A change in accounting policy has let the Employees Provident
Fund (EPF) avoid recognising a RM11 billion loss on its stock-market investments
for the 1997 financial year.
This is why it has taken just a RM404 million hit on its local equity portfolio, despite the massive plunge in the stock market with the onset of the Asian financial crisis.
Still, the impact of this potential loss on the EPF's portfolio is relatively small. If it had treated its investments as it had in previous years, itwould show a total of RM116.3 billion, or 3.0 per cent
growth, instead of RM126.7 billion, or 12 per cent growth, compared with its investments in1996, observers note.
"With effect from financial year 1997, the EPF has changed the basis of
valuation of Quoted Shares and Investments With Portfolio Managers," it
says in its 1997 annual report.
Previously, the fund used to mark-to-market its entire portfolio at the end of each financial year. That is to say, it adjusted the valuation of its investments to reflect the market prices as at each
This year, it has reclassified the bulk of its stock investments --previously identified as just "quoted securities" -- aslong-term quoted shares as at the balance sheet date, Dec 31, 1997. By
differentiating between short- and long-term investments, it has been
able to limit the provision it must make for losses on its investment
The EPF's short-term investments in the local stock market at cost totalled RM792.9 billion, while its market value stood at RM388.4 billion.
The difference of RM404.6 billion has been reflected in the EPF's consolidated cashflow statement as the diminution in value of investments.
Its long-term local investments get off less lightly, in contrast.
Long-term quoted shares at cost amounted to RM20.6 billion, against its marked-to- market value of RM10.7 billion. This RM9.9 billion difference makes up the largest portion of the unrecognised losses.
"The effect of (this) change is that in the financial year 1997, the EPF does not require to recognise the diminution in market value in the
Income and Expenditure Account amounting to RM10.986 billion," it says.
This sum represents a 51 per cent drop in the value of its local equity
investments. Over the same period, the benchmark KLSE Composite Index
plunged 48 per cent from 1,237.96 points on the last day of 1996 to 594.44
on Dec 31, 1997. It closed at 618.54 last Friday.
The EPF says this practice is "in accordance with that adopted by the National Mandatory Provident Funds established by the Governments ofcertain countries", and is not subject to the International Accounting Standard No 26 regulating accounting and reporting by retirement benefit plans.
It is not known how the fund has defined short-term investments and long-term investments. Officials were unavailable for comment.
Meanwhile, observers say these potential losses are not
as alarming as they appear be.
"Yes, in absolute terms RM11 billion looks very big, but this represents just 8.6 per cent of EPF's entire portfolio," points out a senior analyst. "It could have been worse."
A research head of a foreign investment house agrees that the losses should be put in perspective. "Given EPF's ability to take a very long-term view, much of these potential losses are
really academic," he says.
The EPF's priority is to maintain enough liquid funds to reimburse retirees over, say, a 25-year time frame. Over this period, such investment losses will eventually reverse themselves into gains, he points out.
"The EPF is not a commercial organisation, but one where the flow of funds is very important. And what many people tend to overlook is the fact that the workforce here is very young," he says.
Because more workers enter employment every year than contributors who retire, contributions to the fund have been increasing.
This means it will have no problems meeting any of
This also enhances its ability to invest on a very long term view, says the research head, adding, "What better time for it to buy stocks than at the bottom of the market?"
Others, though, have been less forgiving. Says a senior institutional dealer: "I was surprised by how transparent the EPF's 1996 annual report was, but I didn't expect their books to be clean this
year. This kind of juggling just worries people."
EPF's equity investments, both local and foreign, represent just under 19per cent of its entire portfolio, an increase of 22 per cent over equity investments in 1996. More than half its portfolio -- 54.48 per cent, or RM70.5 billion -- is invested in Malaysian Government Securities and various money market instruments, although the total has been allowed to fall under the statutory minimum limit over the last few years. It had63.3 per cent invested in these securities in 1996. Another 26.16 percent was invested in loans and debentures, while 0.37 per cent was invested in property.~C.I.A REFORMASI
Source:Lee Siew Lian