In our previous coverage of the upcoming dividend, we explored the challenges that the EPF is currently facing. These included the ongoing COVID-19 pandemic, its growing portfolio size and an uncertain economic outlook in the short- and medium- term.
So, how is the EPF dealing with these challenges, and what kind of dividends can we expect this year? We spoke to a few experts to find out.
Dr. Mohd Afzanizam Abdul Rashid, Bank Islam chief economist
Imran Yassin Md. Yusof, MIDF Head of Research
Dr. Ahmed Razman Abdul Latiff, Putra Business School Associate Professor
What can we expect for the upcoming dividend?
Bank Islam’s chief economist Dr. Mohd Afzanizam Abdul Rashid said that it is “quite likely” that the EPF dividend in 2020 could be lower than in 2019, which saw a 5.45% dividend for Conventional Savings and 5% for Syariah Savings. This is in light of volatility in the financial markets and a lower interest rate environment.
However, some experts note that the EPF’s performance has been commendable, despite challenges.
MIDF Amanah Investment Bank Bhd’s Head of Research, Imran Yassin Md. Yusof, said that the EPF dividend might match the Amanah Saham Bumiputera’s (ASB) 4.25% dividend that was recently declared.
“This is due to its commendable performance thus far. Based on EPF’s 9M2020 performance, we note that its net investment income is only 0.5% lower than the full year 2019 net investment income. It is quite impossible for EPF to not register any income in 4Q2020. Hence, the performance could potentially be better, barring any impairments,” he said.
Putra Business School Associate Professor Dr. Ahmed Razman Abdul Latiff agrees, saying, “Even though the EPF dividend has never exceeded the ASB dividend in any particular year, this time I think maybe for the first time the EPF dividend will be higher.”
Overseas diversification pays off
According to Dr. Afzanizam, the EPF’s diversification strategy has paid off, as its overseas investments have resulted in a meaningful contribution of income.
These investments have consistently produced higher returns than other asset classes, said Dr. Ahmed Razman. He notes that 32% of the EPF’s overseas investments contributed 45% of the total gross investment income in the third quarter of 2020. That’s up from 30% of its assets that contributed 39% of its gross investment income in the second quarter.
Will i-Sinar and i-Lestari withdrawals affect returns?
To help Malaysians cope with the financial burden of the recession, the EPF has allowed eligible members to withdraw part of their savings through the i-Lestari and i-Sinar programmes.
Dr. Ahmed Razman shared that more than RM34 billion has been withdrawn through these relief programmes. This is “equivalent to 3.6% of EPF assets, not including the potential additional withdrawal from Category 2 i-Sinar, which is still pending,” he said.
But he points out that this can potentially affect the dividend rate, as the EPF had to increase its holding in money market instruments to prepare for withdrawals. These investments are more liquid, but will usually provide lower returns than other asset classes.
“Fortunately, other asset classes such as overseas investment, fixed income and real estate investments have been performing well recently, which allows EPF to continue giving a competitive dividend rate,” he added.
Likewise, Imran Yassin said that MIDF does not believe that these relief measures will impact dividends significantly given the EPF’s performance. He also pointed out that the EPF has always focused on cash flow management.
In addition, the EPF has a high inflow of funds. Prior to the COVID-19 pandemic, it was expected to receive RM1.7 billion in net inflows per month. “Although with the impact of COVID-19, we expect a reduction to this amount, we opine that [the net inflows and the EPF’s focus on cash flow management] will be able cover the outflow without significantly affecting dividends,” he said.
Staying resilient through the SAA
While the pandemic continues to pose economic challenges, the EPF’s Strategic Asset Allocation (SAA) – the framework that helps it optimise for long-term returns – can help it stay resilient. The SAA allocates the EPF’s portfolio to the following assets:
| Percentage of portfolio | Asset class |
|---|---|
| 49% | Fixed income instruments |
| 39% | Equities |
| 5% | Real estate and infrastructure |
| 7% | Money market instruments |
Source: KWSP
Dr. Mohd Afzanizam shared that the SAA would allow the EPF to plan its investment strategy in a more structured way. “This will help them to ensure their investment returns would be optimised against their risk tolerance more effectively,” he said.
The MIDF also believes that the SAA is important in ensuring the sustainability of investment income, and therefore the stability of dividends. “It can moderate any excessive reactions to market movements,” said Imran Yassin. “While the pandemic has led to higher uncertainty, we believe that diversification in an investor’s portfolio is important to ride out the volatility and uncertainty.”
ESG considerations will help in the long run
The EPF is also planning to make all its investments in line with environmental, social and governance (ESG) practices by 2030. It believes that this will make it more resilient against future market disruption, as ESG companies are more likely to deliver sustainable returns. The EPF could be right: a recent study suggests that higher ESG was associated with higher profitability and lower volatility.
“We believe that ESG is the vaccine for any crises,” said former Chief EPF Officer Alizakri Alias in an interview with Bloomberg. He noted that during the height of the pandemic last year, ESG-compliant investments declined at a much lower rate than other assets.
Safety over short-term returns
In short, the EPF may deliver decent returns, although economic challenges may mean lower returns than that of 2019. But it has never been the EPF’s aim to generate high returns in the short-term. Instead of making “rash decisions based on short-term market reactions”, the EPF said that it is guided by a long-term strategy. This helps it ride out volatilities and preserve the members’ savings through sustainable returns.
And it has a good track record for doing so. Historically, the EPF has provided decent returns over the past 70 years – including during multiple financial crises. If you’ve been regularly contributing to your EPF savings, you would have reaped these returns on your retirement fund.
Besides that, the EPF also guarantees a minimum dividend rate of 2.50% for conventional savings, although rates have not been that low since the EPF’s inception in the 1950s. As a regular investor looking to safeguard and grow your retirement savings, you’d be hard-pressed to find another low-risk investment that matches the EPF.
