Friday, September 5, 2008

EPF - 8th Largest Fund in the World

The Star, 4 Sept 08

According to the latest Watson Wyatt Global 300 survey, Malaysia’s national pension fund, the Employees Provident Fund (EPF), was ranked the eight largest fund of its kind in the world with US$94.66bil. The list included the country’s Pension Trust Fund (KWAP), at 22nd spot with US$14.55bil.

Watson Wyatt Asia-Pacific said that Asia-Pacific sovereign pension funds grew by about 20% to US$1.8 trillion in 2007. The strong equity returns last year contributed to the boost in asset growth. Among sovereign pension funds ex-Japan, funds that enjoyed growth of more than 30% included China’s National Social Security Fund (up to 38th from 69th), India’s Employees Provident Fund (from 88th to 68th), Singapore’s Central Provident Fund (from 32nd to 22nd) and Thailand’s Government Pension Fund (from 285th to 241st). Eh, where’s EPF?

Need not compare with countries far way, just glance over down the causeway. As at June 2007, a total of 1.9 million Singapore residents are in the labour force (source: Ministry of Manpower). On the other hand, as at end 2007, there are 5.4 million active EPF contributors. There are another 4 million members that had stopped contributing but have yet to withdraw the money.

Why oh why Singapore’s CPF with much smaller contributors could grow >30% and ranked ahead? Size does not matter? As a stakeholder and contributor, I am concerned. EPF is the custodian of our hard-earned compulsory savings; the policies it makes affects every working Malaysian.

Last year, there was concern when EPF paid RM9 billion to acquire 75% stake in RHB Banking Group. For the record, the debts of RHB have run in excess of RM 3.4 billion as of August 2006, and it is presumed that these debts will be taken over by EPF. (For the record II, the government has spent more than RM3.5 billion to bail out Bank Bumiputera on 3 separate occasions in 1984, 1990 and 1998).

So is EPF being selected to do national service?

EPF simply does not have the capacity and experience to manage a banking group with such heavy debts. Additionally, such large investment in a single stock clearly represents poor portfolio allocation and diversification. EPF has put at risk by 'betting' heavily on a single large investment. EPF had been ‘burned’ before but do they learn? EPF equity investments had suffered severe financial failure in the last few years, amongst them the staggering financial losses incurred in the investment into Malaya Borneo Building Society (MBBS).

Let us revisit the founding principles of EPF as a fund manager that commit to ensure good financial returns to its members within a 25 to 30 year period. During the formation year in the 50s, EPF was required to invest 70% of its assets in securities or government bonds. EPF needed to be conservative in its investments. From the 80s onwards, government bonds were reduced when privatisation was introduced. EPF started to transfer its investments to equity. However it remained as a passive investor. By 90s, EPF investments in government bonds had been reduced to about 30% whereas investments in equity had risen from 2% in 1990 to 19% in 2005.
The acquisition of a bank will not only change its charter and increase the risk, it may also cause poorer performance in its fund management objectives. By redirecting the attention to managing a bank, fund management may inadvertently become a secondary concern for the EPF management. It is important for EPF to retain its function as an investor and not become involved in the management of any company. EPF needs to retain its conservative nature because it is the only long term fund that is responsible for the welfare of its 9 million members.

EPF should emulate the investment principles of Warren Buffet. His primary approach is to invest in low-value securities that guarantee returns on investment and not to interfere in the management of any company. This practice would allow EPF to sell or exchange equity without any conflicts of interest.

Can we do something as a contributor? No action, just talk only?

Well, EPF saw the rebel inside Since November 1996, EPF allowed all eligible contributors to withdraw part of their savings to invest in unit trust. Contributors can invest 20% of their credit in excess of Basic Savings in Account 1.
Put money where the mouth is, so for the past 3 years, me, myself and I has been consistently withdrawing from EPF Account 1 (every 3 months) to invest into unit trust. This diversification creates a second pension fund! The long term objectives are to beat the EPF annual dividend and to wallop the ever increasing inflation rate! Join me or forever keep your peace!

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