One thing stands out from the announcement of the first quarter results of the Employees Provident Fund; the retirement repository of over 12 million Malaysian workers which now manages some RM540 billion of funds and is one of the largest single retirement funds in the world.

This is a sharp drop in its investment income to RM5.6 billion for the first three months of the year, down 28% from the RM7.74 billion recorded for the corresponding quarter last year.

What is positively alarming is the statement that explains the drop: “Income in 1Q12 was boosted by one-off gains that were not replicated in 1Q13.  A lack of volume on the local Bursa Malaysia in the first quarter also contributed to the decline in earnings this quarter.”

That’s puzzling on two counts. First what kind of one-off gains did it benefit from last year? Did it sell shares that it had acquired cheaply to register income? If it did so, then what was the reason? Could be to pay a good dividend for last year to members this year?

Second, why does EPF depend on stock market volume to make its money on the stock market? As a long-term investor which safeguards the savings of its members for retirement, is it not incumbent upon it to get best returns over a period of time instead of short-term profits that cannot be repeated?

The overall paramount question arising from these is whether the EPF is speculating with members’ money instead of investing it in assets which provide a steady stream of earnings and capital appreciation over an extended period of time.

EPF’s behaviour in terms of investing in the stock market is worrisome and has deep implications on the returns it provides on members’ money. The evidence is clear that EPF is engaged in trading to get income up, a dangerous way to go as this is a high-risk strategy totally out of whack with its stated objectives.

And because EPF, the largest single investor in the local stock market, has such a colossal amount of money, it is rather easy to hide the individual losses that it makes.

A look at its income figures is instructive. It made RM1.52 billion from Malaysian government securities  and equivalents, in the first three months of the year, the same as in the previous corresponding period. Income from loans and bonds amounted to RM1.92 billion, down RM485 million or about a fifth, probably reflecting declining interest rates.

The big fall was in equities where income declined RM1.71 billion or nearly 50% to RM1.86 billion while contributions from money market instruments declined to RM78 million (RM178 million previously) and real estate and infrastructure increased to RM227 million (RM74 million).

The big reduction in equities income must reflect decreases in trading income, obtained from the buying and selling of shares, because dividend income from year-to year for the shares would not have been very different. That EPF is so dependent on trading income is unhealthy and risky.

The question is whether EPF deliberately tried to increase its trading income last year so as to be able to pay better dividends this year ahead of the general election as a feel-good factor for the electorate.

The fund declared a dividend of 6.15% for 2012 in February, an increase over the 6% paid out for 2011. It represented a record breaking total of RM27.45 billion being distributed to its members, an increase of 12.2% the RM24.47bil paid out in the previous year, said EPF chairman Samsudin Osman.

Samsudin Osman

“Notwithstanding the increasingly complex investment environment, the EPF maintained its steady upwards momentum to post its strongest set of results since the turn of the millennium, underpinning the effectiveness of its long term investment strategy as well as its disciplined and prudent approach,” he said in a press statement.

Unfortunately, that may have been less than prudent. By taking profits on good investments, it is by no means certain that EPF can get back into these investments at the same attractive prices again. As a long-term investor, it should be invested in good companies which provide good returns.

This is all the more important as equities have become the largest single asset class for investments held, accounting for RM203.75 billion or nearly 40% of the fund with loans and bonds accounting for RM151.48 billion and government securities RM145.56 billion.

A check of trading on May 17 on the local bourse shows that EPF is the most active player on the market, buying and selling some 32 million shares. In some instances, on the same day, it bought and sold hundred of thousands of the same share, incurring needless brokerage.

In contrast, the other major investor on the stock market, Permodalan Nasional Bhd (PNB) and its unit trusts, sold just 2.32 million shares – EPF trades amounted to some 14 times that.

PNB has some RM240 billion under management at last count with an estimated 80% or so invested in the equities markets, which amounts to about RM192 billion, only about 5% less than EPF’s RM205 billion. Yet EPF’s transactions are 14 times that of PNB! Why?

Surely trading stocks cannot be one of the mainstay incomes of a retirement fund.

P Gunasegaram is founding editor of KiniBiz. He is appalled at the continuing lack of transparency, governance and accountability of the EPF.