Alternative Views: Shackles on EPF’s investment decisions must be loosened

The Norwegian Government Pension Fund Global, the world’s largest sovereign wealth fund, which manages assets of US$1.3 trillion (RM5.9 trillion), had a negative return of 14% last year.

It was the second-worst return in the history of the fund, which averaged an annual return of 5.7% over the last 25 years. Considering that even Norway’s government pension fund registered a loss, the performance of the Employees Provident Fund (EPF) is commendable, at 5.35%.

Despite having constraints with regards to its asset allocation strategy and being bogged down by unprecedented withdrawals, the EPF has once again come out tops among government-controlled funds. It declared a dividend of 6.1% in 2021 and 5.2% in 2020.

Permodalan Nasional Bhd’s flagship fund, Amanah Saham Bumiputera (ASB), declared a dividend of 4.6% with an additional 0.5% for the first 30,000 units for 2022. In 2021, the return was 5% and, in 2020, it was 4.25%.

Lembaga Tabung Haji, which declared dividends of 3.1% in 2020 and 2021, expects a moderate return for 2022. The Armed Forces Fund Board (LTAT) hopes to declare a dividend of 5%, after declaring 3.5% in 2020 and 4.1% in 2021.

Apart from the size of its fund, the main factor that differentiates the EPF from the other government-controlled funds is its foreign investments. About 36% of the EPF’s assets are put outside Malaysia and the returns account for 45% of its gross investment income of RM55.3 billion.

In a nutshell, almost half of the EPF’s investment income comes from its investments outside the country. This has been the trend for several years, whereby the EPF’s foreign portfolio delivered higher returns than the domestic investments.

The other reasons the EPF has been consistently declaring superior dividends compared to the other government-backed funds are that it has a group of strong fund managers and its mandate is not confined to only syariah-compliant stocks. The EPF team that works on its investments are from a “well-diversified” group with people from all backgrounds and races. They are not paid as highly as other fund managers but have proven to be competent.

The provident fund is also forced, under its regulations, to keep its books clean.

On this score, the EPF declares a dividend only from profits realised. It cannot keep reserves in case of a bad year. This forces the provident fund to provide for bad investments every year so that the portfolio is not inflated by underperforming stocks. In other government-controlled funds, there have been instances in which the books were inflated because no impairments were done and dividends paid even though the fund could not afford to do so.

For instance, after the change in government in 2018, an audit of Tabung Haji revealed that it had been paying dividends from unrealised profits and did not provide for losses of its core stocks such as TH Plantations Bhd. In the 2017 accounts, the plantation counter was booked at RM4.70 a share in Tabung Haji’s books when the market price was only RM1.16. It had artificially inflated the books.

Likewise, in 2018, LTAT declared its lowest dividend of 2%, with then CEO Nik Amlizan Mohamed stating that the fund should not be paying out dividends “with money it did not have”.

An audit in 2019 found that LTAT had overpaid dividends in previous years. The fund at that time was managed by Tan Sri Lodin Wok Kamrudin, a staunch loyalist of disgraced former prime minister Datuk Seri Najib Razak.

Last year was tough for funds with exposure to the global markets. Interest rate hikes, inflation pressures, the war in Ukraine and high energy prices ended a multi-year bull run in the fixed income markets and halted a phenomenal run of technology stocks.

Funds with exposure to the US, which is the world’s biggest playground for technology stocks, failed miserably. On this score, Norway’s Government Pension Fund Global took a big hit from its investments in the US. 

The return  on the EPF’s overseas investments is commendable, being higher in proportion to its asset size in the fund’s portfolio. Its local investments, as in previous years, did not fare as well as the overseas investments.

The EPF’s fund size will continue to grow beyond its current asset size of RM1 trillion. And it is under pressure to deliver higher returns because many of its account holders have depleted their savings.

To make better returns, it has been proven that the EPF needs to put more money outside Malaysian shores. But it is not allowed to put as much money as it would like overseas, owing to restrictions from the authorities, which include entities such as Bank Negara Malaysia and the Ministry of Finance.

By restricting the EPF from putting more money outside Malaysia, its performance will be curtailed. There are a few reasons for this.

First, there are not many investable companies on Bursa Malaysia. Of the 1,000-odd listed companies with a total market capitalisation of more than RM1.5 trillion, only a handful are worth investing in. And the EPF is already in all those stocks that are worth putting money into.

Moreover, there is an issue of liquidity in some of the stocks that have strong fundamentals on Bursa. The lack of liquidity does not allow a large fund such as the EPF to enter and exit the investment with ease.

Second, apart from equities, the other major asset class that most funds are looking at currently is the world of private equity. The returns are easily more than 10% on an annualised basis and the investment horizon is long term, about 10 years.

These two criteria fit the EPF’s goals because it needs good returns and is prepared to wait for the long term. On this score, most of the unicorns are outside Malaysia. When funds come seeking investment mandates, an entity such as the EPF cannot commit itself because of restrictions on its ability to take money out of the country.

Finally, as pension funds grow in size, it is prudent to invest outside the country to mitigate risks. The Norwegian Government Pension Fund Global puts all its money outside the country, and the Canadian Pension Plan keeps only 15% of its US$536 billion within the country. The rest is outside, with the US being its top investment destination.

The EPF has consistently been able to give better returns in the last few years because of its foreign investments. The decision to put money outside Malaysia started a few years ago and is paying off well.

For the provident fund to continue to grow and spur more people to save, it needs to give commendable returns. Restricting its investment options is not the way.

M Shanmugam is a contributing editor at The Edge

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