Engage financial advisers when investing in unit trusts

MANY people would have contemplated investing in unit trusts by using part of their savings in the Employees Provident Fund (EPF).

For those who have reached retirement age, meanwhile, the question is whether to withdraw their savings and park them in unit trusts.

There are funds that have trumped the EPF’s performance, but how many of them fall into that category or have a portfolio as diversified as the EPF?

The provident fund declared a stellar 6.15% dividend amid another year of market volatility in 2018. The FBM KLCI has been down for four of the past five years.

The dividend declared by the EPF beats close to 90% or slightly more than 1,000 unit trust funds in the country.

For comparison’s sake, let’s take a look at the 2018 performance of some of the highest-rated or top-performing funds available.

The Eastspring Investments Small-Cap Fund – a five star-rated fund by Morningstar – saw an 18.97% loss for the calendar year 2018.

Kenanga Growth, another fivestar fund, went south by 18.08%. Manulife Investment Asia-Pacific Reit also gave a negative annual return of 0.89%.

The CIMB-Principal Global Titans Fund, which is among the recommended ones by Fundsupermart, lost 8.68%.

Some would argue that this would not be an apple-to-apple comparison, considering how diversified the EPF is, so let’s dive into more balanced funds.

The four-star Public Ehsan Mixed Asset Conservative Fund yielded a return of 0.11%.

Maybank Lifestyle Trust Today, also a four-star fund, achieved a return of 2.09%.

Among funds that the EPF lost out to are the Areca Dynamic Growth Fund, which gave a return of 127.8%, and Maybank Shariah Cash at 1,521.52%. But they are not among the approved unit trust funds under the EPF’s Members Investment Scheme (MIS).

So, this begs the question again, would it be worthwhile for those eligible to withdraw their savings to invest in unit trusts?

Only if you know what you’re doing, have a fund you trust or if you have the holding power, according to a fund manager.

“Unit trusts are a good product for long-term investment, and then for retirement purposes.

“If you can keep it for the longterm, you can practise dollar-cost averaging (DCA). You can never buy or invest at the lowest point but when you average this out, you will get the lower average price,” says the manager, adding that investments in unit trusts carry a certain risk element and investors might lose their capital portion.

But if unit trusts are risky and with the EPF issuing dividends exceeding expectations, why is there a need to allow members the option of investing in unit trusts?

One rationale is that the funds in the EPF are too large and with their incremental nature, it cannot manage them entirely on its own.

“The redemption rate is much lower than the subscription rate. That’s why the EPF also has foreign fund managers.

“The MIS is to allow EPF members to have options, and to lessen the burden of the EPF because the larger the size of a fund, the more complications it faces,” says another fund manager.

He adds that unless investors can find a fund performing better than the EPF or fixed deposits, it is better to retain the funds in the provident fund.

“If you’re only fetching 5%, you might as well leave it in the EPF. The track record of a fund can only give you some kind of interpretation, not evidence of its future performance,” he says.

Former investment and corporate strategy director Pankaj C. Kumar says the EPF is the country’s best fund manager that has consistently performed for all.

“For investors thinking of taking out money to do their own investments or in unit trusts, perhaps it’s best to leave it to the EPF, as it is exposing investments to equities, fixed income, real estate and private equity while being geographically diversified at the same time,” he says.

Stephen Yong, the founder of personal finance advisory firm MyPF, says: “The EPF’s performance in 2018 has been commendable, consistent and above most investors’ expectations. This is amid the backdrop of an overall poor equity market performance globally and in Malaysia. Most unit trusts’ one-year performance for 2018 with equity exposure saw poor or negative returns and high volatility.”

Meanwhile Rajen Devadason, a licensed financial planner with Manulife Asset Management Services, says the question of whether EPF members should use their contributions to invest in unit trusts when allowed is one that “hinges on the EPF contributors’ personal risk appetite”. “Those who prefer certainty and are uncomfortable with investment market volatility should retain all their money in EPF account one until retirement. But those who wish to invest externally should do so carefully and wisely, heeding sound asset allocation in high-quality investments approved by the EPF and long-term diversification using DCA strategies, to try to generate long-run returns.

“I have done so for myself and for some – but not all – of my clients with the appropriate risk appetite. For other more conservative clients, retaining all their money in the EPF makes better sense if their low appetite for risk means they will sleep better at night keeping everything safe in the EPF.

“Each person is different and should only take action that is appropriate to his or her internal makeup and circumstances. As such, working with a unit trust adviser or licensed financial planner is wise.”

He adds: “Even those who decide against using their EPF money to invest in unit trusts are likely to benefit from using a portion of their monthly discretionary cash flow from their salaries to invest in cash-funded (as opposed to EPF-funded) portfolios. But this requires disciplined budgeting and a lifetime adherence to delayed gratification that helps people spend less than they make, and to save and invest the difference for a long time. It is the only way to ensure their time in retirement is marked by comfort and sufficient financial resources.”