Tough six months for EPF
PETALING JAYA: The Employees Provident Fund (EPF) is off to a bad start in 2022 after its investment income tumbled by nearly 18% year-on-year in the first quarter (1Q).
With the global stock market meltdown building up, EPF could be heading towards another round of disappointing performance in the second quarter.
Under such circumstances, it would be a tall order for the provident fund, which is affected by withdrawals of over RM140bil, to deliver the same level of dividend it did in 2021 to its depositors this year.
In 2021, the EPF announced a dividend payout of 6.1% for conventional savings with a total payout of RM50.45bil, exceeding the 5.45% dividend declared during the pre-pandemic year of 2019.
As for syariah savings, a dividend of 5.65% was announced, surpassing the 5% declared in 2019.
Economist Dr Geoffrey Williams said EPF depositors should brace for a lower return this year, as the high dividend of 2021 is unlikely to be repeated.
Williams, who is a professor at the Malaysia University of Science and Technology told StarBiz that EPF performance in 1Q of 2022 was ”not expected but also not surprising.”
“This was because of the general market turbulence during the first quarter and high inflation overseas where EPF generates a lot of its income from. There are also concerns about inflation, growth and higher interest rates in the international markets.
The rebound in markets in 2021 was quite strong and had helped the overall dividend performance. But growth is already being downgraded across the world so investment returns are likely to be lower this year,” he said.
In the past six months, especially in the April to June 2022 period, global stock markets have turned more turbulent.
The MSCI World Index declined by 5.5% in 1Q, and the index took a turn for the worst in the second quarter, after it plunged by 18.3% in 2Q until June 20.
With a total of 44% of EPF’s investment assets being positioned in equities, concerns arose whether there would be a massive drop in income for the EPF.
The fact that the EPF undertook a write-down of RM1.09bil in 1Q of 2022 for listed equities – almost equivalent to the write-down of RM1.15bil done for 2021 – is likely a sign of deterioration in investment performance.
However, Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid opined that it is “probaby too early” to anticipate whether EPF’s dividend will take a hit in 2022.
“Having said that, the investment climate this year has been extremely challenging, given that the major asset classes such as fixed income and equities have been badly hit by the aggressive monetary tightening by the major economies’ central banks.
“In addition, geopolitical concerns in Europe and the zero-Covid strategy in China have exacerbated the global inflationary pressures that had in turn made the investment climate more challenging,” he said.
In 1Q of 2022, the EPF recorded a total investment income of RM15.85bil – lower than the RM19.29bil recorded in the corresponding quarter in 2021 – dragged by a significant decline in worldwide markets.
EPF chief executive officer Datuk Seri Amir Hamzah Azizan said the fund had a strong start in the earliest part of the first quarter, but the situation took a turn as global markets suffered a decline, causing lower returns in bonds and equities throughout the remaining quarter.
“The decline was attributed to a number of developments stemming from geopolitical tensions, impact of soaring inflation rates and interest rate hikes.
“The Russia-Ukraine war only exacerbated the situation, causing further uncertainty and volatility at a time when countries are still struggling to recover from high debt burdens and stretched public finances from the pandemic,” he said in a statement yesterday.
While earnings-generation from equities, which continued to be EPF’s main income contributor, was impacted by the market slowdown, Amir Hamzah said the provident fund managed to leverage on its portfolio position to capitalise on additional gains.
In 1Q of 2022, equities contributed RM10.46bil in income, representing about 66% of the EPF’s total gross investment income.
“After taking into account the cost write-down on listed equities, net investment income for the asset class generated RM9.37bil for the period,” according to Amir Hamzah.
A total of RM1.09bil was written down for listed equities during the quarter, thus netting the total net investment income in 1Q of 2022 to RM14.76bil.
According to EPF, writing down is an internal policy on its listed equity investment as a prudent measure to ensure the portfolios remain healthy.
Fixed income instruments, comprising Malaysian Government Securities and equivalent, as well as loans and bonds, contributed a steady income of RM4.75bil, or 30% to the gross investment income.
The income recorded was higher compared to RM3.89bil generated in 1Q of 2021, largely due to higher market yield in 1Q of 2022, compared to the same period last year.
Meanwhile, real estate and infrastructure assets registered a decrease in income to RM360mil from RM710mil in the corresponding period in 2021.
Income from money market instruments stood at RM280mil from RM380mil in 1Q of 2021.
“As at March 2022, the EPF’s overall investment asset grew to RM1.02 trillion, of which 37% was invested in overseas investments.
“The EPF’s diversification into different asset classes, markets and currencies continue to provide income stability and add value to EPF’s overall return.
“In 1Q of 2022, the EPF’s overseas investments generated RM8.23bil in income, representing 52% of the total gross investment income recorded,” stated the provident fund.
MUST’s Williams said that the EPF has managed the turbulent period of 2020 and 2021 “very well” and that the fund is likely to maintain a similar management, moving forward.
“Its strategic asset allocation approach appears to be sound with good allocation in overseas equities, which have performed much better than Malaysian markets.
“It should continue with this strategy to navigate the current market uncertainty.
Meanwhile, Bank Islam’s Mohd Afzanizam said the main priority for EPF should be to ensure it can minimise the risks while at the same time, decide on the right moment to enter the market.
“Certainly, value has emerged in key markets.
“More importantly, the EPF will continue to invest responsibly and be able to deliver returns to its members that could commensurate with the level of risks taken,” he said.