Sunday, March 22, 2009

EPF Aims to Recover Foreign Investments when Dow Hits 9,000


THE Employees Provident Fund (EPF), the country’s largest investment fund, is targeting to break even on its overseas investments possibly by next year when it can write back the bulk of its provisions.

“The Dow Jones was 14,000 at its highest. Today, it is around 7,000. We expect to recover the bulk of our investments when the Dow Jones goes to 9,000,” said EPF CEO Datuk Azlan Zainol.

The EPF has, so far, invested RM16bil overseas on a staggered basis in the five major financial markets – the US, Britain, Australia, Singapore and Japan.

Datuk Azlan Zainol

However, he expects the markets to possibly recover only next year. Yields for Malaysian Government Securities (MGS) have also come off. In 2009, about RM16bil to RM17bil of MGS will mature and be replaced at today’s rate.

Last year, in July-August, it was possible to get 4%-5% for 10-year money, but that has dropped to 3.5%. Companies are also scaling back on dividends.

This year, he said, would continue to be difficult and the fund hopes to be able to maintain its dividend payment of between 4% and 4.5%. “Our policy is to give out everything we earn in the form of dividends. We do not have any reserves,’’ he said.

As far as gross income is concerned, the EPF, which manages RM340bil of funds, performed better than 2007 – gross income was RM19.96bil compared with RM18.24bil.

The big increase is in provisions which was RM515mil in 2007 compared with RM4.69bil last year.

Out of that amount, about RM3bil is provided for overseas investments. “Our policy is to provide in full for every diminution in value in our investments overseas,’’ Azlan said in response to queries from StarBiz.

In Malaysia, if there is a stock with more than 50% loss, the EPF will provide for 25% of it, spread over a four-year period.

“We are more conservative abroad because that is everybody’s market ... anything can happen. Locally, we roughly know (the local conditions),’’ said Azlan.

He expressed disappointment at some of suggestions posted on the blogs. “There is a blog that says the RM4.6bil provision that we made was because we lent to ValueCap Sdn Bhd. That is a gross accusation ... very, very unfair. That is not the truth,’’ he said.

Last year, the EPF had provided a RM5bil loan to government-controlled ValueCap which was set up to undertake investments on the stock exchange.

“As far as our investments are concerned, we are strong internally. What happens outside is a global issue. Our risk management and people are in place. There will be no major changes this year or the next,’’ he said.

In terms of EPF’s asset allocation, it is based on advice from its consultants and its proportion of investments in equity to fixed income is, according to Azlan, a proven formula.

Currently, Azlan as the CEO, assumes direct oversight of the fund’s investments. He is looking for a new head of investments who would probably be an outsider. The former deputy chief executive of investments, Johari Abdul Muid, has moved on to head the strategic planning unit.

“Johari will be responsible for looking into the second phase of transformation for the EPF,’’ said Azlan. The division also looks into retirement benefits and pension fund reforms in the country.

“The retirement money for Malaysians will not be enough. It has been three weeks since he is at the new position and he has done a very good job,’’ Azlan said in response to queries from StarBiz regarding Johari’s move to strategic planning.

Insiders added that it was part of a reorganisation to strengthen certain divisions that also saw new heads for property, withdrawals and call centre.

The dividend of 5.8% for 2007 has come down to 4.5% for last year.

Due to the large provision made, net income has slipped from RM16.87bil in 2007 to RM14.3bil last year. Costs have also gone up – to pay 1% dividend cost RM2.89bil in 2007 compared with RM3.18bil currently.

Gross income from investments in MGS and equivalents was higher by 5% at RM5.75bil last year. Investments in private debt securities and loans yielded a higher gross income of RM5.59bil or 13%.

With the lowering of fixed deposit rates, gross income from the money market went down by 25% to RM694mil.

Gross income from external managers for both domestic and global equities dropped by 43% to RM767mil and by 254% to a loss of RM194mil respectively. External managers were more prepared to cut loss.

However, income from internal managers showed an increase of 33% to RM6.27bil and 123% to RM439mil respectively.

The EPF is heavily invested in local banks with stakes ranging from 13.6% (Malayan Banking Bhd) to 2.8% (Affin Holdings Bhd).

“In Malaysia, big caps like Sime Darby, IOI Corp and Public Bank have all experienced huge drops in market cap. Tell me, how do we pay 7% or 8% dividend?’’ he asked.

No comments: