EPF mulls natural resources investments

This article first appeared in The Edge Financial Daily, on April 21, 2017.
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KUALA LUMPUR: The Employees Provident Fund (EPF) said it is eyeing natural resources investments, especially in the palm oil segment, as a form of long-term investment and hedge against inflation.

EPF chief executive officer Datuk Shahril Ridza Ridzuan said the fund is looking into having more direct exposure in some of the natural resources sectors.

“Today, we are already one of the larger investors in palm oil production. We are a significant shareholder of some of the very well-run palm oil companies.

“We are looking at the prospects of taking a more direct exposure, not just through the listed space, but perhaps directly owning or directly having control of some of these planted assets,” he told the media yesterday during a briefing on EPF’s annual report for 2016.

Shahril added that EPF is eyeing the plantation sector because the industry has managed to perform fairly well in terms of cash flow generation.

“Palm oil prices and palm oil production are quite synchronised, in terms of the prices moving up when production falls off. The net effect is that cash flow is going to be fairly stable.

“That’s why Malaysian palm oil companies — the ones who know the business very well — have been able to perform year in and year out despite any volatility in palm oil prices,” he said.

Asked if the fund is interested in other natural resources sectors such as mining or oil and gas, he said those industries are affected by high price volatility, which would introduce too much volatility to its portfolio, compared with palm oil, agriculture and sustainable forestry which are more stable.

Shahril also pointed out that there has been a trend among EPF’s global counterparts which have been investing in sustainable forestry and farmlands. He said EPF is now exploring these potential areas to see if they would suit the fund.

“We haven’t come to a conclusion on that yet, but certainly it’s a direction that most of the global pension funds are moving into,” he said.

He explained that the fund intends to build a portfolio of long-term assets which can provide steady cash flow and hedging against inflation.

“This underpins our belief that, in terms of asset mix, we need assets which provide steady income and inflation hedge against future costs.

For 2016, EPF saw a 5.3% increase in gross investment income to RM46.56 billion from RM44.23 billion a year earlier, while net investment income fell 6.8% to RM37.92 billion from RM40.7 billion.

Total investment assets rose 6.81% to RM731.11 billion from RM684.53 billion in 2015. The fund distributed total dividends of RM37.08 billion or 5.7% for the year, lower than the previous year’s 6.4%, amid the challenging investment environment last year.

Meanwhile, Shahril noted that Bursa Malaysia had performed well in the first quarter of 2017 and signs of economic recovery are slowly showing.

“Obviously, if the market does well for the rest of the year, then generally we’ll do well too. We are hopeful to see a turnaround in the market this year. Bursa Malaysia is already up by about 6% to 7% since the start of the year.

“This is giving us comfort that Bursa has reversed its course and hopefully we won’t have a fourth straight year of decline,” he said.

While the Malaysian and global economies seem to be stabilising, Shahril said the key focus remains on political risks such as the elections in several European countries and ongoing geopolitical tensions.

“The reality is that there’s always some element of geopolitical tension and political risk every year. We have a strategic asset allocation to ride out these volatilities to provide a relatively stable return,” he said.