Malaysia’s $181 billion Employees Provident Fund (EPF) reported a 36% increase in investment income during the second quarter ended June 30 to RM11.51 billion ($2.8 billion) from RM8.44 billion during the second quarter of 2016.
“Market conditions have improved from a year ago, and all asset classes in our portfolio have recorded healthy year-on-year growth, with equities continuing as the main profit driver,” said EPF CEO Datuk Shahril Ridza Ridzuan.
The total value of EPF investment assets reached RM759.78 billion, a 3.9% increase from RM731.11 billion at the end of 2016. Out of the total investment assets, 47.71% were in Sharia-compliant investments, while the remainder was invested in non-Sharia assets.
Equities, which made up nearly 42% of EPF’s total investment assets in Q2, contributed RM6.18 billion of income, a 62% increase from the RM3.83 billion recorded in the same period last year. Of the RM11.51 billion investment income recorded, equities contributed 53.72%, fixed-income instruments contributed 37.29%, real estate and infrastructure contributed 6.23%, and money market instruments contributed 2.64%.
“While we recorded significant improvements in year-on-year performance in both the preceding and current quarters, there is a slowdown in momentum which saw corporate profits normalizing in Q2,” said Shahril. “We therefore expect a moderation in income growth for upcoming quarters.”
The EPF said that due to regulatory constraints, the fund’s exposure to foreign investment was lower than the strategic asset allocation of 32%, specifically in real estate and infrastructure. It said that this could potentially result in lower-than-expected returns for the fund in the future. EPF’s exposure to the real estate and infrastructure asset class remains at approximately 4%, while its strategic asset allocation is 10%.
“Our foreign investments have proved to be a significant revenue driver in recent years, despite making up less than 30% of the total investment portfolio,” Shahril said. “The increase in global asset values mitigated the negative effect from the strengthening of the ringgit, providing opportunities for us to realize profit.”
The EPF’s overseas investments, which accounted for 29% of its total investment assets, contributed 32.5% to the total investment income during the second quarter.
Shahril said the ringgit is showing signs of improved stability, and he expects global investments would remain one of EPF’s main revenue drivers going forward. He also said that while GDP growth continues to improve domestically, the EPF will be mindful of other external factors that may create uncertainty, including global rate hikes, and rising geopolitical tensions.
“While the domestic market remains integral to EPF’s investments, we need to diversify our portfolio into broader markets with better investment opportunities and greater liquidity,” said Shahril. “Doing so would equip the EPF with the agility and resilience to anticipate and rise above future market challenges.”