EPF rejects MP’s fraud allegations
The Employees’ Provident Fund (EPF) categorically rejects the
statement allegedly made by an Opposition Member of Parliament as
reported in several newspapers on May, 15 2012, where the EPF has been
accused of fraudulent transactions in the stock market. Such statement,
read in conjunction with several past statements of a similar nature
made by the same MP, seems to be designed to systematically discredit
the EPF, discourage its investment activities, and precipitate a
collapse of the stock market.
These vituperative and misleading attacks would have not normally
evoked a response from the EPF due to its obvious political bias, but
since there appears to be a clear and mischievous motive to tarnish the
reputation of the country’s largest retirement fund and to destabilize
the economy through such a strategy, the EPF has decided to issue this
statement.
As has been explained on several occasions, the EPF invests around 93
percent of its funds in government securities, and around 6 percent in
the stock market.
The balance 1 percent is invested in corporate debentures and
short-term government securities.
The investments in the stock market are made with a long term focus
to generate profit and enhance the Fund’s capital base over the longer
term.
In that exercise, the EPF considers, inter alia, the intrinsic value
of shares of companies and their longer term outlook, the possible
enhancement of share value in the medium to long term, the company’s
governing structures, future plans, the quantity of shares available of
such companies, the viability and growth potential of the relevant
industry and the possible impact of the growing economy on the company.
Further, as is practised by many large long term funds all over the
world, the EPF maintains its equity portfolio as a pool of investments,
which comprises of a varied collection of stocks representing key
sectors, including banking and finance, diversified holdings, oil based
enterprises, healthcare, land and property, telecommunication,
plantations, power and energy, tourism and leisure, trading and
manufacturing.
In the case of equity investments, it must be noted that the
performance of different companies and the market values of the shares
of companies within the portfolio at different times, depend on global,
economic, political, financial, sector-specific and company-specific,
factors.
In that background, companies as well as the entire share market does
not perform uniformly, nor does the market prices of shares continue to
rise at all times.
Accordingly, there may be times during which the value of certain
stocks could be lower than the cost, but such situations are almost
always reversed when external factors change for the better, over time.
Therefore, it is in that background that the diversification of EPF
equity portfolio has been done, so that the fund value will yield
above-average results, over the longer term.
To support this investment decision-making process of the EPF, a team
of professional and well qualified staff assess and recommend the
investment opportunities from the point of view of the several aspects
as enumerated above, and thereafter such recommended investments are
approved by the high level Investment Committee, and finally ratified by
the Monetary Board. Therefore, a dynamic and diligent process is
followed, so as to ensure that the investments are made with care, and
in order to safeguard the Fund and ensure its profitability, stability
and growth.
Such policy has resulted in the EPF recording substantial gains, and
the EPF has realized Rs. 2,504 million as capital gains and dividends in
2011, and realized over Rs. 1,559 million as capital gains and
dividends, so far in 2012. In fact, at the time when CSE's ASPI reached
a peak in the latter part of 2010 and early 2011, the EPF equity
portfolio recorded a huge unrealized capital gain of Rs. 19 billion.
Nevertheless, even in the face of such gains, the EPF was of the view
that it would be more advisable to retain such stocks in its portfolio
over the longer period, considering the probable gains that such
portfolio could generate in the longer term, when the country's economy
grows substantially over the next 4 to 5 years.
From the above, it is clear that the MP concerned is now attempting
to viciously attack the EPF with malicious statements, taking advantage
of the temporary bearish environment of the stock market, where almost
all investors are experiencing a downward trend in their investment
valuations, and where some investors are compelled to take losses
particularly due to calls on their margin accounts. However, as is quite
normal in all stock exchanges in the world, the large scale
institutional investors have the capacity and the ability to hold onto
their portfolios without having to dispose of their investments during a
downward trend in the market, and in Sri Lanka where the EPF is clearly
one of the largest institutional investors, the EPF will act in a
similar manner.
Hence, there is clearly no risk of the EPF incurring any real loss
during this bearish phase of the stock market. In these circumstances,
the EPF wishes to reiterate that its portfolio of stocks has intrinsic
value, and therefore would hold onto certain stocks where the market
values may have temporarily reduced below cost, because such stocks have
potential to yield satisfactory dividends, and also make substantial
gains when the ASPI move up in due course.
The EPF also wishes to emphatically state that no fraudulent stock
market transaction has ever been made by the EPF and that all
transactions have been carried out with utmost care, diligence and
professionalism. Further, all EPF transactions including its investments
are audited by the EPF's internal auditor, which is a reputed audit
firm, while in terms of Section 6 (1) of the EPF Act No.15 of 1958, the
annual financial statements of the Funds are audited by the Auditor
General. In that context, the financial statements for the year 2010
have been audited by the Auditor General, and the Annual Report of EPF
for 2010 together with the Auditor General's report has already been
published. In such Annual Report, information on stock market
investments, comprising of the investment portfolio and trading
portfolio, have been published where the names of companies, value of
shares and year-end market values have been disclosed as is required by
the Accounting Standards.
At the same time, the financial statements for the year 2011 have
been submitted for audit to the Auditor General by February 2012, and
the EPF has published such unaudited income statement and the balance
sheet in the newspapers in early May 2012, for the information of its
stakeholders.
The EPF wishes to state that as a result of its prudent investments
and sound management, it has been able to declare an impressive rate of
return of 12.5 per cent in 2010 and 11.5 per cent in 2011. Such rates of
return are substantially above the interest rates applicable to normal
deposits in the financial market during the respective periods.
Further, the EPF is confident that its sound investment decisions
will be proved pragmatic, sensible and profitable over the longer
time-frame, and therefore wishes to advise its millions of stakeholders
not to be misled by this type of vituperative and politically motivated
negative propaganda. |