Every year Malaysians with savings in EPF or ASB look forward to the dividends announced and they usually do not disappoint. Recently, PNB the fund manager for ASB, announced a 5.75 sen dividend, which is equivalent to a 5.75% dividend since ASB is a special type of fund where the price per share is always kept at RM1.00. This is the highest dividend announced since 2020.
I suppose the EPF dividend for 2024 would be around that or lower because it should rebuild its reserves having allowed a massive RM 44 billion early withdrawal by its members in 2022.
Dividends and Investment Income
Dividends are typically paid from income realized from investments that year. Realized income come from:
- Interests from bonds or money market funds
- Dividends from other companies
- Capital gains by selling investments at a profit
According to EPF’s 2023 annual report, it made RM 42 billion mainly from interests and dividends. It also sold RM 226 billion worth of equities to realize a RM 23 billion capital gain. This gives a total income of approximately RM 65 billion.
The EPF then announced a 5.5%/5.4% dividend which would have required RM 58 billion. It had more than enough income to pay for this dividend in 2023.
Did EPF need to sell that much equities to realize the RM 23 billion capital gain in the first place?
The first rule of compounding: Never interrupt it unnecessarily – Charlie Munger
EPF should be in the business of long term investments and leverage the magic of compounding growth. It should have kept the unrealized gains in 2023 because 2024 turned out to be another stellar year for equities. By selling too early, it had limited the capital gains for its Malaysian account holders.
Perhaps it had pressure to announce acceptable dividends. After all, dividends are paid from realized investment income. However, in trying to appease its stakeholders in the short term it had sacrificed some long term gains. Certainly its reserves would have been rebuilt quicker if it had kept the unrealized gains.
A Better Approach
I have always been amazed by the approach taken by Norway’s Government Pension Fund Global (GPFG). It behaves like a massive index fund, diversifying its investments globally based on the relative market cap of different companies and markets. In the last 10 years, the fund had an annualized return of 6.7%. It went from 0.3 billion USD in 1998 to an amazing 1.75 trillion USD today.
The GPFG does not declare any dividend. It does not pre-maturely sell its investments in order to realize investment income. It therefore can let its investment gains compound year after year. More than half of its 1.75 trillion USD value is past retained earnings. Contrast this with the near zero cumulative surplus and reserves value of the EPF.
The Finance Durian 