounting rules, which allowed for the provident fund to have some leeway in providing for impairments in the value of its investments.

It is learnt that had the EPF fully provided for the impairments in value of its investments, the dividends would be below 6%.

So, what would the dividend be like this year? Would it be below the 6% mark? Would is be closer to 5% or between 5.5% and 6%?

So far, everything points to the EPF likely declaring a dividend of less than 6% unless it has invested heavily in the US stock market that is going into its 11th year of a bull run.

For every 1% dividend, the EPF would need about RM9bil, based on the number of contributors it has.

For the first nine months of last year, the EPF registered a gross investment income of about RM35bil. Assuming it ended the year with a gross investment income of RM50bil, it should be able to comfortably declare a dividend of about 5.6%.

However, should it have kept some `reserves’ last year, taking into account the leaner accounting standards for provisioning of diminution in value of investments, the EPF may just be able to spring a surprise by declaring a higher rate than the mid-5% range.

The year 2019 was tough for the equities market except for the US, which continues to amaze. The Dow Jones Industrial Average (DJIA) has been having a fantastic bull run since 2009, hitting a high of 29,379 on Feb 6.

Valuations of several technology stocks hit the US$1 trillion mark. If anybody had put money in the US in 2009 after the financial crisis, they would be laughing all the way to the bank now.

Bursa’s performance

At home, Bursa Malaysia’s performance has been lacklustre since 2014. It was no different last year when the benchmark index ended the year 4.7% lower. Yields from fixed-income instruments dropped because interest rates started to come down.

On the external front, the trade war worsened before the US and China came to a solution in December last year. The negative impact on the global economy, particularly for countries in the region, has been immense.

The UK and Europe were in a quagmire over Brexit for most of last year. The on-off-on Brexit saga finally ended in December last year.

Malaysia’s 3.6% economic growth in the fourth quarter of 2019 is ample evidence of how the trade war and other external events had taken a toll on Malaysia’s economy.

The bulk of the EPF’s money is invested in local assets – mainly in fixed-income instruments and equities. The fixed-income instruments give steady yields of about 3% while the return from equities is much higher.

However, the returns from investments in Malaysia are not sufficient for the EPF to deliver dividends of anywhere near the 6% mark.

Since 2014, the EPF has been dependent on the returns from its investments outside Malaysia for it to declare healthy dividends.

The provident fund has less than 30% of its total assets under management of some RM850bil placed in various investments outside Malaysia. It ranges from property to equities and in some cases, investments in private companies, through specialised funds that are mainly based in the US and the UK.

The returns from the overseas portfolio are much higher than what the domestic investments yield.

Because of its size, specialised funds always seek the EPF with investment proposals. In return, the EPF has been able to make some good investments in the UK, Europe and the United States.

For instance, it went to Poland when most investors were looking at Germany. The return from its investment in Poland has been one of the best performing for the provident fund.

In the past, the EPF had it good outside Malaysia, which translated into better dividends for its contributors.

Last year was bad for both the domestic and external markets. Nevertheless, will the EPF pull off a surprise?

The views expressed are the writer’s own.

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