The Employees Provident Fund is set to announce its first quarter performance over the next three to six weeks. Of interest is the performance of its overseas assets, in particular foreign equities.
Given that return on investments (ROI) from its foreign investments are significantly above that of its domestic investments, dividends from the EPF would have been much lower had the provident fund not decisively diversified more of its investment assets overseas just over a decade ago.From 13% of its portfolio outside Malaysia in 2011 to 20% in 2013 and 28% in 2017, the EPF had targeted to have at least 32% of its assets overseas since 2017. The 32% threshold was passed in 2020, with the EPF having 36% of its assets abroad in 2022, slightly lower than 37% of its total investment assets in 2021. (See Chart 1.)
The EPF, in its 2021 annual report, described overseas assets as “critical contributors to the EPF’s investment income”. That year, foreign investments contributed to a record high of 56% of the EPF’s gross investment income while making up only 37% of its total investment assets, which stood at RM1.01 trillion in 2021. (See Chart 2.)
Income netted from its overseas investments was enough to pay 3.4% to 4.1% dividends in the year the EPF announced the headline-grabbing 6.1% dividend (conventional) for 2021, our back-of-the-envelope calculation shows.
The ROI for foreign assets in 2021 was 9.97% — double the 4.76% for its domestic assets — and the highest in at least three years, possibly enhanced as the ringgit weakened versus the US dollar (see Chart 3). The ROI from foreign-listed equities alone was even higher at 10.44%, according to EPF data.
For the layman, a 30-year-old member who has saved up RM100,000 with the EPF would see that money double to RM200,000 by the age of 42 to 44 if EPF dividends were to average at 5% to 6% per annum over the 12-to-14-year period and thereafter have RM400,000 saved up by the time he or she is 54 to 58 years old at that same rate. If dividends were to fall to just 3% to 4%, however, that 30-year-old with RM100,000 savings would only be able to grow that to RM200,000 when he or she is between the age of 48 and 54 — making it tougher to meet the EPF’s recommended basic savings of RM240,000 by age 55. (See graphic.)
When announcing the higher-than-expected 6.1% dividend for 2021 in March 2022, EPF CEO told reporters that the EPF had brought back RM22 billion from its overseas investments “that had been built up over quite a number of years” — some prematurely to meet liquidity needs to satisfy Covid-19-related withdrawals. This was to avoid rattling the local market, where the EPF is already a hefty investor.
It is not immediately known if the EPF also did premature selling of foreign assets in 2020 in preparation for liquidity needs from Covid-19-related withdrawals, given that the i-Sinar withdrawals (which saw RM58.7 billion prematurely taken out from the EPF in 2021) were first proposed in November 2020 when Budget 2021 was tabled, even though criteria for withdrawals up to RM60,000 each were only lifted in February 2021.
ROI for foreign investments remained high at 9.27% in 2022 (above 6.2% of overall ROI) when the EPF’s foreign investments contributed 45% (56% in 2021) to gross investment income even as its proportion to total assets eased to 36% (from 37% in 2021).
The impact of the lack of higher returns from foreign income can, for instance, be seen in the lower dividends paid for shariah savings (4.75% dividend in 2022) compared with conventional savings (5.35% dividend in 2022). The EPF had allocated 43.6% in foreign assets for the conventional portfolio versus only 24.1% in foreign assets for its shariah portfolio. As such, the PM’s suggestion that EPF increase its domestic investments to 70% instead of the present 64% should be disregarded. It is this sort of political interference that caused the failure of many institutions including Bank Bumiputra Malaysia Berhad or Malaysia Airlines Berhad. Let the professionals run the institution.
The fund should be allowed to continue growing members’ retirement savings abroad, as guided by its strategic asset allocation, which naturally allocates most of its assets to Malaysia as its obligations to members are in ringgit. But a judicious approach requires some key criteria being met, and that the Investment Committee will have defined clearly. All this falls away, if EPF is used as a “911” rescue vehicle rather than a retirement fund, for what it was intended originally.
References:
The significance of foreign investments to EPF dividends, Cindy Yeap, The Edge Markets, 9 May 2023
Govt shouldn’t force EPF to invest heavily in Malaysia, says Shahril, KJ, Shahrul Shahabudin, FMT, 11 May 2023
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