And so, the cat is finally out of the bag. The EPF just announced 2008’s dividend to its 5.4 million members- a mere 4.5% (Ouch!)! For comparison’s sake, 2007’s dividend was 5.8%.

Based on EPF’s 2005 Annual Report, out of its total fund size of RM260 billion, 19.1% or RM49.6 billion was allocated to Equity investment. Hence EPF’s RM9 billion RHB acquisition venture represents more than 18% of its total equity investments, without even taking into accounts its existing investment in RHB. Such disproportionate amount of investment in a single stock clearly represents poor portfolio allocation and diversification. The EPF has put at risk our workers’ funds by ‘betting’ heavily on a single large investment.

In addition, the total risk of the bank is 12.5 times its equity value based on a minimum capital-assets adequacy ratio of 8% in Malaysia. This means that in the event of a crisis, for every ringgit investment, up to RM11.50 may be required to bail out the bank and keep it afloat. Will EPF, acting as the owner of the bank, be committed to pump in additional monies from EPF to ??escue??the Bank in the event of another financial or banking crisis?

The Malaysian Government has spent more than RM3.5 billion to bail out Bank Bumiputera on 3 separate occasions in 1984, 1990 and 1998. Will EPF in effect, act as a bail out fund for the bank it now owns?

More…

After all the unnecessary risks it undertook in the past years, one would have expected a much higher return, probably in the range of 6 to 7 percentile.

To the extent that some even considered suing EPF.

Also, to refresh your memory, RM5 billion was handed out to the debt-ridden ValueCap Sdn Bhd in October 2008. Whatever happened to the RM5 billion?

The Employees Provident Fund (EPF) Board today, with the approval of the Minister of Finance, has declared a dividend rate of 4.50 per cent for 2008. The lower dividend rate compared to that of 2007 is due to the increase in investment provisioning resulting from the sharp decline in global equity prices brought about by the worldwide financial crisis.

Despite the financial meltdown, the EPF recorded the highest ever earnings of RM20 billion in gross income for 2008. This represented an increase of 9.36 per cent over the previous year?? gross income of RM18.29 billion.

Tan Sri Samsudin Osman, EPF Chairman said, ??hile the year 2008 was challenging due to the unprecedented global financial crisis that has impacted economies worldwide, EPF?? investment portfolio for the year performed better at the gross income level compared to 2007. However, due to the sharp decline in the equity markets, a large provision had to be made resulting in a marked reduction in net income.??r

Net income for the year was recorded at RM14.26 billion, after deducting allowances for diminution in value of equities and doubtful debts, dividends for withdrawals, investment expenses, operational expenses, and death and incapacitation benefit payments. This represented a decrease of 15.47 per cent over 2007 net income of RM16.87 billion.

Here’s the EPF’s return in the last one decade:

1998 – 6.70%
1999 – 6.84%
2000 – 6.00%
2001 – 5.00%
2002 – 4.25%
2003 – 4.50%
2004 – 4.75%
2005 – 5.00%
2006 – 5.15%
2007 – 5.80%
2008 – 4.50%

One can’t help but wonder if there’s any co-relation between Bank Negara’s Overnight Policy Rate and the KWSP returns. For reference, here’s the one-decade return for the fixed deposit from major banks.

1997 – 9.33%
1998 – 5.74%
1999 – 3.95%
2000 – 4.24%
2001 – 4.0%
2002 – 4.0%
2003 – 3.7%
2004 – 3.7%
2005 – 3.7%
2006 – 3.5%
2007 – 3.5%
2008 – 3.5%

The fixed deposit rate is also known as the risk-free rate. This means that your money which is kept in a fixed deposit account will not be affected by the market’s ups and downs. It’s as good as the bank’s guarantee. Any instruments that promises higher return than the prevailing risk-free rate will introduce the elements of risk. Again, one must be clear with the definition of risk, and in investment terms, risk is uncertainty- uncertainty in the sense that you might gain more than you invested or you might suffer losses in your capital. So, there’s really nothing negative about risk because it’s just a state of uncertainties.

The only issue is whether the risk you’ve taken is calculated or uncalculated. A calculated risk is akin to setting up a business where you would reduce all the possibilities of making a loss. For instance, you wouldn’t invest in a land with a nuclear waste disposal plant just 1 km away. When putting down money on any investment, it’s often a good practice to write down the risk you can take, thereby setting a threshold of risk tolerance before your investment portfolio turns into an emotional lab experiment.

So, the question we need to ask the fund managers in KWSP is that why are the returns not in tune with the risks the fund is exposed to?

Also, with the recent RM60 billion mini budget announcement, one cannot help but wonder where the Ministry of Finance could dig up such a huge amount of money.

Hint: There are not many places in this country that has so much monetary reserve.

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