STARBIZWEEK 6 SEPTEMBER 2014
EPF faces challenges to generate more money
The quarterly report card by the Employees Provident Fund (EPF) must certainly have brought a smile to many of its members. With second-quarter investment income up 13.5%, or RM10.4bil, compared with the same quarter last year, members must be relishing the thought that full-year dividends could be better than the 6.35% declared last year.
With an investment income of RM8.8bil in the first quarter, which was more than a 50% increase from the first quarter of last year, the likelihood is that the EPF will be declaring a higher dividend than last year when its financial year is over, assuming its income growth is still strong in the second half of the year.
The challenge for the EPF is to generate more money, as the size of the fund grows. In 2013, it needed RM4.9bil to declare a percentage point of dividend compared with RM3.4bil in 2009.
This is because as the size of its investment assets grows, which now stands at RM612.41bil, the ability to generate more returns gets harder.
This is why the EPF is increasing its allocation to external fund managers in the hope that these nimble money managers would be able to deliver a higher return if the pot is divvied out to a wider base.
The EPF also notes that its move to diversify its assets is paying off and helps to mitigate risk. Year-to-date, it says that overseas investments and external fund managers have both added value to the EPFs overall returns by contributing 28% and 14%, respectively, towards its total income for the first half of the year.
It is no real surprise then that the EPF, in its need to manage its investments better, is taking a direct stake in companies. Its ownership of RHB Capital Bhd is paying off handsomely, as the dividends it receives grow over time. Investments in banks and property development have their risks, but as long as these companies and projects are well-managed and conceptualised, then the risks get smaller.
The move now to have the largest stake in the country’s largest bank will also pay off in the future should it materialise. Seeing that Malaysia is still growing and the real trouble is the high household debt, then banks over time would be able to stomach such volatility. Diversifying the risk in its largest investment by seeing its banking investment having a bigger regional reach will also spread out its risk profile to just that of Malaysia, much in the same way it is investing the people’s money in equities.