The Malaysian Insight

THE Employees Provident Fund saw its investment income increase by 36.36% to RM11.51 billion in the year’s second quarter, compared with the same period last year, due to better equity performance. 

EPF chief executive officer Shahril Ridza Ridzuan said this was due to improved market conditions that saw all asset classes in EPF’s portfolio record a healthy growth, with equities the main profit driver.

Looking ahead to the second half of the year, he said global investments would remain one of EPF”s significant revenue drivers as the ringgit was showing signs of better stability.

“With the ringgit showing signs of improved stability, global investments will remain one of EPF’s significant revenue drivers going forward.  Domestically, while GDP growth continues to improve, the EPF will be vigilant of other external factors which may create uncertainty, including the possibility of global rate hikes, and rising geopolitical tensions,’ said Shahril.

EPF’s overseas investment amounted to 29% of its total investment asset, contributing 32.5% to the total investment income.
 
“Our foreign investments have proved to be a significant revenue driver in recent years, despite making up less than 30% of our total investment portfolio as at Q2 2017. The increase in global asset values mitigated the negative effect from the strengthening of the ringgit, providing opportunities for us to realise profit.”
 
He said at end-2016, the EPF delivered a three-year rolling return of 3.83% above inflation, a significant premium over its 2% above inflation strategic target, thus ensuring that members’ savings were not only preserved, but also enhanced.

“The outperformance was mainly driven by its overseas portfolios, which recorded a three-year annualised return on investment (ROI) of 11.1% as at June 2017, enhancing the value of EPF’s return. 

“While the domestic market remains integral to EPF’s investments, we need to diversify our portfolio into broader markets with better investment opportunities and greater liquidity to enable the EPF to execute our strategies in line with our mandate. Doing so would equip the EPF with the agility and resilience to anticipate and rise above future market challenges.”

He said EPF’s exposure in overseas investment stood lower than the strategic asset allocation of 32%, specifically in real estate and infrastructure due to regulatory constraint. These gaps could potentially result in lower than expected returns for the EPF in the years to come.

As at June 30, EPF’s exposure in real estate and infrastructure asset class remained at about 4% against its strategic asset allocation of 10%.

Shahril said of the RM11.51 billion investment income, fixed Income instruments contributed 37.29%, equities 53.72%, real estate and infrastructure 6.23%, and and money market instruments 2.64%.

“While we recorded significant improvements in year-on-year performance in both the preceding and current quarters, there is a slowdown in momentum which saw corporate profits normalising in Q2 2017. We, therefore, expect a moderation in income growth for upcoming quarters.”

Equities, which make up 41.96% of EPF’s total investment assets as at Q2 2017, contributed RM6.18 billion, 61.45% higher than the RM3.83 billion recorded in the corresponding quarter last year.

Diversification into other asset classes that provide stable streams of income, including fixed income instruments and real estate and Infrastructure investments, through its subsidiaries also  boosted EPF’s earnings.

Earnings of RM820.71 million was generated for Simpanan Shariah and RM10.69 billion for Simpanan Konvensional. Simpanan Shariah derives its income solely from its portion of shariah assets. Income for Simpanan Konvensional is generated by its share of both shariah and non-shariah assets.

“In equities, the banking sector has been outperforming since the beginning of the year while the bulk of our impairments recorded for the quarter came from the telecommunications and oil and gas sectors. If this continues, we expect that Simpanan Konvensional will benefit from the former and outperform in the short term.”

The value of EPF investment assets reached RM759.78 billion, a 3.92% or RM28.67 billion increase from RM731.11 billion, as at December 31. Of the total investment assets, RM362.50 billion, or 47.71%, were in shariah-compliant investments and the balance invested in non-shariah assets. – September 16, 2017.