SINCE 2013, equities investment has contributed to more than 55% of the Employees Provident Fund’s gross investment income — it allocates over 40% of its RM600 billion asset base to stock markets in Malaysia and overseas.

Just five years ago, its allocation and income from equities were about 27% to 28%. Meanwhile, 68% of its funds were invested in government debt papers and highly rated corporate loans that brought in slightly over two-thirds of the total gross investment income it used for dividend payment.

Today, more than half of the EPF’s assets are still in these highly rated debt papers, but returns have fallen below 40% due to yield compression. That the 6.75% dividend the retirement fund declared for 2014 was 3.59% above inflation — as well as more than double the 12-month fixed deposit rate of 3.21% and well above the 3.84% yield for five-year Malaysian Government Securities — is a testament to the reallocation in recent years.

The dividend for 2014 is also up for a sixth straight year compared with 4.5% in 2008 and 5.65% in 2009 when RM100.43 billion (27.05% of its asset base) was invested in equities versus RM269.63 billion (42.35%) last year. Income from equities has grown even stronger from RM4.9 billion (28.37% of total gross investment income) to RM22.91 billion (58.63%) last year.

Some observers are concerned that the EPF — tasked with growing retirement savings for Malaysia’s private wage earners — could be hit should the equities market take a sudden turn. But CEO Datuk Shahril Ridza Ridzuan says short-term price volatility does not matter to long-term value investors like the fund because the intrinsic value of the shares does not change with the price fluctuation.

“The job of the EPF is actually to find value, the right assets or stocks that are underpriced on a long-term view because we believe prices will eventually reflect their value. We’re not a short-term investor,” Shahril tells The Edge.

The EPF had some RM146.4 billion, or 23% of its RM636.53 billion investment asset base as at end-2014, in overseas assets but does not give a breakdown of how much of it is in foreign equities. Nonetheless, Shahril says the EPF’s top foreign stock holdings are blue chips.

Partly to allay concerns over the rise in its equities investment, the retirement fund makes a quarterly disclosure of its top 30 holdings of local equities on its website. These were estimated to be worth RM111.61 billion as at end-2014, being 41.4% of the RM269.63 billion the EPF had invested in local and foreign equities at the end of last year. The same top 30 holdings would be worth a little more at about RM114.3 billion using Feb 16, 2015, prices.

To illustrate the fund’s dominance in the local market, the estimated size of its top 30 equities holdings was 6.76% of Bursa Malaysia’s total market capitalisation of RM1.65 trillion as at Dec 31, 2014. Its entire fund size of RM636.5 billion is over 37% of Bursa’s total market capitalisation of RM1.71 trillion currently.

Given its size and the returns the EPF has generated from equities, its investment moves might be worth watching. The fund does not comment on individual equity investments.

Among other things, the fund is believed to have been relatively early in exiting its investment in Malaysian Airline System Bhd (MAS). As at end-March 2010, about the time MAS announced plans for a RM3.05 billion one-for-one rights issue, the EPF had a 13.66% stake in the airline and this was its 25th largest equity investment by percentage holdings. By September the same year, the stake had fallen to 13% and by December 2010, MAS was no longer among the fund’s top 30 equity holdings. On hindsight, that saved it from having to fork out more money when the national carrier announced its third rights issue in five years in November 2012 that sought to raise RM3 billion.

However, not all its holdings have performed well. Its investment in Shell Refining Co (Federation of Malaya) Bhd, for instance, has fallen in value. Closing at RM5.45 apiece on Feb 16, Shell’s share price has slipped from RM8.25 as at end-2012 and RM6.36 as at end-2013, but has recovered from the RM4.69 seen at end-2014. The EPF has been slowly paring its holdings in Shell, from 17.02% at end-2012 to 16.75% at end-2013 and 16.55% at end-2014. Latest filings show that the EPF had 16.49% equity interest as at Feb 11, 2015.

Fortunately, while Shell is shown as number four on the EPF’s top 30 equity holdings as at end-2014, the value of the stake is relatively small at only RM233 million.

In terms of the value of the shares on the fund’s top 30 holdings as at end-2014, its most valuable stake was its 13.32% in Malayan Banking Bhd, followed closely by its 14.37% in Tenaga Nasional Bhd and 14.7% in Public Bank Bhd. Each of these holdings are worth over RM10 billion.

A closer look at the disclosures found that during 2014, the fund’s largest equity holding increases were at Telekom Malaysia Bhd (up 3.11% to 14.73% as at end-2014), Tenaga (up 2.01% to 14.37%), IJM Corp Bhd (up 2.46% to 13.02%), Pos Malaysia Bhd (up 2.13% to 11.53%) and CapitaMalls Malaysia Trust (up 2.18% to 11.25%) (see table).

Apart from Pos Malaysia, whose shares fell 14.08% year on year in 2014, the other four stocks all ended the year between 8.84% and 29.04% higher, with Telekom being the best performer. Interestingly, the EPF chose to reduce some of its holdings in another telecoms counter, DiGi.Com Bhd, by 1.12% to 13.27% at end-2014, even as it raised its equity in Telekom.

Over the same 12-month period, among the EPF’s larger stake sales were IJM Plantations Bhd (down 3.52% to 12.04% as at end-2014), Petronas Gas Bhd (down 1.47% to 12%), MBM Resources Bhd (down 1.4% to 14.46%), CIMB Group Holdings Bhd (down 1.28% to 14.6%) and Petronas Chemicals Group Bhd (down 1.28% to 11%).

Four of the five stocks that the EPF sold saw their respective share prices fall between 5.46% and 25% while shares of IJM Plantations rose 3.92% for the year. But the year-on-year gains may not be reflective of the EPF’s gains or losses given that its entry and exit costs could differ from the stock’s general trend for 2014.

Time will tell if investors can profit from tracking the EPF’s moves, but it may be worth putting stock in the CEO’s perspective that price fluctuations do not change the real value of the shares.

This article first appeared in The Edge Malaysia Weekly, on February 23 - 29, 2015.

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