EPF share investments: An interesting question - Anil Netto

Recently a news report revealed that fund managers were in agreement that it is unhealthy for the Employees Provident Fund (EPF) to dominate 50 per cent of the daily trading on the local stock market. This raises an interesting question.
Najib had said the EPF’s dominance in Bursa is “not healthy” for the local stock market or for the EPF. This is cited as one of the reasons for allowing the EPF to invest up to 10 per cent abroad.
The EPF’s total funds amount to RM370 billion with a quarter invested in Bursa. The total daily value of transactions on Bursa can surpass RM1 billion per day. Today, for instance, it was RM1.03 billion.
And now the interesting question:

Is there a commission on the EPF’s transactions in Bursa? And if so, how much do they add up to per day and who receives them?
Let’s try and do some rough calculations to arrive at a ball-park figure:
How much was the total value of transaction on Bursa last year? From the brokers’ trading summary for December 2009, we can see the year-to-date total value of Bursa transactions was RM605.6 billion.
Now roughly 50 per cent – i.e. RM302.8 billion – we are told, was accounted for by the EPF.
Assuming a brokers’ commission rate of 0.25 per cent, that would give us RM757 million in commissions.
Assuming these assumptions are fairly close to reality, that’s a lot of money going to brokers in commissions out of workers’ savings in the EPF. The total commissions could be even more than what some banks would make in profits. For example, EON Capital made a profit of RM341 million for 2009, it was revealed to Bursa.
What do you think? I invite corrections to these assumptions or more accurate figures if you have them. It would be good if the EPF can make public how much it paid out in commissions for 2009.
The Star report in full:

Tuesday April 6, 2010
Fund managers echo PM view on EPF trades
By TEE LIN SAY
linsay@thestar.com.my
PETALING JAYA: Fund managers agree that it is unhealthy for the Employees Provident Fund (EPF) to dominate 50% of the daily trading on Bursa Malaysia.
During his speech at Invest Malaysia 2010 last Tuesday, Prime Minister Datuk Seri Najib Razak had said the EPF’s dominance of the local equity market, with up to 50% of daily trading volume, was “not healthy” for the market or for the pension fund.
“It is no use being the biggest fish in a small pond where you can be attacked by everyone,” said a research head of a local firm.
“When this happens, your strategy is very limited and you cannot liquidate easily. It is difficult to get out, as you always need to be holding the baby. The result is sub-par performance.
“That is why it is very important for the Government to sell down its stakes in the government-linked companies (GLCs) to boost liquidity in the market,” he said.
He cited the example of Lembaga Tabung Haji, which at RM23bil, was less than a 10th the EPF’s size, and was thus nimbler and able to exit stocks easier.
Currently, the EPF has a total fund size of RM370bil and about a quarter of this is invested in the local stock market.
Meanwhile, Bursa Malaysia chief executive officer Datuk Yusli Mohamed Yusoff said he was well aware of the challenges facing the market and was continually working with the authorities, index providers and market participants on improving free float and liquidity in the market.
“Having said that, we agree that having one particular type of investor dominating the market is not healthy for the market over the long term.
“We want to attract a diverse set of investors into our market for sustainable growth. Therefore, our current initiatives are addressing the needs and demands of a wide spectrum of investors,” Yusli said.
He said investors should also shift their mindset and look at investing in as many Bursa-listed companies as possible.
“True to the wise saying of not putting all the eggs in one basket, investors should diversify their investment strategy and not concentrate on one or a small number of stocks as this scenario is hampering liquidity,” Yusli said.
At Invest Malaysia, Najib also said the EPF would be allowed to invest more assets overseas, both diversifying its portfolio and creating more room domestically for new participants.
EPF chief executive officer Tan Sri Azlan Zainol said the pension fund planned to increase its overseas investments to 10% of the fund size over the next one or two years.
EPF declared a dividend of 5.65% for last year. This was on the back of an improved total net income of RM19.63bil, up 34.82% from RM14.26bil in 2008.
It could possibly have declared better dividends had it invested more abroad, as that would have given it more flexibility in its movements.
“It is a good thing that the EPF is going abroad. I don’t really think there is a problem of risk as the overseas exposure is small relative to its fund size and present exposure,” said a head of fixed income from an insurance fund. “Going from 6% to 10% isn’t much. So it is not increasing risk, rather a diversification and reduction of risk.”
While certain quarters said EPF was seen as the buyer of last resort for the Government’s equity stakes in GLCs, the fund manager disagreed.
“The EPF is on the ball. They know what they are doing. They will not simply take something without evaluating it first,” he said.
EPF public relations general manager Nik Affendi Jaafar said the EPF competed against other funds whenever a block of shares was offered to the market.
“In most cases, the EPF is not able to purchase shares in the quantities that we desire,” he said.