EPF expects lower equity impairment this year

KUALA LUMPUR: The Employees Provident Fund (EPF) foresees its impairment in the equity market will be lower this year, buoyed by the local stock market’s better performance, which has seen the FBM KLCI hit the 1,700-point mark.
Last year, the pension fund made the highest ever net impairment of RM8.17 billion to account for lower equity prices, which had fallen below book value, and this was particularly true for the banking and oil and gas sectors.
Speaking at a press conference on its dividend announcement here yesterday, CEO Datuk Shahril Ridza Ridzuan assured members that the impairment level is not alarming as it accounts for only 1.2% of the total investment assets of RM731.11 billion as at Dec 31, 2016.
“The impairment is not very much and it allows us to maintain a very healthy balance sheet,” he said.
The impairment, arising from consecutive annual declines in the performance of the local bourse over the last three years, led to the EPF declaring a dividend rate of 5.7% in 2016 versus 6.4% in 2015.The payout is its lowest since 2010, when it declared a dividend rate of 5.8%.
The RM37.08 billion dividend payout was derived from total realised income after deducting net impairment on financial assets, unrealised losses due to foreign exchange rate and derivatives prices, investment expenses, operating expenditure, statutory charges and dividend on withdrawals.
However, Shahril said the market has seen signs of increased activities and interest in Bursa Malaysia.
“If Bursa turns around this year as the FBM KLCI has already breached 1,700 points, we think the impairment will go down and if our investment income remains stable, then we’ll be okay this year,” he noted.
The EPF is maintaining its key strategy of strengthening its portfolio in the private asset markets of infrastructure, property and private equity, which fetch better returns compared with the equity and fixed income markets.
“Over the past one to two years, we have increased investments in infrastructure such as highways, waste management and energy generation. We feel comfortable with these investments that provide the right kind of cash flow profile and long-term profit,” Shahril said.
He believes the EPF is on track to achieve its 30% overseas investment target this year versus 29% in 2016 and may set a higher target in future.
However, Shahril cautioned that the EPF has to be careful in the timing of acquisitions due to the weaker ringgit. Overseas investments contributed 39% to its gross investment income in 2016.
The pension fund registered RM46.56 billion in gross investment income in 2016, 5.25% higher than the RM44.23 billion achieved in 2015. This is the highest gross investment income ever recorded since the establishment of the EPF in 1951.
Equities continued to be the main contributor with RM26.85 billion (57.68%), followed by fixed income RM16.23 million (34.87%), real estate and infrastructure RM2.49 billion (5.35%) and money market instruments RM982.28 million (2.11%).
For 2017, Shahril said the EPF continues to stick to its dividend target of consumer price index plus 2%, with market volatility remaining a concern as the real implications of Brexit and Trump’s administration unfold.