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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » EPF gains – fact or mirage?

EPF gains – fact or mirage?

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1EPF gains – fact or mirage? Empty EPF gains – fact or mirage? Sun Jul 22, 2012 3:49 am

Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
Over the past few months, the Central Bank (CB) has painstakingly defended investments made by the Employees Provident Fund (EPF) against growing criticism from several quarters. In recent months, the opposition United National Party (UNP), particularly its leader Ranil Wickremesinghe and MPs Harsha de Silva and Eran Wickremaratne have been vociferous on this issue while the JVP (Anura Kumara Dissanayake and Sunil Handunnetti) have been equally vocal on the losses (value) made by the EPF due to bad investments.

The criticism has been essentially on investments in small companies and ‘penny’ stocks (low-priced shares) and commercial banks, the latter allegedly because the government wanted control in these institutions. In the second argument, the finger was pointed at the Commercial Bank where CB Deputy Governor Dharma Dheerasinghe was appointed Deputy Chairman (soon after his recent retirement) and the Hatton National Bank (HNB) where former Deputy Governor Ranee Jayamaha took over the reins of chairman. In both cases these high positions were secured by virtue of the EPF having a major stake in both banks. Both the EPF and the CB have strenuously denied these insinuations and issued statements denying any conflict of interests in investment decisions, saying there was protocol, safeguards and firewalls within the Bank to ensure that the EPF department operated independently. It was also pointed out that the share of investments in the stock market was in line with the percentage permitted under the EPF Act, though there had been some changes made some years ago through an administrative decision to some of these provisions and investment sectors.

However, in a statement this week the Ceylon Federation of Labour (CFL) raises a moot point about the right to information on details of the investments made in the stock market. It said the EPF is said to have lost a staggering Rs.12 billion in the stock market and called for a full explanation on each transaction. “The scale of loss is a cause for concern. A full explanation is called for on each of the transactions,” the union said.

It raised many issues including a call for the fund managers of the EPF to explain the losses and investment decisions, urged more transparency and proposed a monitoring mechanism with trade union representatives and other stakeholders to ensure the one trillion-rupee-worth fund is properly managed.

The argument is sound and now figures of EPF investments (see Page 6 for a detailed list and our own analysis) released by Senior Minister Sarath Amunugama in parliament recently confirms the losses in value terms was Rs 11.04 billion as at 20th June 2012. For example of the 65 companies in which investments were made, only 17 companies have shown gains – ACL Cables, Ahungalle Hotels, Aitken Spence, Apollo, Amaya Leisure, Asiri Medical, Caltex, Cold Stores, Durdans, Hayleys, Hemas, Keells Hotels, Lanka Walltile, NDB, Nestle, SLT and Trans Asia.

The biggest gain of Rs 700 million came from shares of Ahungalla Hotels while the next best gain was Rs 276 million from NDB.

On the losing side the biggest loss was seen in Laugfs of Rs 1.4 billion and LOLC – a loss of Rs 1 billion. Other main losses were from Browns (Rs 934 million), Central Finance (Rs 933 million), Vallibel One (Rs 740 million), Grain Elevators (Rs 700 million) and DFCC (Rs 655 million).

Figures showed that EPF had 74 million shares in Commercial Bank which had a loss in value terms of Rs 256.7 million while EPF shares in Ceylon Glass (84.6 million at a low price of little over Rs 5) recorded a loss in value of Rs 57.5 million. EPF had 177 million shares in Dialog which had lost Rs 572 million in value.

EPF’s biggest stake (number of shares) is in Richard Peiris (123 million shares) which showed a loss in value terms of Rs 455 million. HNB, a bank that came under the radar of the opposition, had 30.4 million shares in the EPF portfolio which had lost Rs 420 million in value.

No doubt, taking risks is all part of investment. No investment will give the promised return just like for example interest in the banking sector which has been topsy-turvy in the past few years. Thus risk-taking in EPF investments is acceptable to a point, however.

The statistics now speaks for itself and the huge loss in value reveals that the decisions by fund managers have been clearly flawed. It strengthens the case for an independent mechanism to ensure that investments made on behalf of millions of workers are made wisely and without a political, if any, agenda.

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