EPF sheds light on over­seas in­vest­ments

The Star Malaysia - StarBiz - - Companies & Strategies -

Amid the scru­tiny over its in­vest­ments in the United States fol­low­ing Prime Min­is­ter Datuk Seri Na­jib Tun Razak’s an­nounce­ment that the Em­ploy­ees Prov­i­dent Fund (EPF) is go­ing to in­crease its in­vest­ments there, the fund sheds light on the is­sue. Be­low are the EPF’s replies to StarBizWeek’s queries.

Q: Why does the EPF need to in­vest over­seas? Are there not enough op­por­tu­ni­ties in Malaysia?

A: EPF’s as­sets have been grow­ing at about 10%-11% an­nu­ally, which is much faster than the do­mes­tic cap­i­tal mar­ket growth of 4%-5%. In or­der to achieve its in­vest­ment ob­jec­tives as well as to mit­i­gate con­cen­tra­tion risk in the do­mes­tic mar­ket, the fund has to di­ver­sify its in­vest­ments into for­eign mar­kets through var­i­ous as­set classes. The over­seas mar­ket, such as those in de­vel­oped coun­tries, pro­vides greater op­por­tu­ni­ties to in­vest in high qual­ity ma­tured in­vest­ments that also gives greater liq­uid­ity for the EPF to ef­fec­tively ex­e­cute its in­vest- ment strate­gies.

The do­mes­tic mar­ket still re­mains an in­te­gral part of the EPF in­vest­ment port­fo­lio and as at Q2’17, rep­re­sents 71% of to­tal as­sets. In ab­so­lute amounts, cur­rent do­mes­tic in­vest­ments have con­sis­tently reg­is­tered healthy growth of 7% to 8% an­nu­ally. The EPF is con­tin­u­ally look­ing for op­por­tu­ni­ties to in­vest in the right do­mes­tic as­sets and projects which would con­trib­ute to the over­all per­for­mance of its funds.

Q: What are the EPF cri­te­ria and process in mak­ing over­seas in­vest­ments?

A: The EPF prac­tices a dis­ci­plined and pru­dent in­vest­ment process in line with Sec­tion 26 of the EPF Act 1991. All in­vest­ment de­ci­sions re­quire the ap­proval by the In­vest­ment Panel, whose mem­bers are ap­pointed based on ex­ten­sive knowl­edge and pro­fes­sional ex­pe­ri­ence in fi­nan­cial mat­ters.

The mem­bers com­prise rep­re­sen­ta­tives from the EPF, Bank Ne­gara Malaysia, in­de­pen­dent in­dus­try ex­perts and the Gov­ern­ment. The over­all in­vest­ment gov­er­nance frame­work is fur­ther re­in­forced with the ex­is­tence of the In­vest­ment Panel Risk Com­mit­tee, Man­age­ment In­vest­ment Com­mit­tee and Man­age­ment Risk Com­mit­tee. The re­spec­tive com­mit­tees over­see and are re­spon­si­ble for the es­tab­lish­ment and ex­e­cu­tion of in­vest­ment poli­cies and strate­gies as well as mon­i­tor­ing of in­vest­ment de­ci­sions, ex­e­cu­tion and per­for­mance.

The EPF’s in­vest­ments are fur­ther scru­ti­nised by a quar­terly au­dit process done in­ter­nally, fol­lowed by the Au­di­tor-Gen­eral yearly. The EPF’s over­all as­set po­si­tion and per­for­mance are an­nounced quar­terly and ac­counts are re­ported in ac­cor­dance with global ac­count­ing stan­dards, FRS 139.

Fi­nally, the au­dited ac­counts are then tabled in Par­lia­ment for ap­proval and is sub­ject to scru­tiny by the Par­lia­men­tary Ac­count­ing Com­mit­tee (PAC). As a statu­tory body, the EPF is gov­erned by an in­clu­sive board, whose mem­bers in­clude rep­re­sen­ta­tives from em­ploy­ees, em­ploy­ers, in­dus­try pro- fes­sion­als and the Gov­ern­ment. Col­lec­tively, the board will en­sure that the EPF car­ries out its prime re­spon­si­bil­ity to safe­guard the in­ter­est of its 14 mil­lion mem­bers.

Q: Why would it be good for the EPF to ex­pand its in­vest­ments in the US con­sid­er­ing it al­ready has US$7.9bil there?

A: Cur­rently, the ma­jor­ity of the EPF’s in­vest­ments in the US mar­ket are in pub­lic listed eq­ui­ties and bonds. The US econ­omy has been on an up­trend in re­cent years, and ap­pears to be fully re­cov­ered from the Global Fi­nan­cial Cri­sis to the point that the au­thor­i­ties are with­draw­ing their un­con­ven­tional stim­u­lus mea­sures.

The labour mar­ket is near full em­ploy­ment, and con­sumer spend­ing and busi­ness in­vest­ment has been pick­ing up. In ad­di­tion to the cycli­cal up­turn, in­fra­struc­ture in­vest­ment op­por­tu­ni­ties in the US are ex­pected to in­crease, as this has been lag­ging for some decades.

Glob­ally, the EPF is look­ing to in­crease its in­vest­ments in real es­tate and in­fra­struc­ture. These as­set classes de­liver com­pet­i­tive re­turns with lower volatil­ity risks com­pared to eq­ui­ties in the medium to long-term hori­zon. This is in line with the EPF’s strat­egy to in­crease over­all ex­po­sure in this as­set class, which as at Q2 2017 only makes up 4% of the to­tal in­vest­ments as op­posed to its Strate­gic As­set Al­lo­ca­tion tar­get of 10%.

Q: How do over­seas in­vest­ments add value to EPF’s over­all in­vest­ments and re­turns? How would this ben­e­fit the mem­bers?

A: Aside from the ben­e­fits of di­ver­si­fi­ca­tion, over­seas in­vest­ments have en­hanced the EPF’s over­all in­vest­ment re­turn. For the past three years, the over­seas port­fo­lio has recorded dou­ble digit an­nu­alised re­turn of 11.1%, boost­ing the over­all re­turn by 1.39%. This trans­lates into higher in­vest­ment in­come that is dis­trib­uted as div­i­dend to the mem­bers on an an­nual ba­sis, in line with the EPF’s ob­jec­tives of not only pre­serv­ing but also en­hanc­ing mem­bers’ re­tire­ment sav­ings.

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