Background
Despite
a difficult year in 2018, EPF still manage to generate a respectable
dividend return of 6.15% for Conventional Savings and 5.90% for Syariah
Savings. When majority of stocks and unit trust funds were red with
losses in 2018, our every reliant pension fund manage to churn a single
digit positive return for all of us
So what is the secret sauce of consistent return by EPF?
EPF
uses a long term investment strategy called Strategic Asset Allocation
(SAA). SAA is an strategy that divides the investment portfolios of EPF
into different assets classes to minimise risks, such as equities, fixed
income, alternatives and cash
Apart
from SAA which is use as a long term investment strategy, EPF also
deploys two other strategies to manage medium and short term investment.
The medium term strategy is called tactical asset allocation (TAA) and
while the short term strategy is called dynamic asset allocation (DAA).
EPF's
SAA strategy for 2017-2019, calls for the fund to invest up to 51% of
its assets in bonds, 36% in stocks, 10% in real estate, and 3% in money
markets. As well, up to 32% of its assets is to be invested abroad.
EPF's SAA in action
The
effectiveness of SAA strategy can seen in the EPF's portfolio
performance for 2017. Referencing EPF's 2017 annual report, I have
summarized the portfolio allocation and performance of each asset class
in the table below:
 |
| EPF 2017 Asset Allocation and Gross Income |
Based
on the table above, it is certainly very impressive for EPF to be able
to generate returns of 11.46% for equities that is RM334 billion in
size! The 8.55% returns from the Real Estate & Infrastructure
portfolio can also be considered as above average. The SAA strategy also
mandates a large amount of the portfolio to be allocated into MGS,
Loans and Bonds, thereby creating a safety net for our savings.
It
is also important to note the SAA strategy for 2017 allows EPF to
venture into overseas investment. 28% of the total portfolio in 2017
have overseas exposure, contributing 41.45% of the Total Gross Income
and generating returns of 10.83%.
All
in all, EPF has done extremely well in terms of managing the risk of
investing such a huge portfolio as well as ensuring that riskier
investment (e.g equities) are able to generate the intended double digit
returns.
Can a "Unit Trust" portfolio that mirrors EPF portfolio perform better?
Step 1: Generate EPF's Local and Foreign Portfolio Allocation
Step 1: Generate EPF's Local and Foreign Portfolio Allocation
In
order to construct an EPF equivalent unit trust portfolio, I would need
to determine what constitute the portfolio allocation of EPF towards
local and foreign investment. While there is no official declaration of
EPF with regards to the exact foreign investment within the asset
classes, I have managed to collate information from local news
publication in order to make an assumption:
The
press statement above serves as basis of breaking down the 28% of total
overseas portfolio for 2017 into assets classes as shown in the
"simulated" table below:
Step 2: Matching Unit Trust Categories to Simulated EPF Portfolio
The table below show matches the simulated EPF portfolio to Unit Trust Categories under Conventional and Shariah:
Step 3: Compare Unit Trust Fund Portfolio Returns versus EPF Returns for 2017
The Unit Trust Portfolio for Conventional and Islamic are constructed based on the fund returns in 2017 as shown in the tables below:
The
constructed Conventional Unit Trust Portfolio was able to generate
returns of +12.35% while the Islamic portfolio returned +8.72%. In
comparison to EPF's 2017 dividend of 6.90% for Conventional and 6.40%
for Islamic, both unit trust portfolios were able to outperformed EPF.
Step 4: How does the same unit trust portfolio fare in 2018?
As mentioned earlier in this blog post, 2018 was a year of losses for equities which significantly impacted the performance of both unit trust portfolios as shown below:
A
poor performing equity market clearly highlight the weakness of equity
based unit trust funds in any portfolio. Such is the case for our
simulated Unit Trust Portfolio equivalent of EPF where conventional and
islamic portfolios only manage 0.01% and -1.81% respectively.
 |
| Simulated EPF Portfolio for 2017 |
The table below show matches the simulated EPF portfolio to Unit Trust Categories under Conventional and Shariah:
 |
| Matching EPF Portfolio to Unit Trust Categories |
The Unit Trust Portfolio for Conventional and Islamic are constructed based on the fund returns in 2017 as shown in the tables below:
 |
| Conventional Unit Trust Portfolio equivalent of EPF for 2017 |
 |
| Islamic Unit Trust Portfolio equivalent of EPF for 2017 |
Step 4: How does the same unit trust portfolio fare in 2018?
As mentioned earlier in this blog post, 2018 was a year of losses for equities which significantly impacted the performance of both unit trust portfolios as shown below:
 |
| Conventional Unit Trust Portfolio equivalent of EPF for 2018 |
 |
| Islamic Unit Trust Portfolio equivalent of EPF for 2018 |
If
an investor is looking for consistent positive returns for the long
run, the best option might be to remain invested into EPF where for
2018, dividend of +6.15% was declared for Conventional Savings and 5.90%
for Islamic Savings.
Summary
I have also summarized in the table below the compounded returns over 2 years (2017 and 2018) for both the Unit Trust Portfolios versus EPF dividend return.
Summary
I have also summarized in the table below the compounded returns over 2 years (2017 and 2018) for both the Unit Trust Portfolios versus EPF dividend return.
Despite selecting the top performing unit trust funds to be included into the constructed portfolio, EPF cumulative returns still outperformed the cumulative returns of both Unit Trust portfolios over a period of two years. The consistency of EPF in producing positive return is unparalleled and jives with many Malaysians whom prefer consistent and stable returns for our live savings.
Never the less, unit trust will always be an option for investors with higher risk appetite. An experienced and knowledgeable investor would be able to apply the right strategy in order to take advantage of the various opportunities that arise from market and fund volatility. Huge double digit returns for an investor is totally possible as illustrated in the returns for the 2017 portfolio.
I hope this article has been an enlightening one in terms of helping investors to understand both EPF as well as Unit Trust. If you like this post, please feel free to share this and do follow me at Invest Made Easy Facebook for future updates!
Cheers and Happy Investing!
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