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Thursday March 19, 2009 EPF returns on the slide
By IZWAN IDRIS
Difficult to sustain payouts above 5% in coming years
PETALING JAYA: Employees Provident Fund (EPF) contributors may have to be contented with lower returns in the coming years as the country’s biggest pension fund struggles to boost income amid steep falls in interest rates and a weak equity market.
Analysts said given the pension fund’s size and strict mandate, it would be very difficult to sustain payouts of above 5% in the coming years.
The 4.5% dividend declared for 2008 on Monday was generally well received, despite coming in lower than the 5.8% in 2007.
There were calls for a review from various parties demanding a higher payout, but some quarters said the pension fund had done well in safeguarding the nation’s retirement savings amid the current economic crisis.
The question now is how will EPF fare in 2009 and beyond?
Already the fund has warned that this year’s payout would be less than that for 2008.
Weak equity markets will continue to hurt EPF in the near term, but in the longer term, the fund’s performance will also be determined by the returns it gets from investing in low-risk assets such as government bonds.
The EPF had allocated a quarter of its RM342bil investment funds for higher yielding government papers. But as these higher yielding notes expire, the fund must purchase new issues which will now come with lower returns.
Malaysian Government Securities (MGS) debt papers maturing in three and five years are currently yielding less than 4% at today’s prices.
In comparison, MGS five-year notes yielded more than 5% a decade ago and above 7% during the 1997/98 Asian financial crisis.
Another big chunk of EPF holdings is in highly rated corporate bonds and low-risk guaranteed loans.
However, the global economic turmoil has cut the supply of new bonds coming into the market.
Cheaper lending rates had also reduced interest income from loans given out.
Investment in bonds and loans made up 40% of EPF’s total investments as at the end of last year.
Dwindling yields from these asset classes have been a drag on EPF’s income for the past couple of years.
That the EPF was able to fork out steady dividends of above 5% between 2004 and 2007 was mainly due to gains from investments in equities.
The collapse in global equities last year, however, had eroded the value of EPF’s shareholdings, forcing it to make a provision of RM4.69bil to account for the lower value of its shares, both domestically and abroad.
The KL Composite Index fell 40% in 2008 and was down 3.3% so far this year at yesterday’s closing of 847.96 points.
Also, the economic slowdown has dragged down corporate profits. This, in turn, has impaired their ability to pay out dividends to shareholders, further reducing the return on investments for EPF.
The EPF has stakes in more than 100 companies listed on Bursa Malaysia, as well as smaller stakes in a number of big listed firms overseas.
Income from equities accounted for 35%, or RM6.67bil, of EPF’s total gross investment income last year.
Just how bad EPF’s dividend payouts will be affected by the current market situation remains to be seen.
It is worth noting that under the law, EPF has to maintain a dividend rate of at least 2.5% annually. The dividend must come from income generated from its investments.
Monday March 23, 2009 EPF aims to recover foreign investments when Dow hits 9,000
By YAP LENG KUEN
THE Employees Provident Fund (EPF), the country’s largest investment fund, is targeting to break even on its overseas investments possibly by next year when it can write back the bulk of its provisions.
“The Dow Jones was 14,000 at its highest. Today, it is around 7,000. We expect to recover the bulk of our investments when the Dow Jones goes to 9,000,” said EPF CEO Datuk Azlan Zainol.
The EPF has, so far, invested RM16bil overseas on a staggered basis in the five major financial markets – the US, Britain, Australia, Singapore and Japan.
However, he expects the markets to possibly recover only next year. Yields for Malaysian Government Securities (MGS) have also come off. In 2009, about RM16bil to RM17bil of MGS will mature and be replaced at today’s rate.
Last year, in July-August, it was possible to get 4%-5% for 10-year money, but that has dropped to 3.5%. Companies are also scaling back on dividends.
This year, he said, would continue to be difficult and the fund hopes to be able to maintain its dividend payment of between 4% and 4.5%. “Our policy is to give out everything we earn in the form of dividends. We do not have any reserves,’’ he said.
As far as gross income is concerned, the EPF, which manages RM340bil of funds, performed better than 2007 – gross income was RM19.96bil compared with RM18.24bil.
The big increase is in provisions which was RM515mil in 2007 compared with RM4.69bil last year.
Out of that amount, about RM3bil is provided for overseas investments. “Our policy is to provide in full for every diminution in value in our investments overseas,’’ Azlan said in response to queries from StarBiz.
In Malaysia, if there is a stock with more than 50% loss, the EPF will provide for 25% of it, spread over a four-year period.
“We are more conservative abroad because that is everybody’s market ... anything can happen. Locally, we roughly know (the local conditions),’’ said Azlan.
He expressed disappointment at some of suggestions posted on the blogs. “There is a blog that says the RM4.6bil provision that we made was because we lent to ValueCap Sdn Bhd. That is a gross accusation ... very, very unfair. That is not the truth,’’ he said.
Last year, the EPF had provided a RM5bil loan to government-controlled ValueCap which was set up to undertake investments on the stock exchange.
“As far as our investments are concerned, we are strong internally. What happens outside is a global issue. Our risk management and people are in place. There will be no major changes this year or the next,’’ he said.
In terms of EPF’s asset allocation, it is based on advice from its consultants and its proportion of investments in equity to fixed income is, according to Azlan, a proven formula.
Currently, Azlan as the CEO, assumes direct oversight of the fund’s investments. He is looking for a new head of investments who would probably be an outsider. The former deputy chief executive of investments, Johari Abdul Muid, has moved on to head the strategic planning unit.
“Johari will be responsible for looking into the second phase of transformation for the EPF,’’ said Azlan. The division also looks into retirement benefits and pension fund reforms in the country.
“The retirement money for Malaysians will not be enough. It has been three weeks since he is at the new position and he has done a very good job,’’ Azlan said in response to queries from StarBiz regarding Johari’s move to strategic planning.
Insiders added that it was part of a reorganisation to strengthen certain divisions that also saw new heads for property, withdrawals and call centre.
The dividend of 5.8% for 2007 has come down to 4.5% for last year.
Due to the large provision made, net income has slipped from RM16.87bil in 2007 to RM14.3bil last year. Costs have also gone up – to pay 1% dividend cost RM2.89bil in 2007 compared with RM3.18bil currently.
Gross income from investments in MGS and equivalents was higher by 5% at RM5.75bil last year. Investments in private debt securities and loans yielded a higher gross income of RM5.59bil or 13%.
With the lowering of fixed deposit rates, gross income from the money market went down by 25% to RM694mil.
Gross income from external managers for both domestic and global equities dropped by 43% to RM767mil and by 254% to a loss of RM194mil respectively. External managers were more prepared to cut loss.
However, income from internal managers showed an increase of 33% to RM6.27bil and 123% to RM439mil respectively.
The EPF is heavily invested in local banks with stakes ranging from 13.6% (Malayan Banking Bhd) to 2.8% (Affin Holdings Bhd).
“In Malaysia, big caps like Sime Darby, IOI Corp and Public Bank have all experienced huge drops in market cap. Tell me, how do we pay 7% or 8% dividend?’’ he asked.
Monday March 23, 2009 EPF's Azlan explains timing of overseas investments
By YAP LENG KUEN
THINGS were going on well for the first three quarters of last year, Then in October, the markets saw the crash of the 120-year-old Lehman Brothers and the snowballing of the US subprime problem.
Other funds have been badly affected too. Calpers, the US’ largest pension fund, has dropped by 28% in value; Khazanah 20% and Temasek 31%.
The Singapore central provident fund has two accounts – ordinary that is paying a dividend of 2.5% while retirement and medisave is paying 4%.
An analysis of the EPF dividend over the last five years, split into equity and fixed income, revealed that without making any provisions, the dividend could be much higher.
Could the timing of the overseas investments be held back in view of red hot prices already at a high in many equity and commodity markets? Was there any advice against this at that time?
“There was no advice internally or externally not to enter these foreign markets at a high,’’ said EPF CEO Datuk Azlan Zainol. In fact, one or two organisations that the EPF met had expressed their support as they also agreed that Malaysia was a small market.
“Every time we go into the market in Malaysia, we end up owning stocks like Maybank where we would be holding a stake of less than 20%. We shouldn’t have such high stakes as 15%-16% in Malaysian companies,’’ he said.
The fund has strategic stakes only in the RHB group, Malaysia Building Society Bhd and Malaysian Resources Corp Bhd.
“For the rest of the companies, we should only be looking at 5%-9% stakes. Because we have no choice, we have to buy into these so-called good counters,’’ he said.
On top of that, each time the EPF goes into the market, it accounts for almost 20% of the volume. “That is not good. By right, a fund should not take more than 5% of the volume especially when the market is so dull,’’ he said.
The fund started going abroad in 2007 and 2008. “If people say the timing was not so good, the answer is ‘yes’ and ‘no’. Suppose the subprime market and Lehman had not collapsed, it would have been good. Did anybody say at the beginning of last year that this was going to happen?’’
No doubt, economists had been voicing their concerns over subprime and high levels of debt. “But nobody could foresee that it would be so terrible.
“Can anyone imagine that a 100-year-old bank can just go down like that, or Citigroup would shrink in value in just 12 months to US$1 from US$100?’’ he asked.
In retrospect, it is very easy to say what should not have been done. But the fund has been selling too. In January alone, it sold RM5bil in domestic equity.
“We were selling and luckily, we sold a 25% stake of RHB Capital to Abu Dhabi Commercial Bank at RM7.20. Today, RHB is only RM2-RM3. But I don’t think that was very clever as I thought I could get RM10. That is luck,’’ he said.
However, the EPF’s performance in equity investments had dropped by less than 20% in both domestic (18.4%) and overseas markets (19.5%). In comparison, the KLCI had dived by 39.3% and the Dow Jones 33.8%.
The Tokyo, Hong Kong and Singapore markets were down by more than 40% last year compared with 2007.
MORE members of the Employees Provident Fund (EPF) are opting for flexible withdrawals as they reach 55 years of age to better manage their retirement savings.
In a statement yesterday, the EPF said the Flexible Age 55 Withdrawal saw a significant increase in its take-up rate during the first quarter of 2009.
"In the first quarter, a total of 9,731 applications were approved under the Flexible Age 55 Withdrawal compared with 7,538 applications in the fourth quarter of 2008.
"On a year-on-year basis, it increased by 85.46 per cent compared with 5,247 applications in the corresponding period last year," it said.
Total amount withdrawn under this withdrawal amounted to RM505.94 million (RM442.71 million) in the fourth quarter of 2008 compared with RM341.85 million in the first quarter of 2008, it said.
EPF chief executive officer Datuk Azlan Zainol said the growing popularity of the Flexible Age 55 Withdrawal signified increased awareness among members that lump sum withdrawal would likely lead to inadequate income during retirement.
"The Flexible Age 55 Withdrawal was introduced in November 2007 under the 'Beyond Savings' initiative. It offers members the option to receive their EPF funds in instalments and on an ad hoc basis," he said.
Zainol said nevertheless, the Lump Sum Age 55 Withdrawal plan is still the more popular option for members reaching age 55.
In the first quarter of 2009, 35,640 applications for Lump Sum Age 55 Withdrawal (fourth quarter 2008: 26,658) were approved, with total withdrawals of RM1.62 billion (fourth quarter 08: RM1.15 billion). - Bernama
Tuesday July 14, 2009 EPF equities value surges
By IZWAN IDRIS
PETALING JAYA: The value of equities held by the Employees Provident Fund (EPF) rose faster than the market over the past six months as the fund increased its stakes in battered stocks and rode on the rally that lifted share prices from their lows in March.
The latest publicly available data showed that the market value of EPF’s top 15 holdings had risen 23% since the start of the year, compared with the 21% gain in the FBM KLCI as of last week.
As a pension fund, the EPF follows a strict conservative strategy in managing its funds that had swelled to RM356bil as of the end of March.
About a quarter of this money is invested in equities, but only a fraction is allowed for overseas investment.
“Contrary to popular belief, the EPF is quite aggressive in managing its stock portfolio,’’ said a senior fund manager with a local asset firm.
EPF’s most valuable shareholding is its 930 million shares, or 15.5% stake in Sime Darby Bhd, which is also the most expensive stock in terms of market value on Bursa Malaysia.
Its current stake in Sime Darby is less than the 15.7% reported as at end of last year.
Despite the slight decrease, the value of EPF’s stake in Sime Darby had increased to RM6.67bil as at the end of June compared with RM4.97bil at the start of the year after the stock climbed 38% over the same period.
Filings with Bursa Malaysia in the past months showed that the EPF’s stake in Sime Darby fluctuated by as many as three million shares a day.
Conservative estimates of the fund’s transactions put it at about 20% of the stock’s daily volumes.
The fund is also active in buying and selling shares in other big companies where it owns substantial stakes in Tenaga Nasional Bhd, Malayan Banking Bhd and IOI Corp Bhd.
Bloomberg data showed that the EPF has stakes exceeding 10% in 47 companies as at last week.
However, there were little change in terms of the fund’s equity stakes in the country’s biggest firms over the past six months, except for Axiata Group Bhd, formerly known as TM International Bhd.
EPF’s current top 15 shareholdings have a market value of about RM55bil against RM43.7bil six months ago.
Analysts said a rising market provided the opportunity for funds like the EPF to make trading profit on stocks.
This may help boost returns from investments at a time when companies are expected to pay lower dividends as their profits shrink.
EPF had warned that this year’s dividend payout to contributors may be less than the 4.5% paid for 2008.
It has to guarantee a minimum payout of at least 2.5% every year as its fund size grows at about 7% and 10% rate annually.
Currently, the EPF is invested in more than 100 companies on Bursa Malaysia, with its 67% in Malaysian Building Society Bhd and 57% in RHB Capital Bhd comprising its biggest stakes.
The total market capitalisation of just over 950 companies on Bursa Malaysia stood at RM817bil as at end-June.
While the fund’s stakes in the country’s biggest firms remain relatively stable, it has been increasing its shares in a number of mid-size companies.
Among stocks that saw a significant jump in EPF investment so far this year was WCT Bhd.
The pension fund started the year with a 20% stake in the construction group but took advantage of a steep price plunge in January to buy more shares, raising its equity stake to 26% by end-June.
Latest filings showed that the EPF owned 25.16% of the company as at July 6.
Shares in WCT closed at RM2.23 yesterday, up 47% year-to-date.
The stock, however, was down 61% from a peak of RM4.98 achieved on Jan 11 last year.
EPF’s stake in WCT is currently worth about RM430mil compared with RM220mil at the start of the year.
The fund did not disclose the amount paid for the additional stakes in its filings with Bursa.
Other mid-sized firms that saw increased EPF interest are oil and gas counters like Dialog Group Bhd and KNM Group Bhd.
The two stocks had posted strong double digit gains this year from their recent lows in March.
THE Employees Provident Fund (EPF) is bracing itself for a reduction in revenue this year, as members opt for more withdrawals to facilitate better cash flow in the short term, its chairman Tan Sri Samsuddin Osman said.
"We also face the very real possibility of reduced contributions in the face of a flagging economy where company closures are expected and layoffs imminent," he said in the EPF 2008 annual report released recently.
The EPF recorded its highest ever revenue of RM20 billion last year, up 9.36 per cent over the previous year's RM18.29 billion, thanks to higher returns from investments in loans and bonds, equities and Malaysian Government Securities (MGS).
The strong performance in 2008 enabled it to declare a dividend rate of 4.50 per cent for the year.
