Malaysia's Employees Provident Fund (EPF), the country’s largest pension fund, suffered a 25% year-on-year decline in investment income in the first quarter of 2019, mainly due to a dismal local stock market.
However, the EPF says stocks offer higher long-term returns and will continue to have a “pivotal” role in its investments.
The fund’s overall investment income shrank to 9.66 billion ringgit (US$2.31 billion) in the first three months of the year from 12.88 billion ringgit in the first quarter of 2018. Income from stocks plunged 47.54% to 4.16 billion ringgit.
Almost 40% of the EPF’s assets is invested in stocks but there is no breakdown of the share in local versus foreign stocks.
The Malaysian stock market’s benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index lost almost 12% in the first quarter of 2019 compared to the same period of last year, and was down 2.78% from the end of 2018.
According to Mohamad Nasir Ad Latif, the pension fund’s deputy chief executive officer who oversees its investments, "the volatility of the equities asset class and its impact on earnings was cushioned by EPF’s other more stable asset groups, such as fixed income".
"Despite its volatile nature, this asset class has higher long-term expected returns. Equities will continue to play a pivotal role in enhancing returns and ensuring that we are able to declare dividends of at least 2% above inflation," he says in a statement on May 31.
A Kuala Lumpur-based fund manager at a local asset management firm says the sharp drop in the fund’s income isn’t surprising because the Malaysian stock market was one of Asia's worst performers in the first quarter, which he attributes partly to a lack of catalysts, such as major infrastructure projects.
"For the second quarter, we expect the fund's investment income from equities to be slightly more stable as the equities market has rebounded slightly recently. The main event that will move the needle is the deterioration of US-China trade talks," he tells Asia Asset Management, speaking on condition of anonymity.
The EPF’s investment income from Malaysian government securities, loans and bonds rose 2.1% year-on-year to 4.86 billion ringgit in the first quarter, and income from money market instruments jumped 60.41% to 469.86 million ringgit.
Its income from real estate and infrastructure recovered to 171.6 million ringgit from a 107.38 million ringgit loss in the first quarter of 2018.
The EPF had 859.99 billion ringgit of total investment assets as at March 31, up 3.15% from 833.76 billion ringgit at the end of 2018.