EPF Member's Investment Scheme. WHAT, WHY, HOW..SURE OR NOT? (Part 1)

It is true that over the last decades since inception, EPF has done a decently good job at managing our savings fund. EPF declares an annual dividend on funds collected which hit a record high when Malaysia was an established manufacturing base and has since been progressively declining since 1996 and will continue to do so. The reason is simple; the lowered dividend rates are a result of EPF’s decision to invest in low-risk held to maturity investments, plainly speaking Malaysian Government Securities, loans, bonds and other money market instruments.

EPF’s exposure in held to maturity investments is now at a staggering 60% and is expected to gradually increase due to growing national debt, yes GROWING. The underlying problem with this strategy is that it is tightly knit with the interest market rate and for the past few years it has been low and will continue to do so owing to the slow recovery global economy. Expect an average of 5%.

Source: KWSP's annual reports

In April 2012, it announced that it will increase its investment in global equity and fixed income as part of its diversification strategy which is in line with the mandate given by the government for the EPF to invest up to 23% of its investment assets in international markets (currently at 14%). This pressure came about as the fund is growing at a large pace of nearly RM4 billion a month. It faces constraints domestically given the limited breath of investment products and liquidity to trade on large volumes. Hence it is moving to increase its investment overseas to complement EPF’s long-term investment plan and to provide a “reasonable rate” of return to the savings of its members.

Source: KWSP Annual Report for Financial Year 2011

In a separate report it is said that the fund’s global portfolio will be 20% by 2014. But remember, by going overseas, the fund will not be given the same preferential treatment as it has locally. It may very well be suckered into making deals. Domestically it was easy for EPF to take over our “daylight robber” PLUS highway with the backing of the government. Looking offshore, Khazanah paid a ridiculously high premium for healthcare assets in Singapore just because we have to cross a bridge just to get here oh??. So how confident can we be in making better returns overseas?

 It is a cause for concern when there the risks involved are tabled out, it has become greater. One, investing overseas is not really our forte; local funds with overseas exposure are under performing with some even deeper than the Pacific Ocean!! If the private sector is finding difficult it what should we expect of our public institution? Second, we have been running budget spending deficits (e.g.  Your bills are higher than your income) for the last 14 years until we’ve accumulated a total debt to GDP ratio of almost 55%. For a government that continues to overspend and shows no sign of abating, can you entrust your lifelong savings to continue crediting a gambler?

Nevertheless, EPF’s move is inevitable as it is becoming too large for the domestic market. EPF owns roughly 10-15% of the equity stock market and has crowded out other players, driven up valuations and reduced our already illiquid market. "And during his speech at Invest Malaysia 2010, Prime Minister Datuk Seri Najib Razak had said the EPF accounted for up to 50% of the local equity market's daily trading volume, which is NOT healthy. From an efficient market perspective, the stock market must be liquid enough such that no one single player can control the market," he added.

Source: Securities Commission Malaysia and KWSP annual reports

Looking overseas is positive for both the local economy and state investment funds. By extrapolating the growth of EPF and Bursa Malaysia, EPF will reduce its domestic equity stake to less than 10% by the year 2020 (assuming 35% in equities with 23% of it being global). With Bursa having a larger capital base but almost similar growth rate to that of EPF, more market capitalization will be available primarily to institutional funds like unit trust funds and secondly to retail investors (people like aboi who buys and sells as he pleases).
Investing your EPF monies in unit trust products gives you the opportunity to optimize the potential of your EPF savings for potentially higher returns (at acceptable level of risks) over the long-term, thus providing you with a potentially bigger pool of funds upon retirement. The scheme allows EPF members to invest 20% of the amount in excess of the required Basic Savings in Account I.

You can only invest through appointed unit trust management companies by the Ministry of Finance. You can find it via http://www.kwsp.gov.my/portal/en/web/kwsp/member/members-savings-investment-withdrawal. You are allowed to make your second withdrawal three months after your first withdrawal, provided you are still eligible. Why invest via this scheme?

1. No cash investment required - Investment is transacted directly from your EPF Account 1.

2. Diversification - Opportunity to diversify your retirement funds with EPF approved funds.

3. Capital appreciation - Opportunity to reap capital growth as part of the return on your investment to boost the total lump sum of your EPF savings.

And lastly to  maximize the power of compounding - If you are ignorant and you continue to hold your money in EPF which gives you an average of 5% return, how much will it grow? Your money will only grow 2x times (double) in 14 years. But what if you can maximize it to say 10%, your money will double in 7.5 years. 15% it grows 4 times every 10 years. If you eat enough ginseng and bird’s nest, you will probably have a lot of 10 years in your life! If you are 25 and you live until 75, you have five 10 years. Eat more ginseng and maybe you have six, seven or eight 10 years more.

The table above shows the Basic Savings amount required to be retained in Account 1 based on age. For example: A member at aged 27 with savings of RM40, 000 in Account 1. The required amount needed is at least RM12, 000. Hence the amount in excess of Basic Savings in Account 1 is as computed: RM28, 000 (RM40, 000 – RM12, 000). Eligible amount for investment scheme (20% x RM28, 000) = *RM5, 600. *Please note that the minimum investment amount for most unit trust funds is RM1, 000.

At 15% returns p.a., RM5, 000 will grow to RM330, 000 in 30 years! But with 5% (EPF) p.a. you will only obtain RM21, 600. Stretch it to 10% it grows to RM87, 000! Let’s don’t argue at this page whether 15%-10% is achievable or reasonable, I will leave it for future postings.

Click here for the link to Part 2 of this series.