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Steady Strategy Of The Provident Fund Paid Off, Yielding High Dividends
Malaysia Perspective | 30 April 2012


We predicted in this publication in end-2011 that as long as the date for Malaysia’s general election remains uncertain, punters would continue to go after the related low-capitalisation stocks. Indeed, the feeding frenzy came to a head in March. Though a sense of wait-and-see mood permeates the market in anticipation of the announcement of the general election, investors continued their speculative trading. The KLSE Composite Index (KLCI) broke through the 1,600 level on 2 April, to establish a new record on the back of foreign investors snapping up blue chip counters (especially financial and plantation stocks).

However, local funds and investment institutions tend to liquidate their positions at a good price by the first half of the year in order to achieve their full year dividend target. One such institution is the Employees Provident Fund (EPF). With a trading capacity of 300 million shares at one go, EPF’s actions definitely affect the market.

For now, the market believes that the KLCI will vacillate about the 1,600 level with a risk of dipping below this level in the near future. Thus, EPF has been bulk-selling its blue chip holdings since March with as much enthusiasm as the low-capitalisation stock punters. In fact, it has been named the ‘culprit’ for holding back the KLCI’s up-swing in March. Figures showed that of the stocks sold off by EPF, the top three counters were Axiata Group [SYM:6888], Telekom Malaysia [SYM:4863] and YTL Corporation [SYM:4677] with trade volumes of 65,253,800, 61,592,000 and 52,995,100 shares respectively.

EPF pointed out that it needed to liquidate some positions in order to give out higher dividends. Truth be said, there is nothing about EPF or the companies whose stocks were sold that investors should be worried about. In fact, investors should be cautious of the possibility that the stock market may dip once the election date is announced – caused by the uncertainties in the political election.
EPF’s investments are not only substantial, but also cover a wide array of sectors and many of which are heavyweights of the KLCI – [SYM:6947], Sime Darby [SYM:4197], AmBank Holdings [SYM:1015], Malayan Banking [SYM:1155], CIMB Group [SYM:1023]. The fundamentals of these companies are strong enough to hold up to price fluctuations. In the ensuing feeding frenzy, piggy-back sellers, bargain hunters and position consolidators all stand to reap a handsome profit.
EPF’s assets currently stand at RM470 billion, with plans to raise that figure to RM600 billion over the next five years. Taking into account the limited size of the domestic market, it intends to bolster the proportion of its offshore investments to 30 percent by 2017 in order to achieve higher investment returns. However, this plan needs to be endorsed by the government as, constitutionally, EPF can invest only 23 percent of its funds in overseas markets currently. Of date, its offshore investments account for only 13 percent of its investment portfolio.

If its expansion plan is approved, the market will be paying close attention to its foreign investment transactions in the future, which will be of necessity concern to the mass of EPF members. Within its foreign portfolio, EPF’s penchant for stocks is evidenced by the 80 percent weightage. It is already directly invested in the stock markets of the United Kingdom, the United States, Japan, Australia, and the Chinese market through Hong Kong. EPF’s focus is on regions that offer steady investment returns, with a marked preference for Indonesia among its Southeast Asia target markets.
In contrast to its offshore investments, stocks account for only 35.6 percent of EPF’s domestic portfolio – its investment in stocks by end-2011 was RM167.2 billion. Over the same period, EPF’s investments in government bonds accounted for 27 percent at RM124.6 billion, loans and corporate bonds at RM160.7 billion, money market instruments at RM14.9 billion, and real estates at RM1.8 billion. Even though its investments in stocks can go as high as 42 percent of its domestic portfolio theoretically, EPF has decided to keep it at about 35 percent. One executive among its senior management pointed out that they are “already pushing the limits even at 35 percent.” In his view, Malaysian stocks are still “attractive” but are also exposed to volatility. For this reason, EPF will continue to manage and adjust its investments in its various products to manage risk.
As an institution entrusted with the pension fund of all Malaysians, EPF has adopted a conservative investment strategy of playing it safe – ensure that members’ interests are not compromised, and to maintain its commitment to giving out high dividends to its members. The EPF Board announced a 2011 dividend rate of 6 percent in February, the most generous over the past 10 years. EPF pointed out that the 2011 dividend payout, which amounted to RM24.4 billion, is 20 basis points higher than the 5.8 percent given out in 2010. It added that in spite of the challenging investment environment, its performance in 2011 was its most outstanding since 2001 – boasting an investment income of RM27.24 billion, which is 13.18 percent higher than in 2010. This stellar overall performance can be attributed to the steady returns from its fixed income investments and the handsome rewards from investments in domestic and foreign stocks. Notably, its income from stocks accounted for 48.81 percent of its overall gains, which translated to RM13.2 billion.
In order to counteract the inherent risk of uncertainty, EPF has been gradually shifting its investment focus towards high-return, lower risk investment projects. One of its most important investments in 2011 was the completion of its acquisition of PLUS Expressways. Also, it continues to expand its investments in real estates worldwide, specifically, EPF bought a 20 percent stake in a property development project near Singapore’s Tanjong Pagar mass rapid transit (MRT) station from GuocoLand for S$640 million – this development is slated to become another landmark in Singapore. In addition, EPF is expected to commence work on the Sungai Buloh township development project in June 2012 through its wholly-owned subsidiary Kwasa Land.

It seems that, in order to seek better returns on its investments, EPF will continue to participate actively in the market, and its every move will continue to be tracked closely.

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