EPF, ETF investments policy guidelines followed -Dr Amunugama
Investment policy guidelines have been followed when monies of EPF
and ETF were invested, International Monetary Cooperation Minister Dr
Sarath Amunugama said in Parliament yesterday.
He made this observation in response to a special statement by
Opposition Leader Ranil Wickremesinghe under Standing Order 23(2) in
The minister said: “ I wish to give a comprehensive reply to the
matters raised by the Leader of the Opposition. The EPF has authority to
make investments in the stock market.
The EFP Act Section 5(I)(e) states that the Monetary Board may invest
the monies of the Fund in such securities as the Monetary Board may
consider fit and may sell such securities.
“The EPF has also consistently maintained that all its investments
have been made in line with the guidelines issued from time to time by
the Monetary Board. Further, in response to recent allegations, the EPF
once again issued a press release on June 6, 2012, where it reiterated
that it has followed investment policy guidelines. “The EPF investing
team and the Department is completely independent of the Bank
Supervision Department. In the same way, the EPF is independent of the
Pubic Debt Department as well. As is well-known, about 93 percent of EPF
funds are invested in government securities which are issued by the
Public Debt Department, while only a very small fraction of EPF funds
have been invested in banking shares quoted in the Stock Exchange. In
both instances, the EPF maintains integrity and is not privy to any
information that can have a material bearing on a bank’s share price.
Accordingly, there has been no instances of conflict of interest or
insider trading that has occurred at any time.
“The Monetary Board has provided overall guidelines for investment
and within such guidelines, the Investment Committee is permitted to
take collective decisions in relation to its choice of investments. As
has been explained on several occasions, the EPF has invested around 93
percent of its funds in government securities, and around six percent in
the stock market.
“The balance one percent has been invested in corporate debentures
and short-term government securities. The investments in the stock
market are made with a long term focus to generate profit and enhance
the Fund’s capital base over the longer term. In that exercise, the EPF
considers, inter alia, the intrinsic value of shares of companies and
their longer term outlook, the possible enhancement of share value in
the medium to long term, the company’s governing structures, future
plans, the quantity of shares available of such companies, the viability
and growth potential of the relevant industry and the possible impact of
the growing economy on the company.
“Further, as is practised by many large long term funds all over the
world, the EPF maintains its equity portfolio as a pool of investments,
which comprises of a varied collection of stocks representing key
sectors, including banking and finance, diversified holdings, oil based
enterprises, healthcare, land and property, telecommunication,
plantations, power and energy, tourism and leisure, trading and
“In the case of equity investments, it must be noted that the
performance of different companies and the market values of the shares
of companies within the portfolio at different times, depend on global,
economic, political, financial, sector-specific and company-specific,
factors. In that background, companies as well as the entire share
market does not perform uniformly, nor does the market prices of shares
continue to rise at all times.
“Accordingly, there may be times during which the value of certain
stocks could be lower than the cost, but such situations are almost
always reversed when external factors change for the better, over time.
Therefore, it is in that background that the diversification of EPF
equity portfolio has been done, so that the fund value will yield
above-average results, over the longer term. To support this investment
decision-making process of the EPF, a team of professional and
well-qualified staff assess and recommend the investment opportunities
from the point of view of the several aspects as enumerated above and
thereafter such recommended investments are approved by the high level
Investment Committee and finally ratified by the Monetary Board.
Therefore, a dynamic and diligent process is followed, so as to ensure
that the investments are made with care, so as to safeguard the Fund and
ensure its profitability, stability and growth.
“In each of the decisions to invest in the shares of company, the
Investment Committee has been guided by extensive research which has
indicated that these shares have potential for long term growth and
enhancement in value. Such research is available at the EPF for perusal
by any authorised person, including the Auditors. “What is currently
experienced in the Colombo Stock Exchange is a bearish trend in the
market, where prices of all shares are trading at considerably lower
rates than those that prevailed several months ago. This is not an
unusual phenomenon today, with almost all stock markets all over the
world experiencing downturns.
“It should also be stated that the pragmatic policies of the EPF has
resulted in the EPF recording substantial gains and the EPF has realized
Rs 2,504 million as capital gains and dividends in 2011 and realised
over Rs 1,559 million as capital gains and dividends, so far in 2012.
“In fact, at the time when CSE’s ASPI reached a peak in the latter
part of 2010 and early 2011, the EPF equity portfolio recorded a huge
unrealised capital gain of Rs. 19 billion. Nevertheless, even in the
face of such gains, the EPF was of the view that it would be more
advisable to retain such stocks in its portfolio over the longer period,
considering the probable gains that such portfolio could generate in the
longer term, when the country’s economy grows substantially over the
next four to five years.
“The EPF categorically rejects the statement allegedly made by an
Opposition Member of Parliament as reported in several newspapers on May
15, 2012, where the EPF has been accused of fraudulent transactions in
the stock market. Such statements, read in conjunction with several past
statements of a similar nature, seems to be designed to systematically
discredit the EPF and discourage its investment activities.
“It is clear that an attempt is being made to attack the EPF with
malicious statements, taking advantage of the temporary bearish
environment of the stock market, where almost all investors are
experiencing a downward trend in their investment valuations and where
some investors are compelled to take losses particularly due to calls on
their margin accounts. However, as is quite normal in all stock
exchanges in the world, the large scale institutional investors have the
capacity and the ability to hold onto their portfolios without having to
dispose of their investments during a downward trend in the market and
in Sri Lanka where the EPF is clearly one of the largest institutional
investors, the EPF will act in a similar manner. Hence, there is clearly
no risk of the EPF incurring any real loss during this bearish phase of
the stock market.
In these circumstances, the EPF wishes to reiterate that its
portfolio of stocks has intrinsic value and therefore would hold onto
certain stocks where the market values may have temporarily reduced
below cost, because such stocks have potential to yield satisfactory
dividends and also make substantial gains when the ASPI move up in due
“The EPF also wishes to emphatically state that no fraudulent stock
market transaction has ever been made by the EPF and that all
transactions have been carried out with utmost care, diligence and
professionalism. Further, all EPF transactions including its investments
are audited by the EPF’s internal auditor, which is a reputed audit
firm, while in terms of Section 6(1) of the EPF Act No. 15 of 1958, the
annual financial statements of the Funds are audited by the Auditor
“In that context, the financial statements for year 2012 have been
audited by the Auditor General and the Annual Report of EPF for 2010
together with the Auditor General’s report has already been published.
In such Annual Report, information on stock market investments,
comprising of the investment portfolio and trading portfolio, have been
published where the names of companies, value of shares and year-end
market values have been disclosed as is required by the Accounting
“At the same time, the financial statements for year 2011 have been
submitted for audit to the Auditor General by February 2012 and the EPF
has published such unaudited income statement and the balance sheet in
the newspapers in early May 2012, for the information of its
“The EPF also wishes to state that as a result of its prudent
investments and sound management, it has been able to declare an
impressive rate of return of 12.5 percent in 2010 and 11.5 percent in
2011. Such rates of return are substantially above the interest rates
applicable to normal deposits in the financial market during the
respective periods. Further, the EPF is confident that its sound
investment decisions will be proved pragmatic, sensible and profitable
over the longer time-frame.
“In all instances where direct answers were not given, the
information requested has been with regard to individual stock market
transactions which are sensitive and where disclosing such information
would be detrimental to the Fund’s investment strategy.
The management information and investment analysis prepared by the
EPF for its own research and its future investment strategies are its
confidential and valuable intellectual property and disclosure of such
information would enable competitive investors to benefit by the
strategies implemented by the EPF’s investment team. Hence, the
disclosure of such information has been considered detrimental to its
own operations and consequently to its members. “The purchase of shares
of companies is made by the EPF with a long term view to generate profit
in the future, considering the intrinsic value of shares of such
companies and its long term future outlook.
At the same time, in certain other instances, the EPF may not
purchase shares of certain companies which may not be due to an inherent
weakness of the company, but due to EPF’s own investment strategy at a
given point of time. However, these different investment strategies of
the EPF may be mis-interpreted by outsiders, without in-depth knowledge,
who may only look at the buying and selling of shares by the EPF,
without understanding or appreciating the underlying rationale of the
particular investment decision, at the particular time. “Information on
stock market investment of the Fund are published in the Annual Reports
of the EPF where the names of companies, value of shares and year-end
market values are made available for the information of the general
public. This is the type of information that is disclosed by all fund
managers, both nationally and internationally and there would be huge
damage caused to the EPF and the Colombo Stock Exchange, if this normal
disclosure principle is departed from, by the EPF.
“When day-to-day transaction details of the EPF investments are made
available, different individuals may also interpret the information in
various ways (with after-acquired information as well) and as a result,
they may also attempt to tarnish the image of the Fund and the Central
Bank in particular and the government in general.
“Some people may also attempt to use such information to discredit
the Central Bank and the government, to support their own political ends
as well. The fact that such parliamentarians have been silent when the
stock market was making gains and when the EPF had made unrealized gains
of over Rs. 19 billion at a particular time, is clear evidence of their
“In this regard, the Opposition members have singled out a few share
investments where the values have come down and are basing their
argument on such reduction in value. However, it must be appreciated
that the EPF is not a “hedge” fund where investments are made mainly for
short term gains, but is a Fund that makes investments with the
intention of realizing long term gains.
“In an era where interest rates are likely to decline in the medium
to long term, the EPF has taken the view that returns from investments
in government securities and debt instruments only, would not provide
sufficiently high returns across such long term time horizon. Therefore,
the need to diversify the EPF investment portfolio has been considered
important, while maintaining the overall safety and stability of the
“In that background, over the recent part, the EPF has made several
investments in various listed Corporates through the Colombo Stock
Exchange and also in selected unlisted Corporates, on the basis of,
inter alia, intrinsic value of the company, its growth prospects, the
possible enhancement of share value in the medium to long-term, its
governing structures, the viability and prospects of the industry, the
quantity of shares available, the future plans, the impact of the
growing economy on the company, etc.
“Such shares in various corporates have been gradually accumulated
over the past several months in a methodical and professional manner.
Other than in the case of a comparatively fewer transactions within the
smaller trading portfolio, (which has also yielded capital gains of
several hundred million rupees), the larger portion of the share
acquisitions over the recent past, has been made with the intention of
holding over the medium to longer period.
“That is why even at the height of the bullish trend of the share
market when the ASPI reached its peak in the latter part of 2010 and
early 2011 resulting in significant unrealized gains in the EPF long
term portfolio of over Rs. 19 billion, the EPF Investment Committee took
the view that it would be best to hold those sticks in its portfolio
over the longer period, since it was considered likely that the gains in
the longer time frame, would be substantially higher than the unrealized
gains that were recorded at the last peak of the market.
“In that background, the current concerted effort to highlight the
decreases in values of certain selected stocks in the wide portfolio of
the EPF during the period of a temporary slump of the market, is
obviously a mischievous endeavour carried out by certain persons who are
guided by ulterior motives, to discredit the EPF to further their own
“The EPF is confident that its sound investment decisions will be
proved pragmatic, sensible and profitable over the longer time frame. I
will now turn to the EPF. I wish to inform that under the ETF Act No. 46
of 1980 Section 8 (d) the ETF Board is empowered to conduct day-to-day
investments including share operations.
“Under Section 9 of the same Act Cabinet approval is obtained only if
ETF Board acquires a controlling interest of an enterprise.
“As at June 18, 2012 the total investment portfolio is Rs. 140
billion out of which Rs. 1306 million (92.95 percent) is invested in
state Sector Investments, whilst Rs. 8.3 billion (5.88 percent) is
invested in shares. Further, I wish to inform that according to a Board
decision ETF can invest only up to a maximum of 6 percent of the
investment portfolio in shares.”