This article first appeared in The Edge Malaysia Weekly on November 18, 2024 - November 24, 2024

EXPECTATIONS have built up on the Employees Provident Fund (EPF) to not only beat last year’s payout but also declare a dividend of close to 6% for 2024. This follows three successive double-digit year-on-year percentage headline outperformance indicated in all three quarterly income reports released in June, August and November this year.

Shoring up the expectations is the EPF’s RM57.57 billion headline total investment income for the nine months of 2024 coming in at 85% of RM67 billion gross investment income and 88% of the RM65.2 billion net investment income booked for the full year in 2023 (see Chart 1).

Can the EPF deliver on expectations?

For the majority or just over 90% of the EPF’s 16.1 million members with conventional savings (SK), the short answer is EPF dividends should exceed 5% in 2024, The Edge’s back-of-the-envelope calculations show.

There is a good chance of the EPF beating last year’s conventional dividend of 5.5% and even touch 6% if it does not perform too badly in the last quarter of 2024, which saw the re-election of Donald Trump as the US president and emerging market currencies (including the ringgit) weakening against the US dollar as markets recalibrate the speed at which the US Federal Reserve will be cutting interest rates.

The back-of-the-envelope workings are mathematically deduced based on a comparison of the EPF’s performance in the first nine months of the year with its historical performance and publicly released data on the provident fund’s growth the past two decades.

For the minority of EPF members — about 1.52 million or 9.5% of the EPF’s 16.1 million members as at the end of 2023 — who chose the shariah savings (SS) basket, a bigger positive surprise is in store.

Dividends for shariah savings would definitely come in above last year’s 5.4%.

In fact, the chances of a 6% dividend being declared for EPF shariah savings for 2024 are higher than those for conventional savings, our workings show.

This is thanks to an exceptionally strong third quarter for the shariah savings portfolio — where quarterly investment income was easily over 50% more than that in the first two quarters.

According to the EPF’s Nov 11 statement, total investment income of RM9.55 billion was generated for shariah savings as at September 2024. This is up 78% from the RM5.36 billion generated in the first six months of 2024.

If the feat in the third quarter continues in the fourth quarter, the dividend for shariah savings could even hit 6.5% or 7%. The latter is mathematically out of reach for conventional savings due to the sheer size of the portfolio, back-of-the-envelope workings show.

To hazard a guess, our back-of-the-envelope workings show the EPF dividend for 2024 coming in at between 5.4% and 6.4% for conventional savings (SK) and between 5.5% and 6.5% for shariah savings (SS) (see Chart 2).

If indeed the 2024 dividend for SS exceeds that for SK this year, it would be the first time since the basket was created in 2017 for EPF members seeking shariah-compliant returns for their retirement savings.

Those closely watching the EPF’s performance would recall the “shariah surprise” last year when the EPF declared a dividend of 5.4% for SS, just 10 basis points short of the 5.5% dividend declared for SK. That was the closest shariah dividends ever got to conventional dividends. Dividends for shariah savings had historically come in at between 25 basis points and 60 basis points short of conventional savings, with the average lag being about 40 basis points between 2017 and 2022.

Rather than a huge outperformance, a more likely scenario is for the dividend for conventional savings to come in just below that of shariah savings for 2024.

Given the size of the EPF’s conventional portfolio, however, there is still a chance of conventional dividends coming in just short of 6% if the last quarter of the year proves to be even more challenging.

While the RM48.02 billion total investment income generated for SK in the first nine months of the year looks stellar, there is cause for reservations.

If not for an exceptionally strong performance by the equity portion of its overall portfolio, the EPF could have reported a subpar third-quarter showing with the spotlight on the rare RM5.16 billion red ink in its money markets instruments as well as real estate and infrastructure (see Chart 3).

The EPF attributed the RM3.71 billion loss in its real estate and infrastructure investments as well as RM1.45 billion loss under money market instruments to foreign exchange translation losses, noting that the ringgit had strengthened from RM4.72 to RM4.12 against the US dollar during the quarter.

On a constant currency basis, the real estate and infrastructure portfolio would have recorded a gain of RM0.82 billion during the quarter, the EPF said. This would have been poorer than its second-quarter showing but better than the first quarter this year, our compilation of EPF data shows.

Its investments in equities generated RM18.32 billion or 93% of the EPF’s RM19.67 billion investment income for the third quarter, with fixed income bringing in RM6.51 billion or 33%.

“The increase [to RM18.32 billion] compared to RM9.17 billion in 3Q2023, reflects the EPF’s proactive approach to realising gains amidst market volatility, alongside the positive momentum in the equity market,” the EPF said in a statement.

According to the EPF, the [loss] positions in the real estate and infrastructure as well as money market instruments, which are denominated in foreign (non-ringgit) currencies, “are temporary, reflecting current currency movements”.

“International money markets are highly sensitive to short-term currency fluctuations, leading to translation losses during periods of currency appreciation. The EPF’s investments in real estate and infrastructure have longer-term horizons where currency movements have less impact on overall actual returns,” the EPF added without mentioning specific projects.

In a written parliamentary reply on Nov 5 to questions about the EPF’s 20% stake in the joint venture firm for the Battersea Power Station development in London, the Ministry of Finance said the EPF’s share of the RM120 million provision for rental agreements by Battersea Project Holding Company Ltd (BPHCL) in June this year is RM24 million. This is small relative to the EPF’s real estate and infrastructure portfolio that made up about RM73 billion or 6% of its total investment assets as at the end of September this year.

Money market instruments only make up 3% of the EPF’s portfolio compared with 44% for equities and 47% for fixed income.

International investments made up 37.8% of the EPF’s RM1.22 trillion investment assets as at the end of September 2024, with 62.2% invested in Malaysia.

Overseas investments accounted for RM10.5 billion or 53% of the RM19.67 billion total investment income in 3Q2024. For the first nine months of 2024, overseas investments accounted for just over RM29 billion or just over half of the EPF’s investment income year to date.

It is important to bear in mind that the EPF is not a short-term player but one that needs to continue outperforming inflation (as well as mounting expectations) for the long haul to help members grow and better stretch their retirement savings.

Commenting on its performance, EPF CEO Ahmad Zulqarnain Onn said the fund’s “robust performance reflects its investment strategy of maintaining a highly diversified portfolio across major asset classes”, noting that investor sentiment on Malaysia “remains positive, bolstered by the performance of Malaysian companies, economic policies and fiscal reform”.

While risks remain amid uncertainty about the global growth outlook, the trajectory and pace of interest rate reductions, persistent and escalating geopolitical tensions, particularly in the Middle East, and potentially higher import tariffs into the US with the election of Trump, Ahmad Zulqarnain said the EPF “continues to seek sustainable returns that benefit members while contributing to the nation’s economic resilience”.

The EPF typically announces its annual dividends between mid-February and early March.

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