SOMESH JHA & SAMIE MODAK Covid sell-off eats into EPFO equity returns

Investments accrue -8.3% return in FY20, down from 14.7% the year before

The Employees’ Provident Fund Organisation’s (EPFO’S) investments in the equity markets yielded negative returns in 2019-20, official data showed. The investments accrued a return of 8.3 per cent for FY20, down from 14.7 per cent in FY19.

The unprecedented selloff in March, triggered by the Covid-19 pandemic, has eaten into equity returns of a majority of investors.

In March, the benchmark Sensex slumped 23 per cent, while for the entire year, the index dropped 24 per cent, its worst showing in a decade. When compared to the returns from Sensex, though, EPFO’S equity returns look favourable.

However, the EPFO’S skew towards CPSE and Bharat-22 exchange-traded funds (ETFS) remains an area of concern.

The EPFO made an investment of ~31,501 crore in ETFS in FY20, compared to ~27,974 crore in the previous fiscal year.

The CPSE ETF and Bharat-22 ETF yielded -24.36 per cent and 19.73 per cent, respectively, during the fiscal year. Around 9.5 per cent of EPFO’S equity investments, worth roughly ~10,000 crore, have gone into the two ETFS.

The returns on ETFS run by SBI Asset Management Company and UTI Asset Management Company were comparatively better at -6.2 per cent and -10.1 per cent, respectively. SBI ETF accounts for over 70 per cent of the EPFO’S total equity investments.

The issue of equity market returns will be taken up for discussion in the EPFO’S central board of trustees meeting to be chaired by Labour and Employment Minister Santosh Kumar Gangwar on September 9.

EPFO central provident fund commissioner Sunil Barthwal didn’t respond to a text message.

In its efforts to meet the disinvestment targets, the finance ministry has been floating tranches of CPSE and Bharat-22 ETFS. The CPSE ETF was first launched in March 2014 and the Bharat-22 ETF was introduced in 2017.

The Centre had mopped up ~30,869 crore by divesting through the ETF route in 2019-20. It had raised ~4,369 crore by way of Bharat-22 ETF and ~26,500 crore by selling units in two tranches of the CSPE ETF.

On all three occasions, the EPFO and other state-owned investment bodies were major subscribers.

Market players said owing to weak demand from mutual funds and other investors, the Centre has to nudge the EPFO and others to invest aggressively in this disinvestment vehicles.

While ETFS as an investment tool have proved to be cost-efficient and have also been able to generate superior returns vis-à-vis actively managed funds, the same is not true for the two government-owned ETFS.

On a year-to-date basis, both the ETFS are down over 20 per cent. In comparison, the Nifty has fallen only 7 per cent.

The longer-term returns for these two ETFS have also been below Nifty.

“Both the ETFS have been designed with government disinvestment as a goal. Normally, an ETF has a theme or formula to include quality stocks. That can’t be said of these two products,” said an investment expert.