Dividend may be lower this year: EPF

KUALA LUMPUR (June 18, 2013): The Employees Provident Fund (EPF) has warned of the possibility of a lower dividend – the inflation rate plus 2% – this year, as it grapples with lower returns from government bonds which made up 55.2% of total investments in 2012.

Its CEO, Datuk Shahril Ridza Ridzuan, is, however, confident that it will be able to meet its inflation plus 2% dividend rate target "as long as inflation is under control".

The EPF announced a record dividend of 6.15%, or inflation plus 3.5%, for 2012, earlier this year. Returns from fixed income instruments exceeded 5.5% last year.

"We constantly need to reinvest money (in government bonds) that mature, and money that was previously invested (for the last 10 years) at higher rates of return (is being) reinvested for the next five to 10 years at much lower rates," Shahril told reporters after hosting newly-appointed Deputy Finance Minister Datuk Ahmad Maslan at its headquarters here yesterday.

"As an example, the Malaysian Government Securities (MGS) today for a 10-year paper, we are receiving (returns of) less than 4%, so you can imagine (what will happen) if we have too much of a concentration in fixed income ( investments)," he added.

The rest of EPF's funds are invested in equities (38.8%), money market instruments (3.6%) and real estate and infrastructure (2.4%).

He said the pension fund is already seeing some of the impact of the lower returns in its numbers.

"As we continue to reinvest at lower rates of return for the same amount of risk that we are taking, we will see a lower rate of returns. So that's the biggest issue that we are grappling (with today)," Shahril said.

He said the EPF should still be able to reach its target of inflation plus 2% of dividend rate to contributors, as it expects inflation to remain well under control at 3% or below.

Shahril said the fund has to maintain a very high percentage of its assets in fixed income, given its duty to protect contributors' capital.

"That (capital protection) necessitates a higher percentage of our assets to be in fixed income which are less volatile in terms of price and it provides us with a stable and predictable return over the long term."

Meanwhile, Shahril said the EPF is close to another acquisition in the real estate asset class.

"We are looking at Europe right now. We may be looking at executing one transaction there in the near future, but it depends on the due diligence," he said.

Shahril also said the EPF expects to slowly increase its investments in non-ringgit denominated assets as it looks abroad in more liquid markets, taking care not to "overcrowd" the local market.

Currently about 18% of its assets are non-ringgit denominated.

Meanwhile, Shahril pointed that of the under 200 companies it invests in in the local stock exchange, 40 are mid-cap companies. These are companies that meet key criteria such as liquidity, profitability, cashflow and dividend-payouts.

"The number (of mid-caps EPF invests in) grows every year, but we don't invest in all mid-caps because not all mid-caps will meet our criteria," he said.