Why EPF returns are lower

AS early as in December last year, the writing was on the wall that the Employees Provident Fund (EPF) would declare modest dividends.

The strongest signal came when Permodalan Nasional Bhd (PNB) declared its lowest ever dividend of 5.5% for its flagship fund, Amanah Saham Bumiputra (ASB), for 2019.

Considering ASB’s returns, the dividend of 5.45% declared by EPF for contributors of the conventional fund is commendable.

The provident fund returned 5% for contributors of its Syariah fund.

The reason for the low returns of the provident fund is due to the poor performance of the capital markets as a whole – within Malaysia and overseas.

Unlike PNB, the EPF has placed a meaningful portion of its funds under management outside the country.

In the past, EPF’s returns from investments overseas have performed well and provided the cushion to make up for the modest returns it gets from the money put within the country.

However, for 2019, the EPF did not have the buffer as capital markets as a whole were ravaged due to the US-China trade war.

Within Malaysia, almost all segments of the economy have been under pressure for the whole of last year.

The property sector continued to be in the doldrums while interest rates started to come down again, causing yields from fixed income instruments such as government bonds to drop.

As at the end of 2019, Bursa Malaysia’s leading index – FBMKLCI – was down 4.7% compared to the start of the year.

Over the last six years, the leading index ended in positive territory only once, which was in 2017.

For that year, the EPF declared a stunning 6.9% dividend rate.

Incidentally, the dividend announcement came three months before the historic May 2018 General Election when the then ruling government lost its hold on Putrajaya.

Some 70% of EPF’s funds of RM924.75bil is invested in Malaysia, which means the performance of the local capital markets has a major bearing on its returns.

The bulk of the money within Malaysia is placed in risk-free government debt papers which provide low yields of about 3% or lower.

The EPF is a major investor in the local stock market but the money is spread within less than 200 out of the 1,000 listed companies.

The reason is that most of the listed companies on Bursa Malaysia do not meet EPF’s stringent investment criteria.

EPF’s returns from its investments overseas have been good and made up for the poor returns it gets from the money put in the domestic markets.

That is the reason why even though Bursa Malaysia and the ringgit have been languishing since 2014, the EPF has been able to give splendid returns of more than 6%.

However, for 2019, the trade war between the United States and China sent global capital markets reeling.

From Hong Kong to Poland, all assets came under pressure. Europe and Britain were caught in the Brexit fiasco which did not help with the property market there.

The EPF also has exposure to the United States, which is the only stock market that continues to scale new heights.

In fact, the US stock market has been having a bull run since 2009.

Considering how the EPF spreads its risk among several countries, it is unlikely that the fund would have put all its money in the United States.

Going forward, the year started on a bad footing.

Even the US markers are affected by the Covid-19 epidemic while oil prices are under pressure.

Malaysia’s economic growth is expected to be lower than last year – at least for the first six months.

Unless the EPF is allowed to put more money outside the country to enhance its returns, the dividend rate could come under pressure again at the same time next year.

The views expressed here are the writer’s own.