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:
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| 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.
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| Simulated EPF Portfolio for 2017 |
The table below show matches the simulated EPF portfolio to Unit Trust Categories under Conventional and Shariah:
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| 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:
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| Conventional Unit Trust Portfolio equivalent of EPF for 2017 |
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| 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:
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| Conventional Unit Trust Portfolio equivalent of EPF for 2018 |
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| 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 compounded returns still outperformed the compounded 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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