Don’t judge EPF investments in Bourse too harshly

Monday, 2 July 2012 01:21 -     - {{hitsCtrl.values.hits}}

By R.M.B. Senanayyake

Dr. Harsha de Silva has good grounds perhaps for his criticisms of the EPF investments in the stock market, but his criticisms are having a destabilising effect on the stock market, which was stabilising after a long decline.

There are some facts about investment in the stock market by any large investor.

This is because our market is too small. The average trade is only a few thousands of shares. Whenever a fund or a large investor wants to buy a large quantity, he has to accumulate over a period or his broker has to consult other broker firms and ascertain if they have such large quantity for sale.

Soon word gets around that there is a large buyer for such and such a share. The natural reaction is for such brokers to pass the information to their clients who have any big quantity of such share as they seek to find out if they would like to sell to obtain business for them. Soon the whole market gets to know that some investor or fund is in the market as a buyer for such and such a share.

In the case of foreign funds, they give limits to the broker which they cannot exceed. If they cannot get the share at their price, the foreign firm will drop the purchase and move on to some other share or give up buying altogether. But in the case of a local fund like the EPF, they would prefer to buy the share their superiors have decided on.

The brokers will quote higher prices and persuade the local fund that they have to pay a premium if they want to buy that share. This scenario gives room for broker firms and employees in such firms to do what is called front-running by the regulatory authorities. They buy or advise their clients to buy hoping to sell at a higher price later when the big buyer enters the market. So the EPF as much as other local funds have to pay higher prices for their purchases because they want quantities larger than available in the market in the usual course.

It is not only difficult for a large investor like the EPF to invest in our small market. It is more difficult to get out. Many investors are holding shares which they have bought at high prices during the bull market of 2010 and 2011 first half. These investors are carrying unrealised losses in their portfolios. So is the EPF.

Unlike these investors, the EPF could not have got out in the falling market without causing a total collapse of the market. So the EPF held on and like so many other investors it is carrying large unrealised losses. The EPF is allowed to invest only 6-7% of its collections.

For years, broker firms were demanding that the EPF, the largest source of savings in the country, should invest in the stock market. It is in recent years that the EPF began investing in the stock market. It must gather experience and learn the hard way to avoid the pitfalls and perils in the market. But let us not be too harsh in condemning it. I wonder whether the EPF should be a market maker instead – buying up shares when they reach low levels and selling them when they go too high. But the EPF should continue to be in the market for the long haul.