EFP Equity holding surge but expected ROI below 4.5%

The value of equities held by the Employees Provident Fund (EPF) rose faster than the market over the past six months as the fund increased its stakes in battered stocks and rode on the rally that lifted share prices from their lows in March.

The latest publicly available data showed that the market value of EPF’s top 15 holdings had risen 23% since the start of the year, compared with the 21% gain in the FBM KLCI as of last week.

As a pension fund, the EPF follows a strict conservative strategy in managing its funds that had swelled to RM356bil as of the end of March.

About a quarter of this money is invested in equities, but only a fraction is allowed for overseas investment.

“Contrary to popular belief, the EPF is quite aggressive in managing its stock portfolio,’’ said a senior fund manager with a local asset firm.

EPF’s most valuable shareholding is its 930 million shares, or 15.5% stake in Sime Darby Bhd, which is also the most expensive stock in terms of market value on Bursa Malaysia.

Its current stake in Sime Darby is less than the 15.7% reported as at end of last year. Despite the slight decrease, the value of EPF’s stake in Sime Darby had increased to RM6.67bil as at the end of June compared with RM4.97bil at the start of the year after the stock climbed 38% over the same period.

Filings with Bursa Malaysia in the past months showed that the EPF’s stake in Sime Darby fluctuated by as many as three million shares a day. Conservative estimates of the fund’s transactions put it at about 20% of the stock’s daily volumes.

The fund is also active in buying and selling shares in other big companies where it owns substantial stakes in Tenaga Nasional Bhd, Malayan Banking Bhd and IOI Corp Bhd.

Bloomberg data showed that the EPF has stakes exceeding 10% in 47 companies as at last week. However, there were little change in terms of the fund’s equity stakes in the country’s biggest firms over the past six months, except for Axiata Group Bhd, formerly known as TM International Bhd.

EPF’s current top 15 shareholdings have a market value of about RM55bil against RM43.7bil six months ago.Analysts said a rising market provided the opportunity for funds like the EPF to make trading profit on stocks.

This may help boost returns from investments at a time when companies are expected to pay lower dividends as their profits shrink.EPF had warned that this year’s dividend payout to contributors may be less than the 4.5% paid for 2008. It has to guarantee a minimum payout of at least 2.5% every year as its fund size grows at about 7% and 10% rate annually.

Currently, the EPF is invested in more than 100 companies on Bursa Malaysia, with its 67% in Malaysian Building Society Bhd and 57% in RHB Capital Bhd comprising its biggest stakes. The total market capitalisation of just over 950 companies on Bursa Malaysia stood at RM817bil as at end-June.

While the fund’s stakes in the country’s biggest firms remain relatively stable, it has been increasing its shares in a number of mid-size companies. Among stocks that saw a significant jump in EPF investment so far this year was WCT Bhd.

The pension fund started the year with a 20% stake in the construction group but took advantage of a steep price plunge in January to buy more shares, raising its equity stake to 26% by end-June.

Latest filings showed that the EPF owned 25.16% of the company as at July 6. Shares in WCT closed at RM2.23 yesterday, up 47% year-to-date. The stock, however, was down 61% from a peak of RM4.98 achieved on Jan 11 last year.

EPF’s stake in WCT is currently worth about RM430mil compared with RM220mil at the start of the year. The fund did not disclose the amount paid for the additional stakes in its filings with Bursa.

Other mid-sized firms that saw increased EPF interest are oil and gas counters like Dialog Group Bhd and KNM Group Bhd.The two stocks had posted strong double digit gains this year from their recent lows in March.

The newspaper....click here

Lower the rate of employees’ contribution to EPF

Under the stimulus package, an employee can reduce his EPF contribution from 11% of his salary to 8% for two years from Jan 1. Publish in newspaper in Nov 2008

Lowering the rate of employees’ contribution to the Employees Provident Fund (EPF) temporarily is part of the Government’s bag of tricks to rouse the economy. We saw this in 2001 and 2003, for one-year periods, and we are seeing it again with the stimulus package announced on Tuesday.

This time around, an employee can reduce his EPF contribution from 11% of his salary to 8% for two years from Jan 1. The idea is to boost private consumption by putting more money in workers’ pockets.

Unlike the last two occasions, the next rate cut will be on a voluntary basis. The Government has estimated that RM4.8bil a year will be freed up for spending in the economy if all EPF contributors opt for the rate cut.

That will not happen. It may even be over-optimistic to expect half of the contributors to make that election. It is likely that the majority will stick to the status quo given the choice. We do not know yet the exact mechanism that will facilitate the rate cut.

One possibility is that the reduction will be instituted automatically unless the employees instruct otherwise. That does not quite fit the definition of voluntary and it will be an administrative hassle for employers and the EPF.

It may be a good idea for the Government to reconsider the proposal. Why not make it a mandatory two percentage-point cut across the board?

We are clear about the argument that increasing workers’ disposable income is good for the economy.

If a lower contribution rate helps us all, why the need to leave it to our discretion? Do the authorities make it optional when they raise or lower taxes and interest rates?

Macroeconomic management is already hard enough because of the imprecision and lack of predictability.

A compulsory two percentage-point rate cut ensures that the economy will get a RM3.2bil injection. This is far better than hoping that we can have enough of the EPF contributors agreeing to contribute 3% less.

We should bear in mind that the lower EPF contribution rate simply means we have more money in our hands and not that our money is being taken away. It is up to us what we want to do with the extra cash.

Besides, how many times have we heard about the difficulties EPF faced in investing the billions of ringgit it is managing? And how often have we griped about the relatively low dividends?

Of course, there will be those who still want to have their money under EPF’s stewardship. That avenue is still open. The EPF Act 1991 allows contributors to deposit amounts exceeding the statutory rate. It requires a bit more effort and time, but if setting aside money for a rainy day is important to you, this is a minor hurdle.

If we really believe in the merits of saving for our old age, we need not be legally compelled to do so. But more to the point, what does it say about us if we can’t even trust ourselves to put the extra money to good use when handed back 2% of our salary that would have otherwise gone into our EPF accounts?

Just an EPF saving fund is enough for retirement?

What goes Up must come Down

Downturn crimps industry investments

An integrated set of solutions gives a framework for action-HUGH THOMPSON

GIVEN that the demand for energy can only rise and that crude oil will still make up the largest portion of the energy mix of the future, governments and energy companies will have their work cut out for them in satisfying the huge appetite for fuel and power amid growing concerns over sustainability issues.

However, the global economic recession has slowed investments in the oil and gas industry, with double-digit drops in percentage terms in the upstream conventional fuels and renewable energy segments compared to 2008, according to the International Energy Agency (IEA).

IEA executive director Nobuo Tanaka says the economic and financial crisis has put investments in the industry at risk. “Budgeted spending on exploration and production worldwide for 2009 currently totals US$375bil, down 21% or US$100bil from last year,” he says.

Tanaka points out that between now and 2013, significant liquefaction capacity will start to operate, but more investments are needed this year and next for projects to start in 2015. He says the future demand trend calls for energy supply investment of US$26.3 trillion up to 2030 or over US$1 trillion a year.

“The economic and financial crises has sharply reduced investments all the way down the energy supply chain from production to end use for both conventional energy sources and renewables,” he adds.

Royal Dutch Shell plc’s outgoing chief executive Jeroen van der Veer says the recession has made it even more difficult to keep up investments in future supplies as well as cleaner-burning fuels. He says this points to new price hikes and volatility further down the road.

In a recent media conference, Petronas president and chief executive officer Tan Sri Hassan Marican said that to moderate the volatility inherent in the industry cycle, the clear imperative was to continue to develop oil and gas fields without excessive disruption due to market conditions.

“As far as we’re concerned, we’ll continue to explore and develop new resources,” he told reporters.

We will continue to explore and develop new resources - HASSAN MARICAN

One recent investment was the signing of a production sharing agreement worth US$2.1bil between Petronas and ExxonMobil to further develop seven mature oil fields off the east coast of Peninsular Malaysia.

Hassan said the national oil company was maintaining its spending so as to sustain resources for the future.

He added that there were many initiatives being carried out to maintain production levels, which currently stood at 550,000 bpd or 650,000 bpd including condensates.

“The deepwater fields off Sabah will be brought into production from 2012 onwards while we’ve ongoing cooperation with other national oil companies,” Hassan said.

The US Energy Information Administration says in its latest report that almost 75% of the expected increase in global energy demand through 2030 will be from developing countries, particularly China, India, Russia and Brazil.

It says renewable energy, like wind and solar power, will be the fastest growing energy source, making up 11% of global energy supplies.

In the IEA’s World Energy Outlook 2008 reference scenario, which assumes no new government policies, world primary energy demand is expected to grow 1.6% per year on average between 2006 and 2030 – an increase of 45%.

Demand for oil is expected to rise from 85 million barrels per day (bpd) now to 106 million bpd in 2030 or 10 million bpd less than projected last year, while demand for coal will rise more than any other fuel in absolute terms, accounting for over a third of the increase in energy use.

Renewable energy, according to the agency, will grow rapidly, overtaking gas to become the second largest source of electricity after 2010.

The recession points to new price hikes and further volatility - JEROEN VAN DER VEER

China and India will account for over half the incremental energy demand to 2030, while the Middle East will emerge as another major demand centre.

So the industry and governments will have to think of ways to sustain production as well as reduce reliance on fossil fuels, and this will all happen in the face of declining oilfields, geopolitical instability and climate change.

They will have to invest more in technology and infrastructure to meet the energy needs of the future.

Despite calls for more emphasis on renewable energy and less carbon dioxide emissions, most experts agree that while the industry is not against renewable energy, it will still make up only a small, albeit more prominent, part of the energy mix of the future.

Hugh Thompson, chairman of the ExxonMobil subsidiaries in Malaysia, says to meet growing demand through 2030 and beyond, “an integrated set of solutions will be required in three areas – expanding all commercially viable energy sources to enhance the availability of reliable and affordable energy; accelerating gains in energy efficiency, which conserve supplies, reducing the growth rate of greenhouse gas emissions and lowering energy costs; and lastly, developing and deploying technology to help mitigate the growth of emissions associated with energy use.”

He says this integrated set of solution provides the framework for the company’s actions and underpins its commitment to the world’s energy future.

Energy Intelligence Research managing director Dr David Knapp says making oil and gas “greener” needs to be part of the solution.

He adds that the biggest challenge that oil producers face, especially in the OECD countries, is the depletion of mature reservoir and the environmental constraints on the development of new reserves that have large carbon footprints.

“Meeting environmental requirements on limiting carbon dioxide and other air emissions, water-use levels and discharge will undoubtedly raise costs and may make some previously economic projects fail even at higher prices,” Knapp says.

From Star Biz
20 Jun 2009

Unit Trust Funds outlook in 2009

1.With the falling stock prices, is unit trust the best way to invest in 2009? Why?

While investors keep staring out for the light to emerge at the end of the tunnel, we anticipate that the unfavorable economic condition will continue to pose challenges at least till the second half of 2009. Investors would need to be aware that there could yet be further downside if news flow over the coming quarters is worse than expectations. However, the sharp corrections in stock markets worldwide have already priced in some extent of the bad news which have resulted in panic and fear in them.

Having said that, we urge investors to keep in mind these key points of unit trust investing to ensure they make sound investment decisions:

1.No one could predict where and when the market bottoms.
2.Investors should have a mid to long term view, as it will be necessary especially, in times like this, to ride out the current volatility.
3.Dollar-cost averaging method of investing is the better approach compared to lump sum investment as it takes much of the emotional aspect out of investing, especially in the equity markets. Additionally, it is oftentimes best to start investing when one feels most uncomfortable with the outlook of the economy. We are not advocating investors to pull all their savings in, but rather, to set levels and employ this method to capitalize on the current opportunity.

Moreover, one of the key benefits of unit trust investments is the nature of its diversified composition which may provide investors with a peace of mind as it is indeed comforting to know that our hard earned money is being managed by the experts. As the economic condition declines, there would be many bargained opportunities to venture into different investment instruments and unique asset classes which may only be made available to the retail investors through unit trust investments.


2.What type of unit trust is the best?
During volatile times, the general investors will gravitate towards lower risk products with steady income flow such as income funds or structured funds with capital protection attributes. Under the Public Mutual Investment Management stable of funds, investors are given the option to choose a low risk mixed asset fund ,an evergreen product which should provide returns above fixed deposit rates while offering the prospects of potential capital gains through regular income payout from dividend yielding stocks.

Additionally, at some point in 2009, we would suggest that investors could consider taking some equity risks. We foresee that economy will eventually recover from the current recession, given the encouraging economic stimulus packages orchestrated by the central bank governments globally. These includes rapid interest rate cuts (close to zero levels), massive fiscal stimulus package US$590 billion by the Chinese government and AUD10 billion by the Australian government, and significant liquidity injection by the world central banks as the “printing press” continue to work overnight. All in the efforts focused at encouraging spending and supporting the economy.

3. What is the best investment strategy at this point of time? What kind of portfolio should an investor have at this point of time?
Please refer to question No.2


4.What are the stocks that have fallen in value? What type of stocks will unit trust pick up at this point of time?
In the local front, our picks remain defensive, focusing on blue chips stocks with strong cash flow and consistent dividend payout such as YTL Power, Tanjong Plc, Allianz and Hong Leong Bank. In fact, our main focus is in the regional markets such as Singapore, Hong Kong and China, where their markets and stocks have been lately decimated, as we believe that when the global economy starts “healing”, these markets will be among the first to recover. We are keeping an eye in the consumer discretionary and financial sectors in these regions.

Lesson 2 - Your Benefits With Unit Trusts

Professional Investment Management

A unit trust combines the capital of many investors to employ experienced management in purchasing securities of many companies. The management of a unit trust provides diversification of investments and supervision which few investors could individually afford. Investment management is a full time job requiring specialised knowledge and training. It involves the study of a variety of factors.

Some of the factors which have to be examined are,

1. Comparisons of all industries in the economy
2. Relative studies of companies within a promising industry
3. Personal contact with management of promising corporations
4. Evaluating the effect of international events, both monetary and political
5. Determining the results of government policies on each industr.

Professional management is also interested in studying less obvious factors such as wage rates, which might affect the economy or the profitability of certain companies or corporations. It requires careful study of individual companies within the industry to determine which of the many companies offer the best prospects for the investors. It requires comparing this company with the best companies in other promising industries. Since all this factors are constantly changing, re-evaluation and study have to be continuous.

Diversification
Diversification means spreading one's investments among many securities. It is an important method of reducing risk. It decreases the danger of damaging losses, which can occur through having all of one's eggs in one basket.

Diversification is difficult and expensive for a small investor because the cost of purchasing numbers of shares in many companies at the same time is disproportionately high.

Unit trusts with their resources are able to make widely diversified investments available to even the smallest investor. Diversification involves the ownership of many different securities. All the securities owned by an individual investor or unit trust fund are referred to as an investment portfolio.

Liquidity
An investor can sell his units, wholly or partially, at the following trading day's unit buying price. Units have a high liquidity, that is, they can be readily converted into cash.

It has to be remembered, however, that unit trust’s units will be redeemed at the prevailing buying price on the following day after receipt of the repurchase form. The unit price may be higher or lower than the price at which the investor started the plan. Unit trusts should be regarded as a long term, rather than short term investment.

Advantages of Compounding
Many unit trust funds provide facilities for investors to reinvest their distributions. For those who opted for distribution reinvestment, the fund will automatically credit the distributions into the account, rather than sending distribution warrants.

This process of reinvesting the income from the original investment and also of reinvesting the return on the total accumulating investments is called compounding.

As an illustration, if at 25, you invested RM100 at the beginning of every month at an interest growth of 10% per annum until age 65, your investment would have grown to RM638,000 ! The key element to compounding is time. The longer the period of time, the greater the growth.

Regularity of Investing
Many people do not have substantial sums of cash available to invest, but they can develop an investment account, investing smaller sums regularly in a unit trust.

Most unit trust funds have plans available to make it possible for smaller investors to invest relatively small amounts monthly. It is easy and inexpensive for an individual to acquire units through deposits of RM100 or more a month in a unit trust fund.

Fund Administration - The Convenient Factor
Few people have the experience, time or facility to properly set up an investment programme, much less to supervise it constantly. Unit trust managers have emerged as professional organisation devoted to solving the investment problems of people from all walks of life.

Unit trusts relieve their investors of the need to handle their own securities transactions. Investors in unit trust funds are not obliged to concern themselves with matters such as,

1. Obtaining quotations on securities being bought and sold
2. Delivery and payment for the securities involved in each transaction
3. Safekeeping of cash and securities
4. Accounting and bookkeeping procedures, etc

Investors of unit trust funds will receive semi annual and annual reports which describe

a. The portfolio of the funds
b. Investment changes made in the period
c. Distributions paid, if any
d. Fund manager's opinion on the economic and market outlook

Lesson 1 - Unit Trust In Brief

What is a Unit Trust?

A unit trust is a financial vehicle through which individuals may invest their money. The idea behind unit trust is better investment through collective investing. That is to say pooling the investments of many investors, individuals and institutions.
Investing in a unit trust offers investors numerous advantages, including :
a. Professional management at a low cost
b. Safety through the spreading of risk (diversification)
c. Liquidity
d. Ease of transaction
e. Capital appreciation/income stream

The operation of a unit trust may be best explained by outlining its similarities with the operation of a bank, with which most individuals are familiar.

Many individuals deposit money in the banks, for which they receive interest. These individuals expect complete liquidity where they must be able to withdraw their deposits in cash at any time. The banks employ professional managers to look after the deposits. The deposits are invested. These managers lend the deposits to other individuals requiring funds and a host of other profit generating facilities of the banks.

Similarly, unit trust holders wish to put their money to generate higher returns. The goal of all investments is to make money more productive, either through producing income or growth. Unit trust holders have liquidity because their units can be readily converted into cash at any time. By investing in unit trusts, it allows them to engage professional fund managers at a low cost to the individual investors. These managers diversifies the investible funds in many different securities and other approved channels to spread the risk.

The unit trust is constituted through a document known as a deed which brings together and binds the various parties to the deed :
• The trustee, who holds the assets of the trusts on behalf of the unit-holders.
• The manager, who is the promoter of the scheme and provides investment and administrative expertise and markets units to the public
• The unit-holders who provide the funds for investment and expect to receive the benefits derived from the investment. The effect of dividing the beneficiaries' interest in the trust into units is that their interest is quantified into discrete portions.

Particular advantages of unit trusts over the pooled investments include :
• The provision of an independent trustee to hold the trust's assets on behalf of unit-holders and to watch over their interests on an on-going basis.
•The deed and prospectus are scrutinized by government authorities, prior to an offer of units being made to the general public. The managers and trustee are themselves approved by the regulators.
•A buy back provision or covenant in each deed which requires the manager to redeem an investor's units within specified time limits at a price determined in accordance with the deed.
•Provisions in the deed under which the manager and trustee are in a fiduciary position in relation to the trust (i.e. they can only profit in ways laid down under the deed). The investor can determine in advance what costs and charges they will be required to pay to join and stay in the trust.