Overseas investments continue to enhance overall return

KUALA LUMPUR, 15 September 2017: The Employees Provident Fund (EPF) today reported an increase in quarterly investment income to RM11.51 billion for the second quarter ended 30 June 2017 (Q2 2017), a year-on-year increase of 36.36 per cent from RM8.44 billion during the same period last year.

Commenting on EPF’s Q2 2017 Investment performance, Chief Executive Officer Datuk Shahril Ridza Ridzuan said, “Market conditions have improved from a year ago and all asset classes in our portfolio have recorded healthy year-on-year growth, with Equities continuing as the main profit driver for the quarter under review.”

In accordance with Malaysian Financial Reporting Standards (MFRS 139), the EPF recorded lower net impairment of RM1.34 billion this quarter, an improvement of RM2.28 billion or 62.98 per cent from RM3.63 billion, in line with the better performance of the equities market.

From the RM11.51 billion investment income recorded, Fixed Income instruments contributed 37.29 per cent, Equities contributed 53.72 per cent, while Real Estate & Infrastructure and Money Market Instruments contributed 6.23 per cent and 2.64 per cent respectively.

“While we recorded significant improvements in year-on-year performance in both the preceding and current quarters, there is a slowdown in momentum which saw corporate profits normalising in Q2 2017. We, therefore, expect a moderation in income growth for upcoming quarters,” added Datuk Shahril.

Equities, which made up 41.96 per cent of EPF’s total investment assets as at Q2 2017, contributed RM6.18 billion of income, 61.45 per cent higher than RM3.83 billion recorded in the corresponding quarter in 2016.

The EPF also benefited from diversification into other asset classes that provide stable streams of income, including Fixed Income instruments and Real Estate & Infrastructure investments through its subsidiaries.

A total of RM820.71 million out of the total investment income of RM11.51 billion was generated for Simpanan Shariah, while RM10.69 billion was generated for Simpanan Konvensional. Simpanan Shariah derives its income solely from its portion of the Shariah assets. Income for Simpanan Konvensional is generated by its share of both Shariah and non-Shariah assets.

“In Equities, the banking sector has been outperforming since the beginning of the year while the bulk of our impairments recorded for the quarter came from the telecommunications and oil and gas sectors. If this continues, we expect that Simpanan Konvensional will benefit from the former and outperform in the short term.”

The value of EPF investment assets reached RM759.78 billion, a 3.92 per cent or RM28.67 billion increase from RM731.11 billion, as at 31 December 2016. Out of the total investment assets, RM362.50 billion, or 47.71 per cent, were in Shariah-compliant investments and the balance were invested in non-Shariah assets.

As at 30 June 2017, the EPF’s overseas investments, which accounted for 29 per cent of its total investment asset, contributed 32.50 per cent to the total investment income during the period under review.

“Our foreign investments have proved to be a significant revenue driver in recent years, despite making up less than 30 per cent of total investment portfolio as at Q2 2017. The increase in global asset values mitigated the negative effect from the strengthening of the ringgit, providing opportunities for us to realise profit,” Datuk Shahril commented.

“As at end 2016, the EPF delivered a three-year rolling return of 3.83 per cent above inflation, a significant premium over its two (2) per cent above inflation strategic target, thus ensuring that members’ savings are not only preserved, but also enhanced. The outperformance was mainly driven by its overseas portfolios, which recorded a three-year annualised return on investment (ROI) of 11.10 per cent as at June 2017, enhancing the value of EPF’s return. 

“While the domestic market remains integral to EPF’s investments, we need to diversify our portfolio into broader markets with better investment opportunities and greater liquidity to enable the EPF to execute our strategies in line with our mandate. Doing so would equip the EPF with the agility and resilience to anticipate and rise above future market challenges,” said Datuk Shahril.

Due to regulatory constraints, the EPF’s exposure to overseas investment stood lower than the strategic asset allocation of 32 per cent, specifically in Real Estate & Infrastructure. These gaps could potentially result in lower than expected return for the EPF in the years to come. As at 30 June 2017, the EPF’s exposure to Real Estate & Infrastructure asset class remains at about four (4) per cent against its strategic asset allocation of 10 per cent.

In addition to being an inflation hedge, Real Estate & Infrastructure has also delivered competitive return with lower risk compared to Equities in the medium to long-term horizon. Despite recording significant annualised ROI of 8.80 per cent over the past three years, the contribution of income from Real Estate & Infrastructure remains small as the exposure to the asset class is significantly lower than the targeted asset allocation.

Commenting on the outlook for the second half of the year, Datuk Shahril said with the ringgit showing signs of improved stability, global investments would remain one of EPF’s significant revenue drivers going forward.  Domestically, while GDP growth continues to improve, the EPF will be vigilant of other external factors which may create uncertainty, including the possibility of global rate hikes, and rising geopolitical tensions.

Q2 2017 Statistics (Investment)-Income & Asset