EVERYTHING points to the Employees Provident Fund (EPF) declaring a commendable dividend for 2020. The fund with RM950bil under its belt is expected to declare a dividend rate that is almost the same as Amanah Saham Bumiputera (ASB) or more.
ASB, which is Permodalan Nasional Bhd’s flagship fund, declared a dividend pay-out of 4.25 sen for every RM1 invested. It comprised an income distribution of 3.5 sen and bonus of 0.75 sen.
In addition, the national unit trust company declared a special Ehsan payment of 0.75 sen per unit for up to the first 30,000 units in conjunction with the 30th anniversary of ASB.
In a nutshell, ASB’s return is actually 4.25% for every RM1 invested with an additional 0.75% for the first 30,000 units.
The EPF, with some 14 million contributors, has recorded a net investment income RM37.83mil for the first nine months of 2020. If there are no major impairments to its portfolio, it should be able to match ASB’s 4.25% or come close to it based on the nine-month result.
EPF’s final quarter results are not out yet. Should it record another RM13bil in net investment income -- similar to the results of the second quarter -- the fund’s total net investment income would be about RM50bil.
Assuming there are no major impairments, the EPF should be able to announce a return of close to 5%, which if achieved, would be a feather in the cap for the fund.
For 2019, EPF conventional account holders received 5.45% and the Syariah account holders got 5%. Although a forecasted 5% return for 2020 would be lower compared to the preceding year, nevertheless it is remarkable considering the volatile equities market. Also, it would mark the first time when the EPF’s return matches that of ASB.
But one must consider that there is no comparison between the funds under PNB and EPF because of several fundamental differences.
Firstly, the EPF’s mandate is to have a balanced portfolio to cater for its contributors’ needs who are most retirees. Hence, a fair amount of its funds are into instruments that are less risky and lower returns.
As for PNB, its funds, particularly the ASB was set up to increase Bumiputera equity participation in the corporate sector. Among others, the advantage for PNB is that it is recognised as the foremost Bumiputera institutional investor. Hence, it receives allocation of shares from companies that need to comply with the requirements of 30% Bumiputera shareholding.
When the large capitalised stocks of Bursa Malaysia outperforms, funds under PNB do well, particularly ASB.in 2020, the conventional large capitalised companies under performed, which explains PNB’s performance.
Secondly, the fund size and structure is so different, working in the advantage of the EPF. The EPF gets more money coming in every year than withdrawals, causing it to reach almost a RM1 trillion figure. The EPF is compulsory savings. As opposed to PNB, where the funds are money from deposits and savings of investors. PNB’s fund size is about RM300bil.
The excess funds force the EPF to spread out its risk into a portfolio of 150 over companies locally and a slew of bonds. The EPF’s core equities holdings are RHB Bank, MBSB Bank Bhd and Malaysian Resources Corporation Bhd. The other stocks in their equity portfolio are largely classified as `available for sale’, meaning that the fund will dispose of the shares if the price is right.
The EPF has a large portfolio of fixed income instruments being the primary subscriber of government bonds. The papers are also traded when the price is right with only a small portion left as `held to maturity’ portfolio.
As for PNB, its funds are largely concentrated in the equities market and real estate. The investments give it steady dividend income. In the equities market, the biggest dividends come from Maybank and Sime Darby. In the real estate sector, PNB is easily among the largest landlords in the country with properties in prime areas.
It is building the tallest office block in the country, which will add to its stable of real estate investments.
A third difference is that the EPF is required to make impairments on investments that is under-performing. It can only pay out its dividends from realised income and do not set aside reserves. PNB also has an aggressive impairment policy. But PNB can hold reserves, which means it can keep some of its income aside for rainy days to consistently pay out reasonable dividends.
A telling difference between the two is that the EPF keeps 30% of its funds invested outside Malaysia while PNB’s overseas investments are smaller relative to the size of its portfolio. EPF’s overseas investments have paid off handsomely where the returns far outweigh the amount of money invested.
In a crux, EPF’s investments from overseas investments are more than 30%, outweighing its allocation. The overseas returns particularly played a big role between 2014 to 2019, when the benchmark Bursa Malaysia index under performed in all years except for 2017. During this period, the EPF gave a return of as high as 6.75% and lowest of 5.45% last year.
EPF’s objective is to have a balanced portfolio to achieve its aim of ensuring steady returns in good and bad times for retirees. Almost 50% of its funds are put into safe haven fixed income instruments, 30% into equities and the rest into real estate, private equity investments and money markets.
Last year when interest rates dropped and the big cap stocks performed miserably, EPF’s returns from overseas and fixed income instruments made good returns.
EPF’s fixed income instruments are largely on government debt papers and highly rated corporate papers. It’s fixed income portfolio is actively traded and only a small portion is kept as `held to maturity’.
With interest rates falling, its fixed income portfolio is sitting on good profits as bond prices rise when interest rates fall. For the first nine months of 2020, EPF’s fixed income portfolio has already recorded an income of more than RM22bil.
With the likelihood of interest rates falling further, the fund is sitting pretty on good profits from its fixed income investments.
The only uncertainty in EPF’s earnings for 2020 is the impairments on its portfolio, which should not be a lot.
Nevertheless, the EPF should be in a good position to declare dividends of close to 5% -- which far surpasses the risk free fixed deposit rates -- or more.M Shanmugam is the former Specialist Editor of The Star. The views expressed here are his own.