IT’S probably the one dividend rate most Malaysians will scrutinise. The rate will be dissected, debated and then the verdict from the people will be whether it’s satisfactory or poor.
That single dividend is what the Employees Provident Fund (EPF) announces yearly. Last year’s 6.15% was the highest in a decade but the challenge that the EPF faces is how to keep that going.
The circumstances in generating that kind of return are getting tougher but the transformation in how it invests is helping.
The fund is growing fast – the size of the fund is RM568bil – and the environment of super low interest rates is not helping. Hence, hitting a decade-long high in terms of dividend payments is nonetheless a pleasant achievement for EPF members.
“There are two key goals for the EPF when it comes to financial management. The first is capital preservation.
“Paramount in the way we structure our assets is basically capital preservation. We cannot afford even a low risk in the loss of capital. Because of that, we carry a very high percentage of government debt and high grade corporate securities. When it comes to equities, we only invest in blue-chip companies and the larger companies because of liquidity,” says CEO Datuk Shahril Ridza Ridzuan.
The return of 6.15% for a near zero-risk investment represents a bounty in investment circles. The rate not only bettered EPF’s internal targets of beating the rate of inflation, it also managed to pip the second target it has set for itself, which is to give a return to shareholders that is more than 200 basis points, or 2%, above the rate of inflation over a long-term horizon. Last year’s return was inflation plus 3.8% for a rolling 3-year period.
“Because of that, in the current environment where interest rates are very low because of quantitative easing, the biggest challenge we have today is getting high nominal returns because interest rates everywhere have collapsed.
“Even property yields have fallen as well. Yields have sunk to sub-6% levels in some cases,” says Shahril.
The outlook for this year has been patchy although there are those who are expecting the EPF to keep its streak of better returns over the past four years. The first quarter was slow because of election worries and the EPF is trying to catch up with last year’s performance because of the handicap in returns because of the first-quarter jitters.
“Since the general election is over, we have done quite well but because it’s a low inflation period, we should not have the problem of meeting our inflation targets again,” says Shahril.
“In terms of yield, because we are focused on blue chips and long-term yields, we are still able to meet our targets for this year.”
There will be calls for the EPF to invest in small cap stocks to bump up its return to members, but that piece of risk is something the EPF doesn’t want to digest.
“It doesn’t suit the kind of portfolio building we are trying to do here which is very much focused on long-term, cashflow driven stabilised returns,” says Shahril.
It’s safety first for the EPF as it is responsible for managing and growing retirement savings of most Malaysians. But the job for Shahril and his team is not so easy. Because of comparison against unit trust industry, where in the good years the more heavily skewed equity funds tend to perform well, the EPF will always be benchmarked against its peers.
“If you compare the EPF against a similar balanced fund, I think you will find the EPF, effectively because we have a minimum return guarantee, tends to outperform a lot of these funds. It’s not to say there are no outperformers, there will always be.
“When you compare the EPF against a unit trust, you need to be careful in what you are comparing against. Unit trusts that are 100% equities will have a much higher risk return profile. That means they will outperform the EPF in times when the markets are good but they will significantly underperform the EPF when markets turn.
“But against a 100% equity fund, you will find some of the balanced funds actually outperfrom some 100% equity funds over the long term,” he says.
The returns of a fund depends on the ability of the person managing a fund and the EPF feels it has the the right skillset to manage the retirement money of Malaysians.
“You will find basically that if you benchmark EPF’s investment skillset to a lot of its peer groups, we rank quite favourably. In some areas, we are still learning, and in those cases, we partner with people such as established funds to co-invest or we work with partners and we invest in their funds and learn,” says Shahril.
He says that in the global assets it invests in, which now accounts for 20% of EPF’s portfolio, it has managed an average return of 6%. That rate of return satisfies Shahril as the fund is looking for consistent returns over a long period of time rather than volatile returns.
The EPF invests in slightly less than 200 listed companies, of which, 30%, in its own classification, are small and medium caps. Most of the money it invests in equities though reside with big cap stocks.
“We are focused on companies with good cashflows and have a good track record in terms of paying out cash to their shareholders. So we are heavily invested in the banks, plantations – despite the low price of CPO, they are a decent long-term investment because of the nature of the cycles they are in – and we have invested a lot in consumer goods and consumer facing operations.
“We are also large shareholders of the major REITs. We like REITs generally because of their exposure to the property market and they are directly tied into consumer spending as well. Most of them are retail focused,” he says.
EPF’s investments are roughly about 50% in Government debt and other high grade corporate securities, 40% in equities and the rest are in properties and infrastructure, and money market instruments.
It is increasingly investing overseas and its investments abroad now account for 20% of its portfolio. It’s self-imposed limit is 23%. It’s giant size and influence on the markets here means that it needs to invest abroad.
“On some days, we constitute 20% of trading on Bursa (Malaysia) and this is a high concentration risk and we need to diversify. The Government understands that and we stick close to a diversified model and invest in blue-chip companies. I understand the concept that investing overseas is riskier but this depends on what you invest in.
Look at properties we have. It’s leased to blue-chip companies. Similarly, we invest only in the biggest blue-chip companies overseas,” says Shahril.
Investment in property
The EPF’s first foray into the property sector was after the Asian Financial Crisis when it entered into a venture with S P Setia to develop Setia Eco Park. It has paid off handsomely for the EPF and the one key lesson it has learnt is to always partner a blue chip name.
“It’s not just with property, and it’s with any industry. In property, our investment in Setia Eco Park has done very well for us. We also have investments with Sunway and YTL, although they are not as visible. We are comfortable with that,” he says.
Its exposure into the direct property business is about 3% of its portfolio. Small in percentages but big on publicity.
There was none bigger though than when the EPF decided to get into business with S P Setia again and Sime Darby Bhd to develop the massive Battersea power station in London.
Already comfortable with the property market in the UK as it holds buildings in the country, Shahril says its role is purely as a financial investor.
As it stands, the Battersea development has met with strong buying interest, and that pleases Shahril.
“From the plans we have seen, the second and third phases that are coming up soon will be equally if not more exciting. It’s a good investment for all parties. We are quite comfortable with where the investment is right now,” he says.
That’s not the only big property project the EPF has embarked on. Under unit Kwasa Land, the EPF has bought 2,000 acres in Sungai Buloh where it is planning an integrated development.
Investment in property is a hedge against inflation but it is also a big income earner for the EPF for the next 15 to 20 years. Right now the project is on the cusp of being launched as it is waiting the final nod from the Selangor government.
“It is a way for us to protect against inflation and as we progressively develop the land; we will get income in a few ways. One will be from land sales, and secondly, in joint ventures with developers in the development of the land. Thirdly, for those assets we want to hold, it will be from rental yields. It plays out nicely across the investment curve for us,” says Shahril.
Shahril says the development will be conducted transparently and each parcel sold – ranging from 20 to 100 acres in size – will have strict covenants as what developers can do.
Kwasa Land will replicate KL Sentral in some ways at the former Rubber Research Institute (RRI) land as there will be a 300-acre depot for the MRT system. Two stations will reside on that land and with the KTM Komuter extending its tracks to the Subang airport, Shahril feels connectivity will be a major selling point for the development.
“We have called the pre-qualification in three tiers. The Tier-1s are all your major developers. Tier-2 are the middle sized guys and Tier-3 are bumi developers,” he says, adding that the pricing of land sold will be market driven.
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