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Author: Shane My   |   Latest post: Sun, 1 Sep 2019, 6:43 PM

 

EPF Investment Portfolio vs Unit Trust Portfolio, which one is better?

Author:   |    Publish date:   |  >> Read article in Blog website


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 
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:
Simulated EPF Portfolio for 2017
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:
Matching EPF Portfolio to Unit Trust Categories
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:
Conventional Unit Trust Portfolio equivalent of EPF for 2017
Islamic Unit Trust Portfolio equivalent of EPF for 2017
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:
Conventional Unit Trust Portfolio equivalent of EPF for 2018
Islamic Unit Trust Portfolio equivalent of EPF for 2018
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. 

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. 

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!

Join the discussion EPF versus UT Portfolio HERE
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calvintaneng YOU MUST BUY A STOCK WITH GOOD FUNDAMENTAL FOR SAFETY

EXAMPLE IS UZMA AT 66.5 SEN WITH NTA OF RM1.54 (MORE THAN 50% DISCOUNT TO NTA WHICH GIVES MARGIN OF SAFETY

THEN YOU MUST KNOW A STOCK CAN MOVE IF THERE IS COMING CATALYST

WHAT CATALYST UZMA GOT?

ANSWER

UZMA GOT 12 MONTHS CONTRACT JOBS (PLUS MANY OTHER JOBS AWARDED) TO DISMANTLE & DECOMMISSION 22 OIL RIGS

BECAUSE OF MONSOON FROM NOVEMBER TO MARCH 2019 (5 MONTHS OF MONSOON IN SOUTH CHINA SEA) ONLY 6 OIL RIGS WERE DISMANTLED

SO AFTER APRIL 2019 MONSOON OVER UZMA WILL CONTINUE TO DISMANTLE 16 MORE OIL RIGS

THESE GOOD MONTHS OF APRIL TO JUNE 2019 SHOULD REPORT BETTER PROFITS FOR UZMA

SO HIGH PROFITS WILL BE A CATALYST AS PEOPLE WANT "EARNINGS"

AND ANOTHER PONTER IS UZMA DIRECTORS ARE TURNING BULLISH AND BUYING UZMA SHARES WITH THEIR OWN POCKET MONIES

SO ALL FACTORS POINT TO UZMA AS A GREAT BUY NOW!!!
17/08/2019 4:32 PM
kcchongnz A few comments here,

1) Short-term return of Unit trust funds, and its comparison has not much meaning as upfront fee will trash the real return.

2) Investment in unit trust funds, or any investment for that matter, has to be long-term, and comparison has to be long-term in term of compounded annual return, CAR.

3) Compounded return is normally in annual basis, or more precisely, compounded annual rate of return.

4) Cumulative return, say over two years, is not the same as CAR.

5) Return alone says little about how good the strategy is. It has to consider in parallel with the risk involved.

6) The risk profiles of unit trust investment and EPF dividend are totally different.

7) Unit trust investment may be good for those who have no knowledge about investing in stocks, but asking EPF contributor to withdraw their money to invest in unit trust, in my personal opinion, is highly irresponsible.

8) Why 7 above? Go check the return of unit trust funds over 3 years, 5-year, 10-years or longer periods in Malaysia, and compare with the return of EPF. I haven't taken into consideration of risk-adjusted return yet.
18/08/2019 9:36 AM
winbigbursa So, just leave money in EPF, is much safer option, with good comparative returns.
18/08/2019 9:48 AM
winbigbursa Safety of capital is almost guarantee, dont expect hugh annual returns like 20%, etc , but anytime better option for retiree age contributors
18/08/2019 9:50 AM
RainT yaya

unit trust is not capital guarantee and also high sales charges
18/08/2019 11:11 PM
RainT kc Chong is right

unit trust need hold long term

so cannot compare like that
18/08/2019 11:11 PM
Plantermen Epf trumps unit trust price any time. the sales charge le y by unit trust company (5%) is a killer not to mention the management fee etc
19/08/2019 8:15 AM


 

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