What Do Experts Expect For EPF’s Upcoming 2020 Dividend?

In our previous coverage of the upcoming dividend, we explored the challenges that ETH is currently facing. These included the ongoing COVID-19 pandemic, the growing size of its portfolio, and uncertain economic prospects in the short to medium term.

So how does the EPF deal with these challenges and what kinds of dividends can we expect this year? We spoke to a few experts to find out.

Dr Mohd Afzanizam Abdul Rashid, Chief Economist of Bank Islam

Imran Yassin Md. Yusof, Head of MIDF Research

Dr Ahmed Razman Abdul Latiff, associate professor at Putra Business School

What can we expect for the next dividend?

Bank Islam chief economist Dr Mohd Afzanizam Abdul Rashid said it is “very likely” that the EPF dividend in 2020 could be lower than in 2019, which saw a dividend of 5.45% for conventional savings and 5% for Syariah savings. This is due to volatility in financial markets and a lower interest rate environment.

However, some experts note that EPF’s performance has been commendable, despite the challenges.

MIDF Amanah Investment Bank Bhd Research Director Imran Yassin Md. Yusof said the EPF dividend could match Amanah Saham Bumiputera’s (ASB) 4.25% dividend recently declared.

“This is due to his commendable performance so far. Based on EPF’s 9M2020 performance, we find that its net investment income is only 0.5% lower than the net investment income for the year 2019. It is quite impossible for EPF not to no revenue to be recorded in 4Q2020. Therefore, the performance could potentially be better except for any degradation, ”he said.

Putra Business School Associate Professor Dr Ahmed Razman Abdul Latiff agrees: “Even though the EPF dividend has never exceeded the SBA dividend in any given year, I think that this time, perhaps for the first time, the EPF dividend will be higher. ”

Diversification abroad pays off

According to Dr Afzanizam, EPF’s diversification strategy has borne fruit, as its investments abroad have resulted in a significant contribution to income.

These investments have always produced higher returns than other asset classes, said Dr Ahmed Razman. It notes that 32% of EPF’s overseas investments contributed 45% of total gross investment income in the third quarter of 2020. This represents a 30% increase in its assets which contributed to 39% of its income. gross investment in the second quarter.

Will i-Sinar and i-Lestari withdrawals affect returns?

To help Malaysians cope with the financial burden of the recession, EPF has enabled eligible members to withdraw part of their savings through the i-Lestari and i-Sinar programs.

Dr Ahmed Razman said more than RM 34 billion has been withdrawn through these relief programs. This equates to “3.6% of EPF’s assets, not counting the potential further withdrawal of Category 2 i-Sinar, which is still pending,” he said.

But he points out that this can potentially affect the dividend rate, as EPF had to increase its holdings of money market instruments to prepare for withdrawals. These investments are more liquid, but generally offer lower returns than other asset classes.

“Fortunately, other asset classes such as foreign investments, fixed income securities and real estate investments have performed well recently, which allows EPF to continue to offer a competitive dividend rate”, he added.

Likewise, Imran Yassin stated that MIDF does not believe these relief measures will have a significant impact on dividends given the performance of EPF. He also pointed out that the EPF has always focused on cash flow management.

In addition, the EPF has a significant inflow of funds. Prior to the COVID-19 pandemic, it was expected to receive RM 1.7 billion in net inflows per month. “Although with the impact of COVID-19, we anticipate a reduction in this amount, we believe that [the net inflows and the EPF’s focus on cash flow management] will be able to hedge the exit without significantly affecting dividends, ”he said.

Staying resilient with SAA

As the pandemic continues to pose economic challenges, EPF’s Strategic Asset Allocation (SAA) – the framework that helps it optimize long-term returns – can help it remain resilient. The SAA allocates the EPF portfolio to the following assets:

Percentage of portfolioAsset class
49%Fixed income instruments
5%Real estate and infrastructure
7%Money market instruments

Source: KWSP

Dr Mohd Afzanizam said SAA would allow EPF to plan its investment strategy in a more structured way. “This will help them ensure that their returns on investment are optimized against their risk tolerance more effectively,” he said.

The MIDF also believes that the SAA is important to ensure the sustainability of investment income and therefore the stability of dividends. “This can moderate any overreaction to market movements,” Imran Yassin said. “Although the pandemic has led to greater uncertainty, we believe that diversification in an investor’s portfolio is important to overcome volatility and uncertainty.”

ESG considerations will help in the long run

The EPF also plans to make all of its investments in accordance with environmental, social and governance (ESG) practices by 2030. It believes this will make it more resilient to future market disruptions, as ESG companies are more likely to generate sustainable returns. The EPF might be right: A recent study suggests that a higher ESG was associated with higher profitability and lower volatility.

“We believe that ESG is the vaccine for all crises,” former EPF chief executive Alizakri Alias ​​said in an interview with Bloomberg. He noted that at the height of the pandemic last year, ESG-compliant investments declined at a much slower pace than other assets.

Security on short-term returns

In short, the EPF can generate decent returns, although economic challenges may mean lower returns than in 2019. But it was never the goal of the EPF to generate high returns in the short term. Instead of making “rash decisions based on short-term market reactions,” the EPF said it was guided by a long-term strategy. This helps it to overcome volatility and preserve member savings through sustainable returns.

And he has a good track record for doing so. Historically, EPF has provided decent returns over the past 70 years – including during multiple financial crises. If you contributed regularly to your EPF savings, you would have reaped these returns on your retirement fund.

In addition, the EPF also guarantees a minimum dividend rate of 2.50% for conventional savings, although the rates have not been so low since the EPF’s inception in the 1950s. As a regular investor looking to protect and grow your retirement savings, you would be hard pressed to find another low-risk investment that matches the EPF.

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Jothi Venkat

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