NEM: EPF Taking Excessive Risks?

The EPF must not take unnecessary risks which will jeopardise the hard-earned savings of 12 million ordinary Malaysians

The investment philosophy of the Employees Provident Fund (EPF) as stated on its website includes “prudence in carrying the duty to protect EPF members from the risk of investment loss” as well as the “priority of the EPF funds as a social security fund (not individual investment fund).”

The recent announcement of EPF's increasing investment role in the Prime Minsiter's “New Economic Model” (NEM) speech has raised increasing concerns over the increasing risk the EPF will be taking going forward.

It was announced by the Prime Minister, and confirmed by the EPF chairman that the Fund will be allowed to increase its overseas investments to 10% of its fund size over the next one or two years.

Datuk Seri Najib also declared that “the Government of Malaysia and the EPF will form a joint-venture to promote the development of 3,000 acres of land in Sungei Buloh into a new hub for the Klang Valley” leading to “over RM5 billion of new investments being made”.

While we do not wish to prejudge merits of the above measures, the recent actions by EPF in the investment scene and the recent announcements has raised eyebrows and concerns that the sizable pool of funds in EPF is either being made used of by the Government, resulting in higher and unnecessary risks.

As it is EPF equities investments has increased from RM46.9 billion in 2005 to RM93.9 billion in 2009. This represents a significant increase in allocation to equity from 18.0% to 26.5%. At the same time, EPF's fund allocation to the safest of instruments, the Malaysian Government Securities (MGS) has declined significantly from 39.2% to 27.5% over the same period.

The increase in equity investments is in part due to the takeover of Rashid Hussein Berhad and RHB Capital in 2007 which had cost EPF a whopping RM11 billion. Despite having recovered RM3.9 billion through the disposal of 25% of RHB Capital to Abu Dhabi Commercial Bank in 2008, the EPF has been unable to fulfil its promise to reduce its ownership to 45% by June 2009. Today, it still owns 56.2% as of today, and its share price is languishing at RM5.67, 21% below its intended sale price of RM7.20.

The EPF has also become somewhat like a buyer of the last resort for the Government's equity stakes in Government Linked Companies (GLCs). For example, as Khazanah needed to divest itself of its huge stake in Tenaga Nasional Berhad, 50 million of its shares were sold to EPF on the pretext of “increasing market liquidity” where in essence, there would have been no impact as it's a transfer from one government entity to another government-related one, except in this case, the EPF is funded by Malaysian workers. This transaction itself have cost EPF RM405 million.

In addition, the EPF has become a net buyer of PLUS Expressways while Khazanah is at the same time a net seller.

What is also notable, is the fact that EPF's “loans” portfolio has increased significantly over this period as well, increasing from RM94.36 billion (36.3%) in 2005 to RM145.75 billion (41.2%) in 2009. In part, this is related to a series of loans mandated by the Government such as a RM5 billion loan by EPF to ValueCap to invest in the stock market, as well as up to RM10 billion to Khazanah Nasional for the 2009 economic stimulus plan.

Now, with the joint venture proposal with the Malaysian government to develop the 3,000 acres of prime land in Sg Buloh, it appears as if the EPF will be over-stretching its limits as it will have little or no competency as a mega-property developer.

The EPF must not forget its primary role to protect the savings and retirement funds of ordinary Malaysians and as such its investments must by nature be conservative and income-based. The attempts over the past few years in increasing the risk undertaken will pose major challenges in the event of slow economic growth or further economic turmoil. In addition, the shift by EPF from being a passive portfolio investor to an active major shareholders in diverse industries such as banks and property development will without the necessary competencies will only result in sub-optimal investment returns or possibly losses requiring future government bailouts.

We call upon the EPF and the Government to maintain its core principles of good governance and prudence in the EPF, and not treat the RM360 billion in the Fund as easy pickings for the Government.