Higher EPF dividend on the cards?

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In a few weeks, the Employees Provident Fund (EPF) will be declaring its returns to its members. And many are looking forward to something better than the 6% paid out in February last year.

In its unaudited results for the third quarter ended Sept 30, 2012, the provident fund saw its investment income rise 3.24% to RM7.02 billion from RM6.8 billion a year ago.

The EPF’s increased investment income should give it the clout for a higher payout.

The Malaysian Trades Union Congress (MTUC), for one, has been clamouring for the provident fund to declare a higher dividend. Last month, MTUC vice-president A Balasubramaniam had said that the majority of the 10 million private sector employees are looking forward to a better dividend from the fund as it was the only source of savings for them.

With the general election just round the corner, a higher EPF dividend may be forthcoming.

Legally, the EPF is obligated to provide dividends of only 2.5%, but the rates have been on the rise over the last decade, from 4.25% for 2002 to a 10-year record high of 6% for 2011. There was a dip to 4.5% in 2008 when the equity market was tough.

“Given that it declared a 6% dividend for 2011, I would think that EPF would declare 6% or higher for 2012,” Edmund Tham, Mercury Securities Sdn Bhd’s research head, tells The Edge.

Tham thinks that the EPF’s investment returns “should be quite okay” for 2012.

The provident fund recently registered an impressive 66% year-on-year income growth for its loans and bonds portfolio to RM3.06 billion for the quarter ended Sept 30, 2012, compared with RM1.85 billion a year ago. Its loans and bonds portfolio was the largest contributor, generating 43.6% of the quarter’s income, followed by equities and government securities at 33.6% and 29.4%, respectively.

In a statement announcing third quarter results in December 2012, EPF CEO Tan Sri Azlan Zainol said loans and bonds outperformed other portfolios in the same period and generated exceptional one-off returns due to “a number of tactical capital market transactions”.

Edward Iskandar Toh, chief investment officer of fixed income at Areca Capital Sdn Bhd, points out most bond funds should have met their target returns despite yield compression.

“With the global easy monetary policy and high liquidity environment, our domestic yield curve bullishly flattened, with 10-year sovereign yields dropping 22 basis points, while the shorter 5-year yields barely changed.

“Longer duration portfolios would have outperformed cash and short bond funds as the yield curve moved the most at the far end,” says Edward.

Last year was another vibrant one for the local bond market.

One of the EPF’s largest investment transactions in 2012 included its subscription to the RM30.6 billion global sukuk issued by toll expressway company PLUS Bhd, following the privatisation of PLUS Expressways Bhd.

“With Bank Negara Malaysia studying the system with regular sterilisation of excess funds and maintaining the benchmark overnight policy rate (OPR) at 3% throughout the year despite regional and global rate cuts, the bond market was allowed to grow,” Edward tells The Edge.

“Total Malaysian government securities (MGS) and government investment issue (GII) issued for 2012 amounted to RM96 billion, meeting market expectations of capping budget deficit financing.

“Private debt securities (PDS) had a bumper year of issuances with the total reaching RM116 billion from RM67 billion a year ago, although this was partly skewed by the refinancing of the PLUS Bhd bonds,” Edward says.

Dr Yeah Kim Leng, RAM Holdings Bhd’s group chief economist, has the same view.

“The local bond market grew at its fastest pace since 2007, expanding 20% last year to breach the RM1 trillion mark, up from RM846 billion in 2011. Both the private sector and government bond market segments experienced strong double-digit growth,” Yeah says.

“In particular, following three consecutive years of moderate 4% to 6% growth, the PDS and sukuk market picked up strongly to 13% last year to reach RM306 billion, up from RM270 billion in the previous year.

“Meanwhile, the public sector debt market grew by 24% to reach RM713 billion, up from RM576 billion in 2011.”

The record-setting bond market activities in 2012, Yeah says, are reflective of the strong pick-up in private investment activities as well as the deficit-financing requirements in the public sector.

The EPF’s investments in MGS saw a marginal decline of 0.6% year-on-year in its income of RM1.54 billion in 3Q2012, a trend that will continue as old and high-yielding government papers mature.

Compared to corporate bond issuance, MGS have been “quite volatile”, with the yield of 10-year MGS dropping as low as 3.3%, and currently at about 3.5%, says  Nor Hanifah Hashim, head of fixed income at Franklin Templeton GSC Asset Management Sdn Bhd. Overall, MGS still produced positive returns for 2012, delivering about 3% to 4%, but trailed behind corporate bonds, which produce about 4.5% to 5%,  Nor Hanifah says.

From its equities portfolio — the largest at 38.2% of its investment assets as at 3Q — the EPF raked in a return of RM2.34 billion in income in the third quarter, down 26% from RM3.18 billion previously, shaped by volatile equity markets.

As at Sept 30, 2012, the EPF’s investment assets stood at RM510.11 billion, a 12.9% increase from RM451.81 billion recorded a year ago.

One of the EPF’s major investment transactions in 2012 included the purchase of the 942.9ha Rubber Research Institute land in Sungai Buloh  for RM2.28 billion by its wholly owned unit Kwasa Land Sdn Bhd.  The site will be developed into a township called Kwasa Damansara, with an expected population of 150,000.

As part of its diversification strategy, the EPF also teamed up with property developer S P Setia Bhd and Sime Darby Bhd to acquire the Battersea Power Station redevelopment project in London worth £400 million (RM1.98 billion). The provident fund has a 20% stake in the project and expects a 10% return on investment.

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