During the previous quarter, the market value of the listed equity portfolio of the Employees’ Provident Fund (EPF) has increased by over Rs. 20 billion, reaching Rs. 112 billion as of 31 December 2021 from Rs. 92 billion on 30 September 2021. This raises the question as to whether it is time the EPF considers increasing its investment in the Colombo Stock Exchange (CSE) due to the positive performance observed in the market over the past two years.
According to a press release published by the Central Bank of Sri Lanka (CBSL) on Monday (17), the market value of the listed equity portfolio of the EPF as at end-December 2021 recorded a value of Rs.112 billion against its cost of Rs. 84 billion, thereby reflecting a substantial unrealised gain of Rs.28 billion in the portfolio. In addition, the EPF also realised Rs. 4.7 billion during the year 2021 by way of scrip and cash dividends as well as capital gains. Further, the dividend income received during the three-year period from 2019 to 2021 was recorded at Rs. 2.5 billion on the unlisted equity investment portfolio of Rs. 9.6 billion.
Under its investment policy, the EPF maintains its investment portfolio with the long-term objective of maximising the returns to its members while preserving the value of the fund. Accordingly, the EPF has invested 94% of its funds in government securities and the balance in listed and unlisted equities, corporate debentures, trust certificates, and other money market instruments. Therefore, only around 3% of the EPF funds are invested in listed and unlisted equity.
Considering the performance of the CSE over the past two years, a legitimate question arises as to whether the EPF should increase its investment in the market to ensure that its members benefit from the massive gains on offer in the stock market.
The All Share Price Index (ASPI) went up by 80% in 2021, while the Standard and Poor’s Sri Lanka 20 (S&P SL20) index was up by 60%. Market capitalisation by the end of the year was Rs. 5.48 trillion – a historic high for the CSE. Similarly, the daily average turnover also reached an all-time high of Rs. 4.88 billion easily surpassing the targeted daily average turnover of Rs. 4.0 billion in the beginning of 2021.
However, understandably, there will be considerable hesitancy not only on the part of the CBSL but also among the public regarding such a development due to the infamous “pump and dump” in 2012.
Controversies over manipulation at the CSE began to emerge in the third quarter of 2012.
Consequently, a total number of 19 investigations were conducted by the Securities and Exchange Commission (SEC) into instances of suspected market misconduct, including market/price manipulation, insider dealing, front-running, etc.
These manipulations included a practice called “pump and dump” – a scheme that attempts to boost the price of a stock through recommendations based on false, misleading, or greatly exaggerated statements.
The perpetrators of this scheme already have an established position in the company’s stock and sell their positions after the hype has caused the share price to increase. It creates an artificial picture which masks the stock’s true value.
The manipulators use this to their advantage to earn a profit, while investors who are unaware of the manipulation and who make decisions based on the available information stand to lose, sometimes substantially, as a result of manipulation. In fact, manipulators count on this, often making a profit on the losses of others. This practice is illegal based on securities law and can lead to heavy fines.
The EPF made significant investments in these “pump and dump” stocks and the resulting losses incurred by the EPF from these investments amounted to Rs. 11.04 billion as of 20 June 2012 and out of 65 companies in which investments were made, only 17 had recorded profits.
The EPF was established under the EPF Act No. 15 of 1958 and is currently identified as Sri Lanka’s largest superannuation fund with an asset base of Rs. 3.2 trillion at the end-2020.
EPF’s equity portfolio soars to Rs. 112 b
19 Jan 2022
EPF’s equity portfolio soars to Rs. 112 b
19 Jan 2022