Can EPF’s Shariah scheme match conventional in 2017?

By NG MIN SHEN / Pic By TMR File

The Employees Provident Fund’s (EPF) dividend payout for last year is expected to surpass the 5.7% return in 2016, boosted by higher returns for its foreign investments and the recovery in the local equity market.

However, the market remains cautious on the Shariah-compliant savings scheme as Malaysia’s largest pension fund with over RM750 billion in asset will announce the first return for the scheme.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said equity investment has been the largest contributor, accounting for 61% of EPF’s returns in the third quarter last year (3Q17).

He said the performance was helped by the global and domestic equity markets which have performed favourably last year.

“We can expect higher dividend rates for 2017. EPF’s strategy to invest abroad, based on the strategic asset allocation approach also means that investment returns have been prudent,” he told The Malaysian Reserve (TMR).

The fund is expected to announce its dividend rates in February. Last year, the fund paid a 5.7% dividend rate, amounting to RM37.08 billion in total payout.

The 2016 rates was lower than the 6.4% announced in 2015 and 6.75% in 2014. An analyst at an investment bank who spoke to TMR on the condition of anonymity said the dividend for 2017 would be higher as the fund’s foreign-equity exposure had performed well.

“The dividend for 2017 will probably be close to 6% as global and domestic markets largely turned around and the fund’s global investment strategy have paid off.

“The ringgit’s strengthening may pare down some of the returns, but the gains will probably supercede the position of the ringgit,” said the analyst.

However, the market is anxious to see whether the dividend for the Shariah-compliant portion of the fund will be similar to the conventional half.

“It’s uncertain if the dividend will match that of the conventional fund. The Shariah-compliant fund just started last year.

So, it’ll take time to build up. It’s challenging for EPF’s fund managers, given that the base of stocks available for investment is narrower,” the analyst said.

“Nonetheless, EPF’s strength lies in its diversification into different asset classes such as real estate, infrastructure and foreign equity. So, they will be able to leverage on that.”

EPF CEO Datuk Shahril Ridza Ridzuan had stated that there will be no minimum 2.5% dividend on the Shariah-compliant scheme, as a return cannot be guaranteed under Shariah governance. Returns on the Shariah-compliant fund will be based on portfolio performance.

EPF’s investment assets stood at RM771.2 billion as at end-September 2017, up 5.48% from RM731.11 billion as at end-2016.

Out of the total investment assets, 52%, or RM401.1 billion were in non-Shariah assets, while the remaining 48% or RM370.1 billion were in Shariah- compliant investments.

Beginning 2017, the fund’s performance results will be broken down into conventional savings and Shariah savings.

Regist rat ion for EPF’s Shariah-compliant savings scheme opened on Aug 8, 2016. As at Dec 23, 2016, the scheme had a take-up rate of 59.03%, with 635,037 members having switched from conventional savings to Shariah savings.

An initial RM100 billion was allocated last year for the Shariah savings scheme, representing 15% of the fund’s total investment assets of RM681.7 billion as at March 2016.

For the 3Q ended Sept 30, 2017, the fund grew its investment income 5.13% to RM12.95 billion from RM12.32 billion a year ago. Of the RM12.95 billion income recorded, RM860.83 million was allocated for Simpanan Shariah — derived solely from EPF’s portion in Shariah assets, while RM12.09 billion income was allocated for Simpanan Konvensional, which was generated by its share of both the Shariah and non- Shariah assets.

As at end-September 2017, the fund’s overseas investments, which accounted for 30% of its total investment assets, contributed 48% to total investment income for 3Q17.

Investment income for 2Q17 was 36.36% higher at RM11.51 billion against RM8.44 billion recorded in 2016, while the first three months of last year saw EPF’s investment income surged 73.9% to RM11.8 billion from RM6.78 billion previously.

Equities contributed 61.09% to total investment income during 3Q17, comprising 41.86% of the pension fund’s total investment assets.

Meanwhile, Mohd Afzanizam said there could be a correction at the local stock market in the medium term, particularly when the valuation has become highly stretched in certain sectors like technology.

“Perhaps, a slight correction is also healthy in order to allow the fundamentals to catch up with the current valuation,” he said.

Affin Hwang Asset Management Bhd also said recently that there could be a correction of 10% to 20% in emerging markets, including Malaysia, during the second half of 2018 if 10-year US Treasury yields increase to above 3% or 3.5% from the current 2.65% to 2.66% as a result of rising inflation in the US.