DESPITE the headwinds last year, the Employees Provident Fund (EPF) may declare a dividend rate ranging from 4.0% to 5.5% for 2020, according to a number of economists.
Sunway University economics professor Dr Yeah Kim Leng expects a 5.0% to 5.5% dividend rate, pointing out that the fund’s investment income for the first nine months in 2020 exceeded the prorated 2019 dividends – when it declared 5.45% dividends – by 10%.
He opined, “The prognosis for EPF prospective dividend to be declared for 2020 is therefore highly promising despite the severe economic downturn.”
Yeah reasoned that both the local and foreign stock markets have bucked the global recession due to massive fiscal and monetary stimulus mounted by governments across the world, steadily improving in the final quarter of 2020.
As EPF’s sizeable investment assets overseas amount to about a third of its total assets, he said that this enables the fund to “chalk up an enviable trend-bucking performance despite the low interest rate environment”.
Similarly, Putra Business School Associate Prof Dr Ahmed Razman Abdul Latiff and AmBank Research group chief economist/head Dr Anthony Dass forecast that the pension fund will declare a dividend rate of 4.5% to 5.5% and 4.0% to 5.0% for 2020 respectively.
Ahmed Razman attributes the reason for EPF’s positive performance to the fund’s Strategic Asset Allocation (SAA), which guides the management of its investment portfolio.
“One advantage for EPF is its high percentage holding of overseas investments assets that consistently give higher returns than other classes of assets, ” he said, noting that 32% of EPF’s investment assets are overseas that contributed 45% of its RM17.33bil total gross investment income in Q3 2020 – up from 30% of its assets that contributed 39% of its RM15.12bil gross investment income in Q2 2020.
That said, there are concerns that the performance of EPF’s dividends could be impacted by the various Covid-19 stimulus packages and emergency relief measures, with Yeah adding a caveat that the fund’s overall performance could likely be dampened by the resultant early redemptions and contributor withdrawals, as well as missed opportunities to reap higher returns.
EPF has 14.8 million members with 7.6 million active, receiving RM1.7bil net deposits per month before the pandemic. Once the pandemic hit, however, the unemployment rate soared to 5.3% and more than 200,000 Malaysians lost their jobs, likely affecting total EPF deposits.
Moreover, emergency relief measures such as i-Lestari and i-Sinar have resulted in more than withdrawals of RM14.1bil and RM34bil respectively since launch – not including the potential additional withdrawals from i-Sinar Category 2.
Conversely, other economists believe that the government’s emergency relief measures may not have a significant impact on its dividend rates.
Anthony opined, “Even with the outflow of funds as a result of the emergency relief such as i-Lestari and i-Sinar, its assets and investments locally and abroad still offer high returns and will enable it to declare modest dividends.”
“[Such measures] prompted EPF to increase its holding in money market instruments, which is more liquid, but would normally give lower returns than other asset classes. Fortunately, other asset classes such as overseas investment, fixed income and real estate investments have been performing well recently, which allows EPF to continue giving a competitive dividend rate, ” Ahmed Razman added.
In addition, Bank Islam chief economist Dr Mohd Afzanizam Abdul Rashid further pointed out that EPF’s experience managing its assets and liabilities would have enabled the economies of scale for the fund to plan their cash flow to not disrupt operations.
He said, “I think EPF’s diversification strategy has really paid off, in particular venturing overseas. This has resulted in a meaningful contribution of income and, to a large extent, has also helped them to build their economies of scale and experience.”
For the years to come, Yeah offers a challenging outlook as there are increased risks of “sudden stops” in flows to emerging markets as global financial markets are awash with liquidity.
This, he said, is in addition to stronger market swings and greater financial volatility due to increased sensitivity to common global risks such as geopolitical conflicts, climate change, currency and trade wars, growth swings and inflation shocks.
“It will be increasingly tough for EPF to sustain good dividends without taking on more risks in its investment portfolio. Fortunately, its portfolio is well diversified among asset classes and geographical markets, but they have increasingly become more correlated, ” Yeoh noted.
On top of that, Anthony stressed that EPF also evaluates and considers the risks with its diversified portfolio, so it will hold its ground even through the challenging year.
He added, “What is important is that its robust investment strategy will help it make the right investment decisions and yield consistent returns in future.
“As a provident fund, they have been doing reasonably well despite the circumstances, due to having clear objectives with a robust investment framework. Long-term strategy and objectives are anchors for pension funds, especially in the wake of last year’s volatility – I believe they can ride it out.”
As for Ahmed Razman, he is confident that post-2020, EPF can maintain and even declare a higher dividend rate than last year’s, as the global economy will continue its recovery phase, especially with the distribution of the Covid-19 vaccine worldwide.
Although there has been a slight deviation in terms of the percentage of investment EPF allocates for each asset class, he believes that it is understandable given the current circumstances that affect the liquidity of EPF’s assets.
“I’m sure that starting this year, EPF will start to revert fully to guidance given by SAA to ensure they will be able to consistently give higher return of investments for a foreseeable future.”
Afzanizam went on to explain that the SAA would allow EPF to plan its investment strategy in a more structured way, thus helping ensure that investment returns are more effectively optimised against its risk tolerance.
At the same time, he also noted that EPF’s experienced fund managers and research team, alongside its governance structure, would ensure that every investment decision will be data- and knowledge-driven.
Whether EPF can maintain good dividend rates in the future would be “greatly dependent” on the investment climate, he said, but adhering to the SAA would help guide its investment strategy, with Tactical Asset Allocation also deployed to leverage prevailing market conditions.
He shared, “Meaning to say, EPF will always have flexibility to ride the market condition and will react accordingly in order to deliver respectable investment returns.”
Adding on to that, Yeah lauded EPF for having performed “exceedingly well with its well-diversified portfolio in terms of asset classes and markets” as one of the cornerstone institutions underpinning the country’s economic resilience.
“Besides high quality governance and transparency, its customer service quality is at par or exceeds those in the private sector.
“More importantly, its long track record in providing steady returns to millions of contributors engenders confidence in the mandatory savings system that is a crucial pillar of the country’s social safety net, ” he said.
Ahmed Razman shared similar sentiments, going on to say, “As the 12th largest pension fund in the world with assets nearing RM1tril, throughout the years, EPF has been managed professionally by their management and this has contributed to the consistency in giving a good return on investment every year.
“They also practise a high standard of corporate governance and because of that, are not susceptible to any financial abuse or doubtful investment decisions. These characteristics contribute to their stellar performance over the years.”