THE Employees Provident Fund (EPF) saw a big drop in its investment income for the first six months of this year (1H22), with part of the scarring coming from a drop in earnings from the global stock markets.
The pension fund recorded a total investment income of RM27 billion for the 1H22 ended June 30, a decrease of RM7.06 billion, or 21%, compared to RM34.06 billion in the 1H21.
The fund attributed the drop to market reaction to the elevated risks of both slower global growth and high inflation, something not experienced by major economies since the 1970s.
In a statement issued last Friday, it said underlying these risks include the protracted Ukraine-Russia conflict, which disrupted global supply chains that sent prices soaring; rise in global inflation rates, hitting multi-decade highs; and in-step interest rate hikes by numerous central banks, partly in response to US Federal Reserve (Fed) rate hikes and partly to reel in inflationary pressures.
These risks had been flagged at the beginning of the year, but the rate at which they materialised was unprecedented, like the magnitude and speed of Fed rate hikes. All these factors had intensified and resulted in most markets posting their worst 1H in decades, with US stocks recording their worst in more than 50 years.
“Expectations of global growth have suffered which caused a persistent sell-off in the global markets. The consistent downtrend impacted EPF’s equity earnings especially through global stock markets, which declined between 17% and 21% during the 1H22,” EPF CEO Datuk Seri Amir Hamzah Azizan.
He added: “Nonetheless, the EPF’s diversification into different asset classes, markets and currencies, as prescribed in its Strategic Asset Allocation (SAA), has helped the EPF to remain resilient against turbulent market conditions and to protect its long-term investment returns.”
Not insulated from global market events, EPF said its total gross investment income for the second quarter (2Q22) was RM11.14 billion, down RM3.63 billion from RM14.77 billion recorded in the 2Q21. Equities continued to be the main contributor of income for 2Q22 at RM4.88 billion, accounting for 44% of the total gross investment income in the quarter under review.
It said private equity, which is part of the equities asset class, managed to deliver healthy returns of RM1.15 billion, an increase of over 100% against the RM0.54 billion recorded in 2Q21.
The portfolio is gradually becoming more important for the EPF’s diversification efforts as the volatility in listed equity markets remains high, the statement added.
It said fixed income instruments, comprising Malaysian Government Securities and equivalent, as well as loans and bonds, continued to provide a steady stream of income, mitigating the impact from short-term market volatility and providing stability to the EPF’s overall income.
It noted that this asset class, which serves in a capital preservation role, has been the anchor for EPF and contributed a significant portion of its gross investment income for 2Q22 at 42% of total income or RM4.73 billion.
Real estate and infrastructure registered an income of RM1.2 billion, while income from money market instruments generated RM0.33 billion, in line with its return expectations for these asset classes.
In 2Q22, the EPF’s overseas investments, which make up 36% of its total investment assets, generated RM5.51 billion in income, representing 49% of the total gross investment income recorded.
As at June 2022, EPF said its assets under management totalled RM957.25 billion, taking into account pandemic-related withdrawals amounting to RM44.6 billion.
It said asset growth remains healthy as contributions received amounted to RM43.23 billion as at June 2022, supported by the income generated from its investments. — TMR
- This article first appeared in The Malaysian Reserve weekly print edition