The study by the World Bank was timely (I will explain later). Being a government led pension fund puts EPF squarely against other similar funds by other countries. I must say that EPF has been punching above its weight for the longest time.
The Future Challenges
However, we need to know why EPF did well, or else we will not be able to replicate the past performances. I think its critical that EPF, having done wonderfully, has to reposition and re-strategize because it has gotten too big for certain assets that it has invested heavily in the past.
EPF will also have to contend with how much more inter-related and correlated global markets is nowadays and will continue to be even more so in the future (thanks to the proliferation of ETFs and indexing).
As good as EPF has been, we have to be cognizant of the fact that Malaysia is still a place where there are not a lot of safety nets (e.g. reasonable life term pension scheme, unemployment benefits, free medical, free university education, etc. ... basically, programs that protect their citizens from economic shocks and natural disasters).
Just looking at the average savings would reveal the first problem - insufficient amount to retire). The second statistic, which is less than half the population actually has an EPF account, is just as alarming. To be clear, both issues are not under the purview of EPF and its management, but rather on the government's blueprint going forward.
EPF Stats
As at the end-2016 total funds managed by EPF was RM731.1b. As for the end of June 2018 it stood at RM814.3b. EPF is the second largest pension fund in the world among developing countries. The fifth largest in Asia and 15th globally. To put into better perspective, Malaysia is number 66th globally in nominal GDP per capita. In terms of working population size, Malaysia is ranked at 36th position globally.
Success Factors for EPF
Show the above chart to all CPF holders, they will cry. The study by World Bank confirmed that the "success of EPF" was due to:
b) strong governance structure - one that is independent and transparent, and free from interference from the ruling government of the day (although the last bit may be open for interpretation on its absoluteness).
The above excerpt is very important. It shows that EPF is very much aware of the ballooning size of funds under management and the need to tweak exposure to certain assets. This is to ensure that EPF does not turn from an investor to a substantive/critical investor in that asset class. The danger of that is that it could distort the market prices, and worse, artificially influence the price.
Another feather in the cap is that the cost to manage the funds stands at just 0.26%, almost the average cost of ETFs or indexing. Believe you me, that is a great achievement. On a side note, we still need some deep restructuring to the local unit trust and funds management industry. No investor should be made to pay more than 1% or even 1.5% to invest, period. The current practice is ridiculous and eats at short and long-term investment returns substantially.
If you have ever needed to deal with EPF, its a breeze. It is easily the best-managed government-linked unit in terms of customer service. When it is solid at the top, it transpires to every facet of the company. The same argument can be made with other inefficient and slow government departments when dealing with the public.
I have written often on how wonderful EPF has been, how most of us take for granted the 6%-7% annoual returns for a fund of that size:
https://malaysiafinance.blogspot.com/2018/02/epf-returns-pictureworks-nabs-ocean.html
The Future Challenges II
a) Size per asset class - The Malaysian equity market has been taken up by more and more local funds, esp over the last 10 years. EPF would have been aware of such developments, and wisely, has upped its overseas equity investment side. Nonetheless, we have to careful how "fairly valued" are local equities moving forward. If the bulk of local funds hold substantive stakes in key index component stocks, it could be easy to "manage or maintain" prices regardless of the fundamentals of the said stock. Call it a crowding out effect, call it by any name, it is a big issue.
b) Inter-related/Correlated Investing - The world's investing paradigm has shifted over the past few years with the rise and rise of ETFs and indexing.
https://malaysiafinance.blogspot.com/2018/08/the-future-for-equity-funds.html
The bulk of my arguments lead to the age of normalized returns, the age of reduced alpha and the need to concentrate more on small caps.
c) Safety nets/only half of the working population has an EPF account/ average sum of savings not sufficient for retirement - These 3 issues are not EPF's problem but the ruling government. Take note.
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