Sri Lanka says ‘EPF’ has not made losses by investing in stocks

Sri Lanka’s Central Bank says the Island’s main pension fund, the EPF has gained Rs. 558 billion worth of profits during the year 2009 to 2013 period and have not made losses by investing in stocks, as claimed by certain reports.

Below is the full release issued by the Central Bank of Sri Lanka
The Employees’ Provident Fund (EPF) wishes to state that some media reports which highlight that the EPF has made billions of losses in investing in the stock market is misleading and erroneous.

Such losses reported by some media and politicians are not realized losses, but are marked-to market unrealized losses, arising from variations in marker prices of stocks. Therefore these unrealized losses/gains do not increase or decrease the benefits distributed to the members. Such unrealized losses fluctuate widely as is evident from the peak of Rs.20.7 billion unrealized gains on 14th February 2011, when the All Share Price Index was at its all time high, to Rs.9.0 billion unrealized losses at end 2013. Such unrealized losses have now reduced to Rs.4.4 bn by 21st April 2014, or 51 per cent, while the ASPI has increased only by 4.46 per cent during the same period.

This confirms the fact that the EPF’s equity portfolio has been managed prudently so that performance of the portfolio has well out-performed the market trends.

The EPF also wishes to state that the as a result of EPF’s prudent investments and sound management, it has been able to declare impressive rates of return of 13.75 per cent in 2009, 12.5 per cent in 2010, 11.5 per cent in 2011, 11.5 per cent in 2012 and 11 per cent in 2013 out of profits earned by the Fund.

Such rates of return were substantially above the interest rates applicable to normal deposits in the financial market during the respective periods. In absolute terms, the Fund has made profits of Rs 101.7 billion, Rs 111.5 billion, Rs 107.5 billion, Rs 111.8 billion and Rs.125.6 bn in the years 2009, 2010, 2011, 2012 and 2013 respectively, to its members.

The EPF has invested around 92 per cent of its funds in Government securities, and around 6 per cent in the stock market. The balance 2 per cent has been invested in corporate debentures and short-term government securities. The investments in the stock market have been 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 and 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 practiced by many large long term funds all over the world, the EPF maintains its equity portfolio as a pool of diversified investments.

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.

In recent times, the Colombo Stock Exchange had experienced a bearish trend, where prices of a majority of the shares have been trading at lower rates than those that prevailed previously. This is not an unusual phenomenon today, with many stock markets all over the world experiencing slow growth on downturns. In such situations, it is natural to have unrealized losses in some shares on a marked-to-market basis, but such losses would be realized only if such shares are sold at losses. Accordingly, there have been no realized losses to the EPF, and in any event, most shares are expected to record reasonable increases in value of the Fund over the longer term.

Therefore, the EPF regrets the attempts of certain persons to mislead the general public and its members by erroneous and sometimes mischievous media reports.
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Auditor General H.A.S. Smaraweera in his review of the 2011 annual report of the Employees Provident Fund (EPF) said Sri Lanka’s main social security fund had lost nearly Rs.11.7 billion through investments in 58 private institutions.

He said these losses had resulted in a 1 % decrease on benefits payable to 2.5 million EPF members in 2011.

“There has been a 1% decrease on the benefits payable to the members in 2011 as compared with 2010. This is a decrease on investment income of Rs.5,049.303,683 in 2011,” Mr. Samaraweera stated in his audit review of October 10, 2013.

Out of the long term and short term investments amounting to Rs.63,169,398,923 made by the EPF in 76 companies in the share market by January 15, 2013, the value of investments made in 58 companies amounting to Rs.54,006,955,606 had diminished by Rs.ll,737,841,979.

“Some 500 million rupees invested in 1,863,676 units of an airline company in 2010 had not yielded any income to the fund since the date of investment. In its response, the Central Bank said it was confident of future profits from the companies with the losses decreasing gradually,” the Auditor General’s report noted.

Commenting on unsound or risky investments in private company equities, the Auditor General pointed out that Rs.2,975 million invested in 29,750,000 units of an electricity generating company from April 2007 to November 2008 had not yielded any income to the Fund in 2008, 2009 and 2010 while Rs,540,909,091 had been received twice in the year 2011 as dividend income Nearly Rs.205,489,613 was used to purchase 5,091,200 shares in a Finance Company from February 23, February 2011 to November l, 2011 and the loss of Rs.4,285,937,284 as revealed in the last published accounts of the Company had not been taken into consideration and at the time it was decided to invest in this finance company.

Even during the year under review this company had lost Rs.3,830,135,175. The company shares had been purchased at an average price of Rs.40.36 a share when the market price of a share was Rs.24. The Fund had not received any income from the investment since the date of investment.

The auditor General’s report states that fund had invested a sum of Rs.680,232,419 in 20,942,989 shares of a communications company and the share of that company had not been offered for sale in the stock market since 2009. As such the Fund could not earn capital profits even though dividends amounting to 3.39 per cent in 2008 and 2009 and 0.81 per cent in 2010 and 1.67 per cent in 2011 had been received during the period of investment such income was not commensurate with the investment. In this connection, the Central Bank of Sri Lanka informed that as the communication field would further develop in Sri Lanka it is believed that the dividends and the capital profits receivable by the Fund from the company would increase.

‘The EPF has not received any income whatsoever for the investment of Rs.3,555,864,821 in the year ending December 31 2011 from the shares of 11 companies,” Mr. Samaraweera said.

In keeping with Central Bank’s Monetary Board instructions to increase the investments in the Hotels and Transport Sectors, investment of Rs.3,882,771,148 in 18 Hotels as at December 31 2010 and Rs,7,219,711,548 in 16 Hotels as at December 31 2011 had been made. An income of Rs.50,807,109 or 1.31% had been received in 2011 on the investment made as at December 31 2010 while Rs.173,616,783 or 2.4% was received in the 2012 for the investment made as at December 31, 2011.

In keeping with the decision of the Monetary Board, Rs.810,321,610 was invested by 31 May 2010 in a Hotel Company which had incurred losses amounting to Rs.520.49 million, Rs,405,38 million, Rs.298.85 million and Rs.147,02 million in 2007, 2008, 2009 and 2010 respectively and had unfavourable earnings ratios of 3.15, 3.45, 1.09 and 0.13 during the respective years. The loans payable by this Company by that date amounted to Rs.6.28 billion (approximately). The Fund had not received any income whatsoever since then.

Out of the 16 Hotel Companies referred to above, in which the Fund had invested Rs,7,560,267,157 as at June 30, 2012, the market value of the shares of 13 companies had decreased by Rs,1,605,197,185 and the Fund faced the risk in earning capital gains by the sale of the shares of those companies. In this connection, the Central Bank of Sri Lanka said looking at the progress in the tourism industry, an increase of the prices of shares of all Hotel Companies can be expected along with the share market reaching normalcy, the AG’s report said. (Sandun A.Jayasekera)
http://www.dailymirror.lk/news/46122-investments-in-shares-epf-loses-billions.html

When we learn elements of accounts in 1960s we were told to take

market price or cost price which ever is law.

Auditor General must conduct basic accounting class for Pundits Of CBSL