EPF unlikely to match 2017 dividend rates on volatile stocks

Fund’s 2018 dividend payout to reflect market conditions that saw many regional markets tumbling

By MARK RAO / Pic By TMR

The Employees Provident Fund (EPF) is expected to declare lower dividends for 2018, compared to 2017, as the domestic and regional markets were battered in what had been a roller-coaster year for equities.

The country’s largest pension fund, with about 14 million members as of September last year, declared a dividend rate of 6.9% for conventional savings last year, the highest since 1996, amounting to payments totalling RM44.15 billion.

The Shariah-compliant portion of the fund announced a 6.4% profit sharing for 2017.

EPF’s gross investment income for 2017 was RM53.14 billion with a total investment asset of RM791.48 billion as at the end of December 2017.

It posted an investment income of RM14.61 billion for the third quarter ended Sept 30, 2018 (3Q18), RM12.38 billion (2Q18) and RM12.88 billion (1Q18), totalling RM39.87 billion for the nine-month period.

The fund needs to post an income of about RM13.27 billion in 4Q18 to achieve 2017’s record income level.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said EPF’s 2018 dividend payout would reflect the market conditions that saw many regional markets tumbling into the red, along with the volatility of the fixed-income stream.

“In the current context, perhaps it would be unrealistic to expect the same or even higher dividend rate than the 2017 level, in view of the decline in the FTSE Bursa Malaysia KLCI (FBM KLCI) during 2018 by 5.9%.

“And this is very much in tandem with the regional market performance, whereby most markets were in the red in 2018,” he told The Malaysian Reserve.

But Mohd Afzanizam said it is also imperative for EPF’s dividend rate to be higher from its strategic benchmark of 2% above inflation on a rolling three-year basis.

“The average inflation rate between 2016 and 2018 is about 2.3%. Perhaps, the minimum dividend rate in 2018 is about 4.3%,” he said.

The fund is expected to announced the dividend payouts next month.

Equities make up a key component of EPF’s investment portfolio, contributing 60.8% of its RM14.6 billion total investment income during 3Q18.

Mohd Afzanizam said EPF’s equity portfolio in 4Q18 is expected to have been negatively affected due to uncertainties in the external environment, which saw foreign investors turn net sellers during the final three months of 2018.

The fund’s top five holdings at the end of 3Q18 were Malaysia Building Society Bhd, RHB Bank Bhd, Malaysian Resources Corp Bhd, Telekom Malaysia Bhd and Axiata Group Bhd.

These companies’ shares declined 8.9%, 2%, 15.3%, 17.4% and 13.2% respectively during 4Q18, which resulted in a combined RM9.3 billion loss in market capitalisation over the three-month period.

Mohd Afzanizam said EPF’s equity investments will be offset by its fixed-income portfolio and other asset classes such as loans, private equity and real estate.

“Therefore, we need to view EPF’s investment performance in a wider sense as there are other asset classes in its stable.

“Each of them has a different risk level and the decision to invest in each asset class would be based on the Strategic Asset Allocation,” he added.

Fixed-income instruments remain a key portion of EPF’s investment portfolio, contributing to 50.7% of total investment assets and bringing in RM4.73 billion in income in 3Q18.

The fixed-income portion will help offset the volatility in the equity space, which saw the FBM KCLI decline 5.7% quarter-on-quarter and 5.9% year-on-year in the last three months of 2018.

Mohd Afzanizam said fixed-income markets were equally volatile in 4Q18 with foreign investors in the local bond market turning net sellers in November and December at RM5.2 billion and RM2.2 billion respectively.

However, he said strong domestic support from investment funds, insurance companies and banks in 4Q18 could provide positive mark-to-market value for EPF’s bond portfolio.

He added that support from these institutional investors resulted in 10-year Malaysian Government Securities ending the year at a 4.07% yield, after reaching as high as 4.18% on Oct 26, 2018.