EPF chief executive officer Ahmad Zulqarnain Onn.
PETALING JAYA: A higher dividend rate may be on the cards for 2024, surpassing last year’s 5.5%, as the Employees Provident Fund’s (EPF) first-half distributable income surged by 29%.
EPF has grown its distributable income to RM36.7bil in the first six months of 2024 (6M24) from RM28.4bil in 6M23, despite withdrawals and the Prime Minister’s direct order to invest more domestically.
The RM1.21 trillion provident fund is expected to deliver at least a “decent” income in the second half of this year, said former EPF head of economics Mohd Afzanizam Abdul Rashid, allowing a higher dividend rate for 2024.
UCSI University Malaysia associate professor Liew Chee Yoong is projecting a dividend rate of between 5.5% and 6% for 2024.
“This (the projected dividend rate) is based on current performance trends and the fact that EPF dividends in the past have correlated with income growth,” Liew told StarBiz.
For 2023, EPF paid out 5.5% in dividends to contributing Malaysians for conventional savings and 5.4% for syariah savings. A year earlier, the rates were 5.35% (conventional) and 4.75% (syariah).
Meanwhile, economist Geoffrey Williams said the prospects of a higher dividend rate may discourage EPF members to withdraw from Account 3 or Flexible Account and instead encourage higher voluntary contributions.
As of July 19, about 3.4 million EPF members under the age of 55 have withdrawn from the Flexible Account amounting to RM8.9bil.
As for voluntary contributions, the numbers are already rising substantially.
EPF said yesterday that the number of voluntary contributors staged a 39% year-on-year (y-o-y) growth to 742,556 members in the first half of 2024 (1H24).
Total voluntary contributions, on the other hand, jumped by 91% y-o-y to RM7.51bil in the six-months period ended June 30, 2024.
However, it is worth noting that the number of formal sector members who opted to contribute more than the statutory rate dropped to 27,121 in 1H24, compared to 38,893 in 1H23.
In a statement, EPF said its total distributable income for the second quarter of 2024 (2Q24) after write-downs was RM17.5bil, which represents a 25% y-o-y increase.
Ahmad Zulqarnain Onn, the chief executive officer of EPF, said favourable market conditions in Malaysia and internationally contributed to the 29% y-o-y growth in 1H24’s distributable income.
He further added that the Malaysian market has benefited from increasing investor interest in growth oriented policies and fiscal reforms.
International markets such as the United States benefited from continued solid macroeconomic conditions, declining inflation and anticipation of the beginning of an interest rate reduction cycle.
“Despite relatively calm market conditions, risks persist as illustrated in the recent sell-down in global markets and sharp increases in volatility caused by market participants unwinding some concentrated and crowded positions.
“As a long-term investor, the EPF will continue with its strategy of constructing a highly diversified portfolio, driven by its strategic asset allocation,” stated Ahmad Zulqarnain.
The total distributable income of RM36.7bil in 1H24 does not include mark-to-market gains of securities that have not been realised.
Of the amount, a total of RM31.34bil was generated for conventional savings while the remaining RM5.36bil was for syariah savings.
In 2Q24, equity investments continued to be EPF’s main contributor of income at RM10.75bil after write downs, accounting for 61% of the total distributable income.
Better equity market performance, both domestically and in the global developed markets, drove income growth compared with the RM7.84bil recorded in 2Q23.
Write-downs in 2Q24 were marginal at RM690mil, due to active portfolio management by the fund managers and overall better equity market performance.
Fixed income, which comprises Malaysian Government Securities and equivalents as well as loans and bonds, contributed 33% or RM5.72bil, to EPF’s total distributable income in 2Q24.
EPF’s investments in real estate and infrastructure registered an income of half-a-billion ringgit, while money market instruments generated RM530mil, in line with the prevailing interest and profit rates.
Looking ahead, Mohd Afzanizam said EPF’s high exposure in fixed income instruments would ensure its investment principal is preserved.
Mohd Afzanizam, who is the chief economist for Bank Muamalat, said global interest rates have peaked and are already on the way down.
“There is an inverse relation between bond prices and interest rate. The fixed income instrument should do well under these circumstances and provide the upside potential for EPF total investment returns.”
As of June 30, EPF’s investment assets stood at RM1.21bil, of which 38% was invested in overseas investments.
In 2Q24, EPF’s overseas investments generated RM8.64bil or 49% of the total distributable income recorded.
The provident fund also pointed out that it has allocated over 80% of its new investment annual allocation to the domestic market.
This was in line with Prime Minister Datuk Seri Anwar Ibrahim’s order last year for EPF to invest more domestically.
He also urged the fund to review its direction to ensure that its investments reflect the aspiration of the government which it has focused on, among others, youth involvement, food security and startups.
The call to invest more locally has not sat well with the market observers, which is understandable considering that EPF’s overseas investments have typically performed better than its local assets.
Williams said that overseas equities “clearly” have better returns.
“In the last decade from 2015, the S&P500 has increased 153%, but Bursa Malaysia stocks have been in negative territory and have only just recovered to the 2015 levels.
“This is why 49% of EPF returns come from putting 38% of investment funds overseas.
“So they have a good stock of overseas investments and it is only new investments where 80% is domestic.
“In these cases the type of investment matters, if they invest in real estate such as Kwasa Damansara, they might get good returns with asset protection.
“From the government perspective they need government-linked investment companies to invest in domestic markets to underpin financial stability.
“That balance appears to be a fine one at the moment because for EPF account holders rebuilding their savings following the Covid-19 withdrawals and ensuring long-term retirement adequacy is a priority,” he said.
Mohd Afzanizam said the decision to invest more locally at this juncture would help to insulate EPF from the external uncertainties.
He added the global equities market remains extremely volatile with the unwinding of yen carry trade yet to be completed and the Bank of Japan may have room to raise their benchmark interest rate further.
“Plus, there is still value in Malaysian markets as the government has been proactive to rejuvenate the economy through the implementation of economic reforms that will improve the growth potential for Malaysia.”
UCSI University’s Liew, meanwhile, said it is crucial for EPF to maintain a diversified portfolio to mitigate potential risks, particularly given the volatility that can arise in emerging markets like Malaysia.
“If the domestic market continues to perform well, this strategy could yield strong returns, but it should be balanced with international investments to ensure long-term sustainability,” he said.
