EPF Member's Investment Scheme. WHAT, WHY, HOW..SURE OR NOT? (Part 2)

This is the second installment for the series. If you miss the first, here's the link: EPF Member's Investment Scheme. WHAT, WHY, HOW..SURE OR NOT? (Part 1) 

A start point would be to refer to Lipper ratings (a fund rating agency). You will need to get a hardcopy of the entire unit trust funds in Malaysia in a table from “The Edge” magazine RM5 and Personal Money RM8. You will also need to use this web link: http://www.lipperleaders.com/. The web offers the advantage of having to filter by asset type while hardcopy shows you the fund size (which is important as will be explained later) & Personal Money includes trust funds by insurance companies. In a nutshell one can narrow funds into the following major groups:

    #1 Equities (highest risk/best returns)

    #2 Mixed Assets (best of both)

    #3 Bond (lowest risk/least returns)

Using Lipper makes it easy because its ratings per classification are compared relative to peers of the same classification and are based on equal-weighted average of percentile rank. The highest 20% of funds in each classification receive a score of 5 a.k.a LEADER, the next 20% receive a score of 4 and so on until 1 (lowest 20%). Lipper uses those ratings on the three following conditions:

    1. Total Return; fund’s historical return performance.

    2. Return; fund’s historical risk-adjusted and adjusted for volatility returns.

    3. Capital Preservation; fund’s historical loss avoidance.

You will use this to define your “best unit trusts fund” criteria including another two additions: Fund Size and Expense. This will be explained as your read on la. First step is to define your expected or minimum returns. For example, I have an expectation of 12% per annum growth (greedy lo) and you will use that % for comparison against different years of total returns. You don’t have to take out your calculator and punch some numbers because I’ve wasted some of my lifespan doing it for you.

Certainly the % will differ based on asset type, I would say the following is a good guideline for everyone to begin screening for good funds:-

    #1 Equities =>10%

    #2 Mixed Assets =>6% to 9%

    #3 Bond => 4.5% (must be HIGHER than fixed deposit interest rates)

The Bond Asset (Lowest Risk/Least Returns)

Let’s start with bond which is a type of security where the issuer (debtor) owes the holders (creditor) and the coupon is the interest. Bonds can be issued in the financial market by various parties such as public institutions, companies, the government as well as credit institutions like banks. In the Malaysian market structure they are classified by the type of issuer-government, quasi-government and corporate. http://asianbondsonline.adb.org/malaysia/structure/instruments/bond_types.php

Step 1: Expectations. Decide your risk profile. I will pick 5% returns p.a. and using the table from the above, the expectations are: 1-year returns 5%, 3-year returns 16% and 5-year returns 28%.

Step 2: Screening. Fund screening can be done via web @ lipperleaders.com. Set a time period of “5 Year” with Total Return of “5 – Lipper Leader” and leave the rest by default. See an example below:-

Step 3: Weeding. Some hands on here; cross reference your results with The Edge/Personal Money. #1 Add fund size #2 Add 1-year and 3-years returns respectively. Using values from step 1 begin to cross out underperforming funds. Say “adios” to KAF Bond, RHB Islamic Bond & PB Fixed Income.

*Expected returns: 1-year returns 5%, 3-year returns 16% and 5-year returns 28%.

Step 4: Fund Size comes into the picture here. Usually bigger funds do not outperform smaller great ones hence I will weed those largest out. Now let’s shift+delete Public Islamic Bond and Public Bond.

Step 5:  Preservation as the next level differentiator so take off those with value of 2. That leaves only AmDynamic Bond and PB Islamic Bond. From here onwards your choices are narrowed down:

1. Have an insurance investment linked plan? For Affin go for AXA Affin Active Bond.
2. Likewise for Great Eastern; either Dana Sejati or Lion Fixed Income.
3. Need bond market exposure out of Malaysia? Hwang Select Bond offers you that.

Step 6: Expenses matters!! Head to http://www.invest.com.my:8080/personal/funds/compare/, browse the menu and look for your fund OR you can compare up to 3 funds at once. Make an educated rough guess to see which is more expensive, you don’t need a PhD.

PB Islamic Bond: 15% fee of returns, O.M.G

Go with AmDynamic Bond with a track record of *9.40% returns p.a.!!

*Minus annual management fee not considering one time sales charge, returns p.a. based on 5-year performance

Remember from my previous post in Part 1. "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." 

Here I rest my case, a 9.40% p.a. average return is nearly 10% and here I am talking about only the Bond class which has the least risk. The best part has yet to come (Equities and Mixed Assets class), stay tuned!

Disclaimer: The reports, analysis and recommendations in this blog are solely my personal views. I do not link to any investment body or company. As such, I will not be responsible of any of your investment decision. Consult your investment adviser or come to your own conclusions before making any investment decision.