Time to review your EPF investment in unit trusts

MANY EPF investors I talked to assume that their EPF investment left in unit trust accounts will grow automatcally and outperform the EPF dividend rate. Unfortunately, four out of five will be disappointed. This autopilot mode may not always work due to a few reasons:

1. Not all equity funds will perform. I had a case of investor whose EPF fund were invested in nine unit trust funds. Unfortunately for her, only two funds were doing well and only 8.2 per cent of her funds were in those two performing funds. The rest of her portfolio were in underperforming equity funds.

2. Investing your EPF funds in low or medium risk unit trust funds may not be a good strategy. Since EPF is giving dividend of five to six per cent per year, and the quarterly withdrawals already is a form of dollar cost averaging ( DCA) method, it is a better strategy to invest in equity funds. Higher risk but the downside risk is averaged using DCA.

3. Not taking profit when the market cycle is near the peak or over the peak. When your fund portfolio is making good positive return, you need to realise the profit. If not, when the fund price drop after the maket turn bearish, your fund portfolio value will also be affected.

To solve the above challenges and problems faced by EPF investors investing in unit trust and to increase the the odd of out-performing the EPF dividend rate, you may like to switch to value averaging ( VA) investing strategy that was first proposed by Harvard Professor Michael Edleson in his book Value Averaging The Safe and Easy Strategy For Higher Investment Returns published in 1993.

The method is also validated by Professor Paul S. Marshall who had published his findings in Journal of Financial And Strategic Decisions ( Volume 12 Number 1 Spring 2000).

The research paper entitled A Statistical Comparison of Value Averaging Vs Dollar Cost Averaging and Random Investment Techniques has this conclusion:

“Results strongly suggest, believe it or not, that value averaging does actually provide a performance advantage over dollar- cost averaging and random investment techniques, without incurring additional risk.”

It further concluded that: “The results are amazing and Dr Edleson should be congratulated on seemingly important work in developing value averaging.

Based on the past cases I have done in the last six years using value averaging as the formulabased investing method when helping investors invest in unit trust, I observed a few advantages that I like to share with our unit trust investors.

1. It is difficult to choose a good and performing equity fund and it is difficult to predict the continuous future performance of a fund. The whole industry is actually obssessed with past performance.

Most fund promoters introduce their unit trust funds by arming themselves with past performance records, awards won and ratings. In value averaging, it works when one uses a high volatility fund ( 3-years volatility of 17 and above) and market cycles of 2 to 4 years.

2. The value averaging ( VA) method performs better compare to dollar- cost averaging ( DCA). The average cost per unit is pushed down much more by using VA when the fund price is depressed. And then when the fund rises again, VA actually dictates that less high-priced units are purchased, thus keeping the average cost per unit as low as possible again. This the way VA can extract higher return than using DCA.

3. Value Averaging method has another superior strength, where it has a built-in profit taking signal. After profit taking, the capital and profit realised can then be reinvested using value averaging to enjoy the advantage of compounding effect.

In conclusion, EPF members investing in unit trust should now seriously look at how their hard- earned retirement fund is performing. And they are strongly recommended to explore how value averaging can help enhance the returns of their unit trust funds.

For further enquiry, contact Lee Khee Chuan ChFC, CFP, CLU, FLMI, B . A.( S’pore), a Bank Negara & Securities Commission- licensed financial adviser representative (CMSRL/B1602/2011) and Director, Advisory & Practice Management of Standard Financial Adviser Sdn Bhd at 016-888 0138 or kheechuan.lee@ standardfa.com.