This article first appeared in The Edge Malaysia Weekly on December 12, 2022 - December 18, 2022

IN about two months, the country’s 15.6 million Employees Provident Fund (EPF) members — 8.26 million of whom are still actively contributing to the fund — should receive at least a 5% dividend for 2022, thanks to an improved performance in the third quarter.

A 6% dividend for 2022 is tough but not impossible, if the EPF either books a record-breaking fourth quarter or chooses to take profit on more investments to shore up its realised income in the last three months of 2022.

While the odds of dividends being above 5% had improved from end-June, it is highly likely that 2022 dividends would come in below the 6.1% announced for conventional savings and 5.65% announced for shariah savings in 2021. That is going by challenging market conditions, the EPF’s performance in the first nine months of the year as well as its growth and returns over the past decade.

Even a 5.5% dividend would require a significantly higher haul from equities for 4Q2022 income to significantly beat its first-quarter performance and five-year average, our back-of-the-envelope calculations show. Though lower year on year, a 5.5% dividend for conventional savings would still deserve praise in the current environment — being above 5.2% in 2020 and 5.45% in 2019. Dividend for shariah savings was 4.9% in 2020 and 5% in 2019. EPF dividend was last below 5% in 2008, on the back of the global financial crisis (see Chart 1).

For 2022 dividend to come in above 5%, the EPF’s fourth-quarter performance would need to match that of 3Q. That is possible in the absence of sudden shocks that results in the EPF repeating its underperformance in the second quarter, during which not only was there a rout in emerging markets on the back of quantitative tightening (QT) by the US Federal Reserve but also liquidity management pressures from the last Covid-19 pandemic-related EPF special withdrawals that totalled RM44.6 billion in 1H2022 (for which disbursements began on April 18).

While those special withdrawals were only RM1.37 billion more than the RM43.23 billion (gross) contributions received in the first half of this year, net withdrawals in 1H2022 are likely to be larger, as money would also have been disbursed through other types of EPF withdrawals.

As such, there is still a chance for the EPF to see a repeat of the once-in-20-years negative net contribution of 2021 (gross contribution less than gross withdrawals) and see more money going out than coming in, for the full year of 2022 — though the size of net withdrawals for 2022 should be only a fraction of the RM58.2 billion recorded in 2021.

In its statement dated Dec 5, the EPF made no mention of any type of withdrawals in the third quarter but did say (gross) contributions were RM63.61 billion as at September 2022, which implies RM20.38 billion (gross) inflows in 3Q. In a normal year pre-Covid, the EPF generally saw about RM2 billion more coming in (gross contributions) than what went out (gross withdrawals) in a month. This information has no longer been disclosed on a monthly basis by Bank Negara Malaysia since mid-2021, which was around the time data would show the EPF seeing more money being taken out than money going in. The Edge reported the likelihood of the EPF seeing a rare negative net contribution in 2021, several months before it was confirmed by the EPF on March 2 this year.

EPF CEO Datuk Seri Amir Hamzah Azizan attributed the improvement in the EPF’s gross investment income from RM11.14 billion in 2Q2022 to RM12.32 billion in 3Q2022 to “stabilised market conditions for both equity and fixed income investments”.

“There are ongoing concerns that high interest rates will lead to a global recession, exacerbated by continuing geopolitical risks and interest rate hikes by the US Federal Reserve. However, notwithstanding these challenges, the EPF’s disciplined investment approach, guided by its robust Strategic Asset Allocation (SAA) and active portfolio management, helped to cushion the impact and allowed the EPF to deliver a steady performance driven by the strong rebound in the domestic market,” he said in the Dec 5 statement.

Net investment income improved to RM12.28 billion in 3Q2022 from RM8.98 billion in 2Q2022 even as gross investment income improved, with write-down of listed equities at only RM36 million in 3Q2022 compared with RM2.15 billion in 2Q2022. In 1Q2022, write-down was RM1.09 billion while net investment income stood at RM14.76 billion.

At RM12.32 billion, gross investment income for 3Q2022 is still about 12% below the five-year quarterly average (see Chart 2).

It is worth noting that quarterly gross investment income for 2Q2022 and 3Q2022 have slipped below the five-year average of about RM14 billion as the EPF netted a smaller income haul from equities.

Contribution from equities to gross investment income may have increased to RM5.49 billion in 3Q2022 from RM4.88 billion in 2Q2022, but it had halved from RM10.46 billion in 1Q2022 and is RM2.5 billion smaller than the quarterly average of RM8 billion for the asset class in the past three years (see Chart 3).

Income contributed by overseas assets has also declined year to date, falling to RM5.28 billion, or 43% of gross investment income, in 3Q2022, from RM5.51 billion, or 49% of gross investment income, in 2Q2022, and RM8.23 billion, or 52% of gross investment income, in 1Q2022.

When the EPF’s quarterly gross investment income hit a record high of RM19.26 billion in 1Q2021, for example, some 74%, or RM14.28 billion, was from equities even though the asset class made up only 44% of total assets as at end-March 2021. A sizeable portion is likely to have come from foreign equities, given that overseas assets generated RM11.15 billion, or 58% of gross investment income, in 1Q2021.

With the RM39.3 billion gross investment income for the first nine months of 2022 being below that of the corresponding period in 2018, 2020 and 2021 (see Chart 4), the pressure for catch-up in 4Q2022 is greater to deliver on expectations of at least 5% dividend from the EPF — even though it only needs to deliver 2.5% dividend per year on savings and beat inflation by 2% on a rolling three-year basis, according to the EPF Act 1991.

Ironically, some of that pressure may ease if indeed the amount that the EPF needs to pay every 1% of dividend did not increase from the RM9.38 billion in 2021 and falls closer to the RM9.2 billion required in 2020.

There is a chance that the amount the EPF needs to pay every 1% of dividend will be smaller year on year for the first time in at least 20 years, with its assets under management slipping below the RM1 trillion at which it had ended 2020 and 2021. Assets under management were RM961.01 billion as at end-September 2022, slightly above RM957.25 billion as at end-June 2022 — both periods had 36% in foreign assets. In its earnings releases, the EPF did not specifically say whether a weaker ringgit has had a significant impact on its asset base and earnings.

It remains to be seen whether the EPF’s fund size can end the year above RM1 trillion, but it is only a matter of time before it regains ground, if its track record is anything to go by. If nothing else, there should be no more Covid-19-related withdrawals: The EPF saw RM14.55 billion withdrawn in 2020, RM86.2 billion in 2021 and RM44.6 billion in 1H2022 — excluding money that did not go into the retirement kitty, as statutory contribution rates were cut during the pandemic.

As usual, the statement releasing 3Q performance made no direct mention of dividends for 2022, but Amir did say Malaysia’s economic recovery not only provided fertile ground for investments but also made it “an opportune time for institutional investors like the EPF to reconfigure its business strategy to position for short-term endurance, along with long-term resilience and growth”.

He adds: “From an investment standpoint, the EPF remains resilient and focused on what we can control, namely asset allocation, costs and an overarching strategy that emphasises long-term sustainability of our investments and returns, in line with our SAA.

“Though the uncertainty revolving around international markets continues to be a strong concern, we are taking a ‘cautiously optimistic’ stance, as we are not ignoring indicators that may suggest improvement in the macroeconomic outlook such as the possible peak in global inflation and the Fed’s hints that interest rate increases will begin to slow in the coming months.”

Seizing the right investment opportunities should help the EPF’s performance rebound stronger, should 2022 turn out to be a blip.

Going by its release schedule of the past 18 years, the EPF could announce 2022 dividends as early as end-January or as late as mid-March but is more likely to do so in the second or third week of February as in pre-Covid years.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.