The Employees Provident Fund (EPF) has reported a 36.36 percent increase in investment income to RM11.51 billion for the second quarter ended June 30, 2017 (Q2 2017) from RM8.44 billion in the same period last year.

In a statement here today, the provident fund said out of the total income, fixed Income instruments contributed 37.29 percent, equities (53.72 percent), while real estate and infrastructure and money market instruments contributed 6.23 percent and 2.64 percent, respectively.

In accordance with the Malaysian Financial Reporting Standards (MFRS 139), the EPF recorded lower net impairment of RM1.34 billion in Q2 2017, an improvement of RM2.28 billion or 62.98 percent from RM3.63 billion previously, in line with the better performance of the equities market.

CEO Datuk Shahril Ridza Ridzuan said the market conditions had improved from a year ago and all asset classes in EPF's portfolio recorded healthy year-on-year growth, with equities continuing to be the main profit driver for the quarter under review.

"While we recorded significant improvements in year-on-year performance in both the preceding and current quarters, there is a slowdown in momentum which saw corporate profits normalising in Q2 2017. We, therefore, expect a moderation in income growth for upcoming quarters," Shahril commented.

Equities, which made up 41.96 percent of EPF's total investment assets as of Q2 2017, contributed RM6.18 billion of income, up 61.45 percent from RM3.83 billion recorded in Q2 2016.

Shahril said the provident fund had also benefited from diversification into other asset classes that provided stable streams of income, including fixed income instruments and real estate and infrastructure investments through its subsidiaries.

A total of RM820.71 million out of the total investment income of RM11.51 billion was generated for Simpanan Shariah, while RM10.69 billion was generated for Simpanan Konvensional.

Simpanan Shariah derived its income solely from its portion of the Shariah assets while income for Simpanan Konvensional was generated by its share of both Shariah and non-Shariah assets.

"In equities, the banking sector has been outperforming since the beginning of the year while the bulk of our impairments recorded for the quarter came from the telecommunications and oiland gas sectors.

"If this continues, we expect that Simpanan Konvensional will benefit from the former and outperform in the short term," said Shahril.

The value of EPF investment assets reached RM759.78 billion, a 3.92 percent or RM28.67 billion increase from RM731.11 billion as at Dec 31, 2016.

Out of the total investment assets, RM362.50 billion, or 47.71 percent, were in Shariah-compliant investments and the balance were invested in non-Shariah assets.

As at June 30, 2017, the EPF's overseas investments, which accounted for 29 percent of its total investment assets, contributed 32.50 percent to the total investment income during the period under review.

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"Our foreign investments have proved to be a significant revenue driver in recent years, despite making up less than 30 percent of the total investment portfolio as of Q2 2017. The increase in global asset values mitigated the negative effect from the strengthening of the ringgit, providing opportunities for us to realise profit," Shahril added.

As of end-2016, the EPF delivered a three-year rolling return of 3.83 percent above inflation, a significant premium over its two percent above inflation strategic target, thus ensuring that members' savings are not only preserved, but also enhanced.

The outperformance was mainly driven by its overseas portfolios, which recorded a three-year annualised return on investment (ROI) of 11.10 percent as of June 2017, thus enhancing the value of EPF's return.

"While the domestic market remains integral to EPF's investments, we need to diversify our portfolio into broader markets with better investment opportunities and greater liquidity to enable the EPF to execute our strategies in line with our mandate.

"Doing so, would equip the EPF with the agility and resilience to anticipate and rise above future market challenges," he said.

Meanwhile, due to regulatory constraints, the EPF's exposure to overseas investment was lower than the strategic asset allocation of 32 percent, specifically in real estate and infrastructure.

Shahril said these gaps could potentially result in lower-than-expected return for the EPF in the years to come.

As at June 30, 2017, the EPF's exposure to real estate and infrastructure asset class remained at about four percent against its strategic asset allocation of 10 percent.

In addition to being an inflation hedge, real estate and infrastructure has also delivered competitive return with lower risk compared to equities in the medium to long-term horizon.

Despite recording significant annualised ROI of 8.80 percent over the past three years, the income contribution from real estate and infrastructure remains small as the exposure to the asset class is significantly lower than the targeted asset allocation.

On the outlook for the second half of the year, Shahril said with the ringgit showing signs of improved stability, global investments would remain one of EPF's significant revenue drivers going forward.

"Domestically, while the gross domestic product growth continues to improve, the EPF will be vigilant of other external factors which may create uncertainty, including the possibility of global rate hikes, and rising geopolitical tensions," he added. -- BERNAMA