EPF investing in stocks creates wealth for members

Central Bank Governor answers critics:

The Employees Provident Fund (EPF) has an active membership of 2.1 million as its custodian Monetary Board of the Central Bank of Sri Lanka has the responsibility of managing the fund and make prudent investments for gaining high returns to its members.

The EPF is actively involved in stock market trading making investments in sectors such as hotels and banking.

Some have criticized the fund’s investments in some stocks saying EPF is not permitted to invest on those areas.

Daily News Business interviewed Central Bank Governor Ajith Nivard Cabraal to find out on EPF investments and its returns to members.

* Daily News: Can a fund like EPF invest in banking and financial institutions?

Governor: Of course it can. In terms of the EPF Act, the Monetary Board of the Central Bank of Sri Lanka has been charged with the responsibility of managing the Fund as its custodian while the general administration of the Fund has been vested with the Labour Commissioner.

The overall objective of the Fund in investing its money is to provide a reasonable return to members, while safeguarding and enhancing the value of the Fund. In terms of the section 5(e) of the EPF Act, Monetary Board may invest the moneys of the Fund in such securities as the Board may consider fit and may sell such securities.

In keeping with these statutory obligations, the EPF, as Sri Lanka’s biggest fund, has been keen to provide attractive returns to the EPF members while safeguarding their investment.

In that context, especially at times of low interest rates, we need to diversify our portfolio and ensure that reasonable returns which are essentially higher than inflation are achieved.

Since of late, Sri Lanka’s stock exchange has been hailed as one of the best performing markets in the world and a massive peace dividend has been generated due to the efforts of our President, Government, the armed forces and all patriotic people.

Why should not the ordinary people of our country whose savings are invested by the EPF benefit by this peace dividend? Unfortunately, there are some people who believe that the exceptional gains in the stock market should be enjoyed only by the foreign portfolio investors as well as their wealthy friends in Colombo!

While we have no objection to these parties benefiting by our stock exchange, we are also keen to ensure that the ordinary people of our country receive a part of this boom.

That is why the EPF has invested in fundamentally sound stocks with a long-term focus. By maintaining such a diversified portfolio, we will also provide millions of our members an indirect ownership of the top listed companies in our country as well.

By our actions, the country and the economy will also benefit because when the EPF enters the stock market, it will help to stabilize the market on a long-term basis and that would safeguard the market, to some extent, from speculative actions which are generally prevalent in emerging markets.

Let me also remind you that the banking and financial sector is the largest contributor to the Sri Lankan equity market with more than 20 per cent of the total market capitalization.

This sector has always been performing exceptionally well. So, why should the largest Fund in Sri Lanka deprive itself of the opportunity to invest in these stocks? That is why the EPF has now decided to invest in banking sector shares with the intention of creating more wealth for our millions of EPF members in the long run.

The EPF is a superannuation fund with long-term time horizon for its investments. Unlike an individual investor or a short-term hedge fund, EPF is not unduly pressurized by short-term fluctuations in the market prices, but will focus on the long-term fundamental performance of the stocks that it invests in.

* Daily News: EPF has invested in various sectors such as banking and leisure. What are the other investment options which EPF has focused?

Governor: A large chunk of EPF investments are in the government paper and this trend would perhaps continue over the next few years as well.

However, if the government were to reduce its fiscal deficit, over the next few years (as they have announced), there is a strong possibility that the EPF investment options of investing in government paper could reduce to some extent in the medium to long-term.

In that scenario, interest rates too could decline further and hence the returns to the members could reduce proportionately, although of course such returns may be reasonably above the inflation rate.

In that environment, a slight shift towards other instruments which provide higher yields, such as; debentures, mortgage backed securities and selected private equities would be a useful diversification.

As you know, the EPF has been carefully investing a small portion of its funds in such instruments in order to provide an edge to its overall returns, and this policy will continue.

As a prudent investor, our responsibility is to scan the environment and anticipate the impact of various policy measures, both international and local, in the future.

We have to look at these matters with a long term focus and that is the only way that we can ensure such a prudent and reasonable return.

* Daily News: What is the ROI during the first six months of these investments and what is the progress of it compared to last year’s performance?

Governor: In this market, which is performing well, our returns have been very attractive. But, I would hasten to add that in the future, we would concentrate more on long-term returns, growth and capital gains, rather than short-terms gains.

The way to judge a long-term fund is not to see whether it is making money week by week, but to look at its investment strategy and long-term focus.

In that regard, the Monetary Board has given the broad direction to the investment committee of the EPF that their focus should be based on those parameters and we are satisfied with those broad directions are being followed in the investment decisions that have been taken so far.

* Daily News: What is the EPF fund value up to date and the number of members?

Governor: At present, EPF has an active membership of 2.1 million and the total value of the fund is Rs 835.5 billion as at end June 2010.

* Daily News: When it comes to investing in the stock market, does the EPF do an analysis to identify the best stocks before they invest?

Governor: Of course they do. The EPF has been providing exceptionally good returns to its members over the past few years and they have done a lot better than what some of the private sector managers of investment funds were able to achieve.

I know there have been various attempts by some previous governments to break up the EPF fund and hand it over to various fund managers to manage.

Some of the people who are shouting today about the EPF investing in the stock market, are the same people who were attempting to break up the fund and give pieces of it to private managers.

Naturally therefore, they may be upset that this Government has not privatized the EPF or given the Fund to those so-called fund managers, who may be friends of the persons who are making these wild accusations against the EPF.

I can categorically confirm that those dreams of these theoreticians would not materialize. But, we have to understand that in their frustration about the successes of the country, the economy, the stock market and the EPF, they must be getting very upset.

That is why they are doing an about turn and calling the stock market a ‘casino’. This is very childish and foolish. I hope these people will take a more mature stand in the future.

May I also, for the record, confirm to you that the EPF fund is managed by a team of highly professional fund managers who act in accordance with the stipulated rules and regulations with proper checks and balances. Therefore, we are confident of providing satisfactory yields for our millions of members in the long term.

* Daily News: Memberwise, what is the target for this year?

Governor: The target of EPF is to consistently provide for a positive real rate of return to all its members in the long-run. As in the previous years, EPF will continue to maintain this policy through prudent investments.

(C de S)