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M'sia's pension fund EPF takes high risks for high returns

Publication Date : 18-04-2014


Malaysia’s largest fund, the Employees Provident Fund (EPF), is walking a tightrope, trying to keep returns high by investing in more overseas property and domestic stocks while fending off concerns that these are too risky.

The fund, the seventh largest pension fund in the world, manages more than 586 billion ringgit (US$180 billion) for the country’s 13 million workforce. It recently announced a dividend payout of 6.35 per cent - its highest in a decade, from higher returns in local equities and real estate.

In recent years, the fund has become more aggressive in investing abroad, buying top-end office property in London and Australia. In 2012, it announced a 40 billion ringgit plan to join two Malaysian conglomerates in redeveloping London’s iconic Battersea power station.

Recently, the Malaysian parliament’s Public Accounts Committee (PAC) said it may call the EPF up for questions after the 2013 Auditor-General report released last week highlighted the fund’s real estate investments, mainly overseas, as having grown 10 per cent last year from 2012, and had almost doubled the fund’s property investment income.

“Although it has done well, the PAC wants an explanation on its plans and measures to reduce risk in international investment,” the PAC chairman Nur Jazlan Mohamed said to local media on April 7.

In defending the fund’s investment strategy, EPF’s deputy chief executive officer Mohamad Nasir Ab Latif said its total overseas investments as of December 2013 was at 20.97 per cent of total investment assets, within the 23 per cent- limit allowed by the government.

He said the EPF has no choice but to invest more abroad. “The constraints such as limited trade liquidity and opportunity in the domestic market make it inevitable and imperative for us to find suitable investments globally that fit our long-term diversification programme,” he told The Straits Times via email recently.

Foreign property is not the only asset class that some fund managers are worried about.

Although more than half of the EPF’s investments is in government bonds - mainly domestic - that bring in lower but stable returns, it also parks funds in stocks, mainly in thirty high dividend-yielding equities on the Malaysian stock exchange. The EPF is also controlling shareholder in several public-listed companies such as the Malaysia Building Society Bhd and Malaysian Resources Corporation Bhd, a construction company.

As it is, some fund managers feel that the EPF is already holding too many stocks in its portfolio, which are riskier than bonds due to market volatility.

Five years ago, about 25 per cent of the EPF’s investment assets were in equities. That has since increased to almost 43 per cent last year.

“EPF is not a sovereign wealth fund and so, should be more conservative in its investment approach,” a fund manager who declined to be named said. “Its priority is to safeguard the people’s retirement funds.”

EPF’s investment strategy is under hard scrutiny because it holds and manages money from Malaysia’s workforce. Contributions by both employees and employers are high - up to 23 per cent of monthly income - and can only be drawn out after age 55, though some of it can now be withdrawn to buy homes and pay for education and medical expenses.

Fund managers said in recent years, the EPF has increasingly come under pressure to top its dividend payout each year to depositors to compensate for escalating inflation, even as interest rates have remained low, leading to lower returns from bank savings.

With inflation expected to climb to four per cent this year, up from 3.2 per cent in December last year, a fixed deposit with about three per cent annual returns offered by most commercial banks is not helping depositors increase savings.

“Expectations by the depositors are high as most of them depend on the fund’s returns for living after retirement such as to pay medical bills and buy homes for their children,” Ang Kok Heng, chief investment officer of Phillip Mutual Bhd, a fund management company, told The Straits Times.

While the EPF is obligated to give depositors a floor return of 2.5 per cent, the fund’s dividend payout rose steadily from 4.5 per cent five years ago to more than six per cent since 2012. By contrast, Singapore’s Central Provident Fund gives a constant dividend payout of 2.5 per cent and only invests in Singaporean government bonds.

It is getting harder for the EPF to sustain its earnings with mainly government bonds, said Chris Eng, head of Etiqa Insurance & Takaful Bhd’s research and investment management division. “With the US Federal Reserve's stimulus package on the economy in recent years, bond yields have fallen and given lower returns to investors.”

Indeed, EPF’s investment income from loans and bonds fell from 9.6 billion ringgit in 2012 to 7.5 billion ringgit in 2013.

Mohamad Nasir said the fund is vigilant even as it continues to boost overseas investment.

“Our investment objectives are clear which are capital preservation and value enhancement to members’ retirement savings,” he said.

*US$1 = 3.24 ringgit


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