http://www.livemint.com/Politics/jgWHbp8H5PG7s7ybfV4y9H/EPFO-to-review-market-approach-after-poor-returns.html
New Delhi: The Employees’ Provident Fund Organisation’s (EPFO) tryst with equity investments hasn’t got off to a good start: the exchange-traded funds (ETFs) it invested in the stock markets earned an annualized return of just 1.52%.
The pension fund manager is now reviewing its approach.
The EPFO’s experience highlights several things: the volatility of the equity markets in the short-term; the larger issue of a lack of understanding of how the equity markets work, even in seemingly informed circles; and the challenge facing anyone trying to increase the market orientation of entities such as EPFO.
EPFO started its equity investments, only in exchange-traded funds, on 6 August. The idea was to invest about Rs.6,000 crore till 31 March 2016.
It invested Rs.2,322 crore until 3 November in two funds run by SBI Asset Management Co. Ltd.
The 1.52% return should be seen in the context of the 6% fall on the Sensex, the benchmark index of the BSE, and the 6.15% fall on Nifty, the broader index of the National Stock Exchange, in the same period.
On Tuesday, the Sensex closed at 25,775.74 points, 14.15% off its 52-week high.
Foreign Institutional Investors (FIIs) have so far sold Indian equities worthRs.15,768.78 crore since 1 April, net of purchases.
Still, the 1.52% return has prompted EPFO to discuss its equity investments and review the plan, if required, although there is no talk of discontinuing them. It plans to present this to the apex decision-making body of the EPFO, the Central Board of Trustees (CBT), in December.
On Tuesday, EPFO presented a status report on the investments to CBT headed by Union labour minister Bandaru Dattatreya. The board also has representatives from employee unions and employers.
“The CBT members expressed concern over the rate of return,” said K.K. Jalan, central provident fund commissioner.“The finance investment and audit committee of EPFO will discuss the matter and update the CBT,” Jalan said after the meeting.
The poor return will likely provide ammunition to the unions that have all along opposed the equity investments.
“We’ve always spoken against equity investment by EPFO and had argued that any such investment should come with an interest guarantee from the government,” said A.K.Padmanabhan, a CBT member and president of Centre of Indian Trade Union (Citu).
According to data available with the labour ministry, the EPFO has investedRs.592.27 crore of its ETF investments in the Sensex ETF and Rs.1,734.06 crore in the Nifty ETF.
While Sensex ETF has given it an absolute profit of Rs.4.26 crore, or “annualized profit” of 2.97%, Nifty ETF has given it an “annualised profit” of 1.03%.
An ETF comprises a clutch of stocks that reflect the composition of an index, such as the S&P CNX Nifty or BSE Sensex, and are traded on stock exchanges like company stocks.
Jalan, however, said that though the annualized return of the last three months comes to 1.52% as of now, “it should not be construed as the end of it. A three-month return should always be taken with a pinch of salt as equity investment over long term is considered more beneficial”.
A labour ministry official, who declined to be named, said that while the equity investments will be reviewed, it is “certainly not going to be discontinued” as this is a long-term plan for bettering returns over a longer period of time.
The apprehensions are understandable given that EPFO has entered the equity markets for the first time, said Gautam Bhardwaj, director of the Invest India Economic Foundation, a private think-tank in the space of social security investments.
“A review of the investment is a good idea but it should not be only restricted to the equity investments. They should also review whether their debt investments are giving good real returns to the subscribers” he said. “Any knee-jerk decision based on three-month return on investment from equity will be a huge mistake.”
The poor returns are unlikely to impact the interest rate offered by EPFO. The organization plans to invest up to Rs.6,000 crore, or just 5% of the incremental corpus of 2015-16 in equities. EPFO manages an overall corpus of more than Rs.6 trillion and another Rs.2 trillion is managed by the exempted trusts of companies that manage their own provident fund money within the broad guidelines of EPFO’s investment pattern and are accountable to the retirement body.
EPFO has an active subscriber base of over 40 million employees.
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