This article first appeared in The Edge Malaysia Weekly on February 3, 2020 - February 9, 2020
THE Employees Provident Fund, which is set to declare its annual dividend for 2019 anytime now, can beat last year’s 6.15% dividend if its investment performance in the fourth quarter is its highest in at least 20 quarters. The feat is also necessary for the EPF to pay 6% dividend to its 14.5 million plus members this year, The Edge estimates show.
Put another way, the chances of the EPF’s beating last year’s 6.15% payout for Simpanan Konvensional (SK) and 5.9% dividend for Simpanan Shariah (SS) are slim.
The challenge has a lot to do with the EPF’s steadily growing fund size, which is set to reach RM1 trillion by 2021. Accumulated contributions from members stood at RM864.7 billion as at end-October 2019 versus RM344.6 billion at end-2008, data from Bank Negara Malaysia shows.
The amount to pay 1% of EPF dividend had more than doubled from RM3.73 billion in 2010 to RM7.7 billion in 2018. In 2008, the EPF needed only RM3.18 billion to declare 1% of dividend.
The amount to pay 1% dividend probably rose to RM8.4 billion (SK + SS) for 2019, going by the average annual increases in the past decade.
To illustrate the significance of this number, the RM47.3 billion that the EPF needed to declare 6.15% conventional dividend and 5.9% dividend for its Shariah-compliant pool for 2018 would have been enough to pay 12.7% dividend in 2010 and 14.9% dividend in 2008.
The EPF’s highest-ever annual dividend was 8.5% from 1983 to 1987, during which interest rates were much higher. Three-month fixed deposit rates at commercial banks as well as 20-year government securities stood at 8.5% as at end-1983, with the base lending rate at 10.75% back then, central bank data shows. Yield for 10-year Malaysian Government Securities (MGS) was 3.885% at the time of writing.
The EPF’s RM47.3 billion dividend payout for 2018 — achieved on the back of RM50.88 billion in gross investment income from RM833.76 billion total investment assets —would give only 5.6% dividend for 2019.
To pay 6% dividend for 2019, the EPF would probably need just over RM50 billion for distribution, back-of-the-envelope calculations show. The hurdle to match last year’s 6.15% dividend rate this year is about RM52 billion.
The EPF’s highest ever declared dividend was RM48.13 billion from RM53.14 billion gross investment income in 2017, which gave 6.9% and 6.4% dividend for SK and SS, respectively, two years ago — but would probably be enough for only 5.7% in 2019 according to The Edge estimates.
Did equities do well enough?
In the first nine months of 2019, the EPF’s gross investment income totalled RM35.48 billion — RM9.66 billion (1Q2019), RM12.32 billion (2Q2019) and RM13.5 billion (3Q2019).
While quarterly numbers were lower year-on-year in the first three quarters of 2019, the cumulative sum should still be enough to secure 4.2% dividend, even if the provident fund made enough to cover only the costs in the fourth quarter.
The latter means the EPF, whose primary mandate is to generate consistent and sustainable returns to preserve its members’ retirement kitty, has more than fulfilled its commitment of delivering at least 2.5% nominal dividend and beat inflation by at least 2% on a rolling three-year basis.
Based on the EPF’s RM50.86 billion investment income for 2018, fourth-quarter numbers that year should be just under RM11 billion.
It remains to be seen whether the EPF’s performance in 4Q2019 would be better than in 2018.
Local bellwether, the FBM KLCI, ended 6% lower in 2019 after losing 5.9% in 2018 while the broader FBM Emas slipped 1.8% last year after skidding 10.9% in 2018. In the fourth quarter, the FBM KLCI was 0.31% higher quarter-on-quarter while the FBM Emas rose 1.1% over the same period.
Global equity indices, however, show better conditions for equities last year versus 2018. The MSCI World Index rose 25.2% in 2019 (-10.4% in 2018), the MSCI World High Dividend Yield Index gained 19.4% in 2019 (-10.3% in 2018), the MSCI Emerging Markets Index gained 15.4% in 2019 (-16.6% in 2018) while the MSCI ACWI — which includes developed and emerging market countries such as China, India, South Korea, Brazil and Russia — gained 22.7% in 2019 (-9.6% in 2018), according to Bloomberg data.
As at end-September 2019, equities made up 38% of asset allocation but are likely to have contributed just over 50%, or about RM18 billion, of income for the EPF in the first nine months of the year — about 70% of which probably came from foreign equities, assuming a 70:30 split in the first quarter. Without income boost from foreign equities, the EPF’s annual dividend would be about 1.5% less, going by just the performance in the first nine months of the year.
Between April and September 2019, income from foreign equities was RM9.7 billion, or 70.4% of total equity income, with about RM4.08 billion coming from domestic equities, according to data from the EPF. It did not provide a split between foreign and local equities income in the first quarter.
Fixed income investments, which constitute 51% of asset allocation, probably contributed about 43% of income over the same nine-month period. Money market instruments, which form 6% of the EPF’s portfolio, is likely to have contributed 3.8% of income for the nine months. The remaining 2.5% or so in income comes from real estate and infrastructure, which make up 5% of its portfolio. These are based on our estimates, given limited disclosures in the EPF’s third quarter release relative to its 1Q and 2Q numbers.
Good year for bonds
Global bond markets had a relatively good year in 2019.
The FTSE Russell All-World, Developed and Emerging Index each had 20% to 28% total returns compared with overall 9% to 13% y-o-y declines in 2018, information on the FTSE Russell website shows.
According to Bloomberg data, the Bloomberg Barclays Global Aggregate Bond Index, which measures debt from 24 local currency markets, for instance, gained 6.8% in 2019 (-1.2% in 2018 and +7.4% in 2017). The Bloomberg Barclays US Treasury Total Return Index rose 6.86% in 2019 (+0.86% in 2018 and +2.31% in 2017). The JP Morgan Government Bond Index (Emerging Markets) rose 40.7% in 2019 (-22.9% in 2018 and +74% in 2017).
That said, expectations of the EPF’s beating its dividend payout last year are not high.
In December, Permodalan Nasional Bhd (PNB) declared the lowest dividend for its flagship Amanah Saham Bumiputera (ASB) trust units since 1990 of five sen per unit plus 0.5 sen bonus for 2019 — down from 6.5 sen dividend plus 0.5 sen bonus declared for 2018.
PNB chairman Tan Sri Zeti Akhtar Aziz, who noted that the fund’s profits came on the back of a “well-planned” increase in foreign investments, attributed the y-o-y decline to “uncertainties in the financial market, the prolonged US-China trade war and slowing global economy”. A total of RM9 billion in dividends will reportedly be paid to 10 million depositors holding more than 1.6 billion ASB units, bringing total distribution and bonus to RM152 billion since inception in 1990.
PNB’s total fund size is about a third of the EPF’s pool, which receives statutory monthly deductions from private-sector wage earners and their employers. Net contributions to the EPF ranged between RM1.6 billion and RM2.84 billion a month between January 2018 and October 2019. To recap, the EPF would need more than RM46 billion to pay 5.5% dividend for this year.
Between 2008 and 2018, dividends declared by the EPF had been trending upwards except for 2008, 2015, 2016 and 2018, the years when the local stock market fell.
In 2008, during which the FBM KLCI fell a whopping 38.9%, the EPF dividend saw the largest y-o-y decline of 130 basis points from 5.8% in 2007 to 4.5% in 2008. Nonetheless, one of the largest y-o-y gains in the provident fund’s dividend rate — a 115bps jump — was recorded in 2009 (a 5.65% dividend rate) while 2017 saw a 120bps jump to 6.9% from 5.7% in 2016.
It is worth noting that the EPF beat expectations on dividends last year, thanks in part to unfounded rumours that dividends would fall close to 4%. Malaysia will soon find out whether the fund surprises on the upside again.
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