Saturday, September 6, 2008

SWF and EPF

SWF has been gaining a lot of attentions lately. Are they commercially or politically driven? Blogger S. Dali wrote a piece about SWF appears in the Star newspaper today. He opined SWF acts as a new lender of last resort and stabilizing force in the financial markets. That does not sound like not many of them operate purely on commercial basis.

Let’s talk something similar in nature, EPF the institution that managing our hard earned money. EPF ranked 8th largest fund of its kind in the world with US $ 94 billions or RM 320 billion assets under management in Q1 2008. Are they commercially or politically (nations development) driven? They allocated about 32% of their assets in Malaysian Government Securities, 39% in Bonds and loans, 20% equities and 9% others. Essentially, almost 70% plus invested in fixed-income securities.

Average dividend has been around 4-5% per annum. With that kind of asset allocation, we should actually expect them to deliver around 6-7% in the long run. They are under-performing in my opinion. Why? fixed income market should generate 5-6% while equities and others with passive investment strategies should yield around 9-10% per annum. Given ratio of 70% fixed income and 30% on equities and others, returns should be 6-7%.

Their elephant size fund should not be an excuse of non-performance. You know where I am leading to, they could be bailing out some companies or financing low return projects.

We have a choice whether we should keep complaining or do something. If we decided to do something, make sure we have enough discipline. Most of people withdraw their money when the market is at the peak and essentially destroying their wealth – buy high sell low. We may end up getting worse than EPF 4-5% return.

If I decided to withdraw, I will go for equities funds to cut fixed-income exposure. There is no point going for money market or bond funds as EPF investment in MGS is quite conservative and safe. No point paying your agent and fund manager money for nothing.

The other consideration is loading fees of 5.5 – 6.5%, it will cost you 1.1% - 1.3% per year if you invested for 5 years but 0.55% - 0.65% per year if you stay invested for 10 years. This is not counting your annual fund management fees. Picking a wrong fund manager will destroy your wealth. You got to evaluate risk-reward hurdle, I will take it if a fund manager has a track record of generating at least 9-10% annual compounding return.

1 comment:

hng said...

Generating annual income of 9-10% is achieveble without any help from fund manager. The return of REITS in Malaysia mostly at 8%-9% (axis, UOA, Tower) with some even at 10% (helter, atrium, Amfirst). As most of these REITS declare income distribution either quarterly or semiannually, investor could buyin at the time 1-2 month before the income declare. By adopting timing and switching strategy, investor could enjoy even higher return. It is like getting multiple rental income from various asset without having to owe it!