KUALA LUMPUR (Sept 15): The Employees Provident Fund’s (EPF) second quarter investment income rose 36.36% to RM11.51 billion for the second quarter ended June 30, 2017 (2Q17), from RM8.44 billion a year earlier, on better performance in the equity market.
“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,” said EPF chief executive officer Datuk Shahril Ridza Ridzuan.
Quarterly net impairment recorded fell 62.98% to RM1.34 billion 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% of the income, Equities 53.72%, Real Estate and Infrastructure 6.23%, and Money Market Instruments 2.64%, the retirement fund said in a statement.
“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 2Q17. We, therefore, expect a moderation in income growth for upcoming quarters,” said Shahril.
Equities, which made up 41.96% of EPF’s total investment assets as at 2Q17, was 61.45% higher at RM6.18 billion, from RM3.83 billion a year ago.
A total of RM820.71 million out of the total investment income 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, while Simpanan Konvensional’s income is generated by 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,” said Shahril.
The value of EPF investment assets as at June 30 saw a 3.92% increase to RM759.78 billion, from RM731.11 billion as at Dec 31, 2016.
EPF’s overseas investments, which accounted for 29% of its total investment assets, contributed 32.5% 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% of total investment portfolio as at 2Q17. The increase in global asset values mitigated the negative effect from the strengthening of the ringgit, providing opportunities for us to realise profit,” said Shahril.
Due to regulatory constraints, the EPF’s exposure to overseas investment stood lower than the strategic asset allocation of 32%, specifically in Real Estate and Infrastructure, he said.
“These gaps could potentially result in lower-than-expected return for the EPF in the years to come,” he added. As at June 30, 2017, the EPF’s exposure to Real Estate and Infrastructure asset class remains at about 4% against its strategic asset allocation of 10%.
In addition to being an inflation hedge, EPF said Real Estate and Infrastructure has also delivered competitive return with lower risk compared to Equities in the medium- to long-term horizon.
Despite recording significant annualised return on investment of 8.8% over the past three years, the contribution of income from Real Estate and Infrastructure remains small as the exposure to the asset class is significantly lower than the targeted asset allocation, it added.
Commenting on the outlook for the second half of the year, 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,” he added.