Is It True That EPF Investment Schemes Perform Below Actual EPF?

As I am writing this article, EPF has just declared its highest return ever of 6.15% in this decade. Many are eager to hear the good news, and certainly many EPF depositors are content with EPF’s performance compared to the performance of other assets. Figure 1 shows the geometric mean for ten years (from year 2001 to year 2010) of historical performance of EPF is 5.04% p.a.Year 2011 gave 6.0% dividend. For comparative reasons with the data, we used information over ten years, from year 2001 to 2010.

Here is not the platform to contest appointed and approved EPF fund managers’ performance if they have performed below EPF returns shown above or merely on the average return of 5.04% p.a, neither is it trying to question any performance of EPF. What I am more interested in is to see the rational decisions and how EPF depositors justify the performance of these two; namely EPF and EPF Investment schemes managed by fund management institutions.

Logically, we would not simply withdraw an amount from EPF Account 1 to invest in another fund if the EPF investment scheme’s portfolio performance does not assure us that it can perform better than the EPF return. To justify it, we need to analyse similar years of return of assets involved in EPF and the fund management. Hence, the basic principle of investment applies, where we look at a longer holding period, such as ten years, in which volatility can be easier managed. We assume all fund managers are able to perform at least at the index value of their respective class of asset, and also without taking the cost of sales involved in investing into any funds or assets managed by appointed fund management institutions.

Loss Aversion Bias and Status Quo Bias If you are a conservative investor after a fact-finding examination with a qualified financial adviser, you should expect of a growth of 80.18% or 6.06% p.a.over ten years,with a portfolio of 70% Fixed Income and 30% Malaysia Equity (FBM KLCI index). This would translate into an additional gain of 1.02% p.a. or 10.15% total capital gain if you enhance your EPF retirement fund return without developing any loss aversion bias towards managing your retirement fund. The real rate of return of EPF of 2.80% p.a after adjusting for inflation rate of 2.24% (See figure 4)would be marginalised if the actual inflation is higher than the government declared inflation rate which is measured by the Consumer Price Index (CPI). For example if you agree to 4% p.a. inflation, then you just simply earn 1.04% p.a. for EPF and 2.06% p.a. if it was withdrawn from EPF for EPF investment scheme.

You are probably happy with the status quo of EPF, and are unable to understand the management of the investment risk or volatility of the portfolio, this would easily create a situation where you would try to avoid any option that can potentially enhance your EPF retirement fund. This comparison shows it is still worthwhile for any conservative investor to withdraw from the EPF for fund management investment scheme despite taking a minor risk premium and small gain. For those who fall under the categories of high risk takers, from the moderate to very aggressive, any development of Status Quo and Loss Aversion Biases certainly do not help them to retire earlier because they are losing out this wealth enhancement opportunity in maximising EPF retirement fund return. Complacency would not help the moderate and higher risk EPF depositors if they still have capital shortfall in achieving their life goals or need a long period of time to accumulate wealth for their life goals target.

Regret Aversion Bias

During the Global Financial Crisis 2008, many EPF depositors who have withdrawn from EPF Account 1 for unit trust funds investment suffered badly. Many simply developed fear and loss of confidence resulting in loss aversion bias, and they chose not to rebalance their portfolio even though they have been advised by qualified and competent financial advisers to do so. Many preferred to blame fund managers for poor performance, financial practitioners for poor portfolio management and since then some of them dare not be involved in unit trust investments anymore.

Although year 2009 proved to be a great recovery year from the trough, and the bull run continued throughout year 2010 for the local equity market, many who developed Regret Aversion Bias after suffering in 2008 tended not to continue or hung on their funds without rebalancing despite being familiar with the famous investment guru Warren Buffet’s advice, “Be Fearful When Others Are Greedy and To Be Greedy only When Others Are Fearful”. This bias seeks to forestall the pain of regret associated with poor decision-making during the year, and caused many to hold on to losing positions for too long in order to avoid admitting errors and realising the losses.


Unlike EPF, unit trust funds and private managed accounts of EPF investment schemes carry higher investment risks without any statutory protection. Therefore it is necessary to set up a well-diversified and proper asset allocation portfolio for the EPF withdrawals to mitigate the invest- ment risk. Rebalancing portfolio is crucial to maintain an intact asset allocation strategy that suits your investment philosophy. Figure 3 shows if you have rebalancedyour investment portfolio frequently for a moderate risk portfolio, for example on a yearly basis, you would have a portfolio with steadier and better investment return.

Narrow Framing and Asset Allocation

Very frequently, we see EPF invest- ment scheme investors invest all EPF withdrawals into a single asset, most likely an equity asset. You may think that EPF is equal to fixed income asset based on its average return and its major asset class which is in fixed income and cash. You may simply just diversify it into different categories of equity asset, such as syariah and non-syariah equities; dividend and growth equities; big cap and small cap equities. Since EPF has restricted the funds to be invested in local equity market, you would not be able to diversify your portfolio into other potential equity asset in foreign markets. With that in mind, does this mean you have effectively diversified your portfolio? And if yes, is it a sustainable portfolio and does it reflect your investment philosophy?

We tend to be happy and praise the return of our EPF investment scheme or its funds if it has performed better than EPF in a particular year. In fact EPF depositors become greedy and withdraw more to invest in particu- larly, top performing equity funds. Conversely, we could easily panic, complain and contest the compe- tency of fund managers when we see EPF giving better returns than EPF investment schemes. Those who invest all their EPF withdrawals into equity funds usually tend to forget their initial diversification strategy of investing into equity assets while treating the balance of their EPF like a fixed income asset. The right way to look at it is to view your EPF and your EPF investment scheme as assets in a single and whole portfolio and evaluate the performance. However, when the situations are not favourable, we tend to break it into two separate portfolios to compare the performance. Hence, you are creating Narrow Framing in managing your investment portfolio.

For example, in the economic downturn of 2008, EPF declared 4.50% dividend. If all your EPF withdrawals were in equity funds of the EPF investment scheme and assuming it had performed on par with market performance, you should see negative returns of -38.49% in your unit trust funds. Definitely, you would not like this number.Many had said “Unit Trust is lousy, performing below my EPF and cannot be trusted!” But, if you look at both EPF and your funds in the EPF invest- ment scheme as a single combined whole portfolio and assume 70% of capital retains in EPF and 30% in equity funds withdrawn from EPF at the time, you should say “Hey I just lost -8.40% despite the terrible Global Financial Crisis!”

On the contrary, during the bull market of 2007,when many of us were chasing for high growth in the uptrend rally since 2006 before the Global Financial Crisis of 2008, we heard many felt disappointed and claimed EPF underperformed at 5.80% dividend. Meanwhile, unit trust funds performance was praised especially if the withdrawals were invested into local equity funds, where the Malaysia equity index performed at 36.92% in year 2007.

In both scenarios, we break the balance in EPF and the investments in EPF investment schemes into separate portfolios even though we are aware that the withdrawals are done for EPF retirement fund return enhancement purposes, and shall mentally accept these two as a single portfolio to evaluate the actual return. To avoid this psychological bias in evaluating the investment return, it would be more practical to treat the EPF investment scheme as a separate portfolio on its own, by creating a proper asset allocation. Else you may choose to invest the withdrawals into private managed discretionary investment which will diversify your portfolio according to your risk tolerance.

For long term investment success, it is very crucial for you to develop proper asset allocation that is suitable to your investment philosophy and which considers your objectives, time horizon, flexibility, constraints and strategies apart from risk tolerance. For proper advice, you should seek the professional advice of a qualified financial adviser to construct the portfolio and to develop a blueprint for this important planning, i.e. the Investment Policy Statement. It serves as the guide to manage the target portfolio and help you avoid any behavioural biases that may misalign your implementation process.