EPF: the median savings of all ethnicities point to a serious need to shore up savings adequacy.

 https://theedgemalaysia.com/node/682163

Why policy takeaway is not Chinese have the most and bumiputeras the least EPF savings and income

By Cindy Yeap / The Edge Malaysia

20 Sep 2023, 02:30 pm

THE low level of retirement savings among Malay and other bumiputera private sector wage earners compared with their fellow Malaysians of Chinese and Indian ethnicity recently made headlines when lawmakers provided such numbers in parliament when arguing against more premature withdrawals of statutory retirement savings from the Employees Provident Fund (EPF).

While the median savings among EPF members of Chinese and Indian ethnicity in May 2023 were higher than that of Malays and other bumiputera, the reality is that the median EPF savings is low even among the Chinese, who make up about 24% of the provident fund’s membership.

According to EPF data, the median savings among the 3.1 million Chinese EPF members was RM47,385 as at May 2023, which works out to only RM197 per month for 20 years. That is just under one-fifth of the prevailing minimum civil service pension of RM1,000 a month — hardly enough to get by, even though the figure looks high when stacked against the median savings of RM7,078 (RM29 a month for 20 years) among the seven million Malay EPF members.

Savings adequacy is also a concern among the one million EPF members who are of Indian ethnicity, even though their median savings of RM15,985 (RM67 a month for 20 years) is above that of the median savings of RM4,579 (RM19 per month over 20 years) among the 1.4 million non-Malay bumiputera EPF members (see Table 1).

That median EPF savings of Malay members are higher than that of non-Malay bumiputera should not cloud the fact that the median savings of all ethnicities point to a serious need to shore up savings adequacy.

With only 19%, or 2.5 million, of the 13.3 million EPF members meeting the EPF’s basic savings by age, not all 3.1 million Chinese EPF members automatically have enough to retire. In short, ethnicity has scant meaning on one’s adequacy of retirement savings relative to more useful details like age, trajectory of wages, education, skills and the industries the EPF members are in.

Experts generally agree that the low level of EPF savings has much to do with low income. Rather than dwelling on ethnicity, policy action that focuses on upskilling and creating higher-income jobs and raising economic complexity should result in greater productivity and higher wages for all Malaysians. 

EPF delivers competitive returns amid tough investment climate in 2022, reaffirms focus to rebuild members’ savings

Summary of EPF’s 2022 Investment Performance; EPF’s Dividend Chart from 2010 until 2022; and EPF’s Investment Assets as at 31 December 2022.

Tables of EPF Year-To-Date December 2022 Members/Employers Registration; Savings of EPF Members by Age Group (as at 31 Dec 2022); Savings of EPF Members by Race Group (as at 31 Dec 2022).

Savings of EPF Members by Savings Level Group (as at 31 Dec 2022).

https://www.theborneopost.com/2023/03/05/epf-delivers-competitive-returns-amid-tough-investment-climate-in-2022-reaffirms-focus-to-rebuild-members-savings/

Building a stock portfolio that beats EPF returns

May 2, 2020

There are many people who believe that stock investing can generate double-digit returns, which is higher than the 10-Year Dividend Yield Average of 6.17% per annum EPF return from 2010 to 2019.

So, is stock investing really better?

Firstly, in stock investing, the 10+% returns are not cash-based as delivered by the EPF and often, it refers to trading gains that are derived from buying stocks at low prices to selling them at higher prices later.

Thus, this 10+% returns are not guaranteed, predictable, or even recurring in nature.

Secondly, if you do not study a stock’s business model, financial results, and future plans before investing in it, and instead buy stocks because you anticipate they will rise in the future, then you are not investing but betting.

Lastly, it is one thing to make 10+% in returns in one year but a different feat if you can replicate this success and make 10+% in returns consistently every single year.

The keyword here is “consistency”.

So how does EPF invest your money to continue declaring future dividends? 

This article sheds light, along with pointers on how you can build a stock portfolio for consistently attaining higher returns than the EPF.

1: EPF’s Strategic Asset Allocation (SAA)

The EPF employs its SAA as a framework to optimise its long-term investment returns. The EPF allocates:

• 51% of its total investments into Fixed Income Instruments for capital preservation, 
• 36% into Equities to grow its returns, 
• 10% into Real Estate to hedge against inflation and 
• the remaining 3% is into Money-Market Instruments to fund its day-to-day operations.

In essence, it is likened to a person who has RM100,000 in capital to invest and parks 

• RM51,000 into FDs, 
• RM36,000 into stocks, 
• RM10,000 into REITs and 
• the final RM3,000 is left in his savings account for living expenses.

2: EPF invests primarily for income (cash flow)

The EPF has multiple recurring sources of income from its investment assets. They include 

• interest income from fixed income instruments, 
• dividend income from equities, and 
• rental income from real estate.

Combined, the amount of its recurring income has increased from RM16.2 billion in 2009 to RM32.6 billion in 2018.

They have contributed about 65% of EPF’s gross investment income for the past 10 years, which is key to its investment success and consistent delivery of the 6+% in annual dividends to its contributors.

EPF’s income flow from its investments.

3: EPF’s stock portfolio

The EPF built itself a global portfolio worth RM300 billion in 2018 where its key markets were in Malaysia, Hong Kong, USA and Singapore.

The following can be concluded by just focusing on the EPF’s top 30 equity holdings in Bursa Malaysia.

• Sector selection

The EPF places great emphasis on stocks that are cash cows. This is evident as it is the largest investor in Malaysia’s finance sector with 9/30 finance stock such as RHB, MBB, PBB and CIMB.

It also has a focus on the palm oil sector and telecommunication stocks, which are basically income and cash flow orientated.

• Holding period

The EPF has held onto 28 of these stocks for more than 10 years. It intends to earn dividend income from these stocks, which is a vital source of income for allowing EPF to pay recurring dividends to its contributors.

• Financial results

However, out of its 30 stocks invested, only 12 have generated a consistent increase in earnings for the long-term (five-10 years). The other 18 stocks have experienced a fall in earnings during the period. This leads to the next point:

• Stock price movements

The 12 that had consistent growth in earnings have enjoyed sustainable capital appreciation in the 10-year period, except for MBB for it has DRIP which requires a different way of assessing one’s total investment returns.

Stock prices of KL Kepong, Sime Darby Plantation and IOI Corporation had been flat.

The chart shows how the stocks have fared over the last 10 years.

How EPF’s stocks have fared over 10 years.

4: What works for EPF’s stock investments?

If you look at the 12 stocks that have appreciated in 10 years, the common ground is that these stocks have achieved consistent growth in profits.

Consistent growth in profits lead to a stock’s consistent growth in its stock prices. That is, in essence, value investing 101.

5: Should you keep your money in the EPF?

Based on financial reports, EPF has built a diversified portfolio of assets that are cash-flow orientated.

With continuous contributions from existing contributors and its dividends reinvested into the fund, EPF’s ability to continue making consistent dividends to contributors is intact.

Hence, if you don’t know how to invest, it would be better to just leave the money in EPF and enjoy the annual dividends.

What you can do is diversify a portion of savings into unit trust funds via i-Invest and collect not only 6+% in net dividend yields from the EPF, but also capital gains.

With that said, capital gains are not guaranteed, and you might incur capital losses instead if the funds fail to do well.

So, whether you can invest in the stock market and beat EPF’s returns depends on how good you are as a stock investor.

Most treat stocks like lottery tickets and invest in the hope that they will magically increase in price. It is, of course, flawed thinking.

This article first appeared in kclau.com

KC Lau

 -

May 2, 2020

https://www.freemalaysiatoday.com/category/leisure/2020/05/02/building-a-stock-portfolio-that-beats-epf-returns/?fbclid=IwAR1qcOySzpDiLdg_VpP6qzJxBoaIL-7M3vFtnD5e-fwUfQJUJD_xl6lfwNk

EPF declares 6.15% for conventional savings, 5.9% for shariah

KUALA LUMPUR (Bernama): The Employees Provident Fund (EPF) has declared a dividend rate of 6.15% for Conventional Savings 2018, with payout amounting to RM43bil and 5.9% for Shariah Savings 2018, with a payout amounting to RM4.32bil.

In total, the payout for 2018 amounts to RM47.32bil, a marginal decrease of 1.7 per cent from 2017.

"With a real dividend of 3.93 per cent for Simpanan Konvensional and 3.68% for Simpanan Shariah on a rolling three-year basis respectively, the EPF has exceeded its mandate of delivering a dividend of at least 2.5% on a yearly basis and at least 2.0% real dividend on a rolling three-year basis," the EPF said in a statement on Saturday (Feb 16).

"We are very grateful and pleased that we have been able to consistently meet our two strategic investment targets. Beyond the anticipated nominal dividends, more importantly is that we consistently deliver above-inflation returns so that we are able to preserve and enhance the value of our members' savings over the long term and help them achieve a better retirement future," its chairman, Tan Sri Samsudin Osman said.

"Nonetheless, we remained focused on our long-term strategy and our portfolio diversification has provided resiliency and delivered commendable returns to our members," he said.

Gross investment income for 2018 was RM50.88bil, out of which a total of RM4.62 billion was attributed to Shariah Savings, proportionate to its share of total Shariah assets, while RM46.26bil was attributed to Conventional Savings.

The lower income for EPF's Shariah portfolio in 2018 was due to the underperformance of the telecommunications, construction and oil and gas sectors in the domestic portfolio.

The dividend payout for each account was derived from total gross realised income for the year after deducting the net impairment on financial assets, unrealised gains or losses from intercompany transactions, investment expenses, operating expenditures, statutory charges, as well as dividend on withdrawals.

The payout amount required for each 1.0% of the dividend in 2018 was RM7.72bil, which is higher compared with RM7.02bil in 2017.

In accordance with the implementation of the Malaysian Financial Reporting Standards 9 (MFRS 9), which came into effect beginning Jan 1, 2018, capital gains on disposal of equity amounting to RM18.21bil for 2018 will flow directly to Retained Earnings from the Statement of Other Comprehensive Income, instead of the Statement of Profit and Loss as under the previous MFRS 139.

In addition, under MFRS 9, the EPF will no longer recognise any impairment on its listed equity holdings, he added. - Bernama




Read more at https://www.thestar.com.my/news/nation/2019/02/16/epf-declares-dividends-for-2018/

EPF proven to be successful retirement funds globally

EPF proven to be successful retirement funds globally — CIMB
February 12, 2018, Monday



KUALA LUMPUR: The Employees Provident Fund (EPF) has proven to be one of the most successful retirement funds globally, said CIMB Group.

Its Group chief executive, Tengku Datuk Seri Zafrul Aziz said the commendable dividend rate is truly reflective of a well-diversified investment strategy.

On Saturday, EPF declared a dividend rate of 6.9 per cent for conventional accounts for 2017, with a payout amounting to RM44.15 billion and 6.4 per cent for Simpanan Shariah for 2017, with payout amounting to RM3.98 billion. Zafrul said CIMB also strongly supports EPF’s cause to make retirement a mainstream topic so that more youths could plan for it, whether through the EPF or Private Retirement Scheme, as soon as they start working. — Bernama

==


EPF eyes Latin America as new investment destination
February 13, 2018, Tuesday


KUALA LUMPUR: The Employees Provident Fund (EPF) is eyeing expansion into the Latin American market as part of its efforts at boosting its global assets portfolio to 32 per cent this year from 28 per cent in 2017.

Chief executive officer, Datuk Shahril Ridza Ridzuan, said an increase in the overseas asset portfolio would provide the fund with the necessary diversification and returns to meet contributors’ expectations.

“Like many global pension funds, we need to have a balanced portfolio and increase its exposure as much as possible to growth around the world,” he told reporters at the fund’s 2017 dividend briefing yesterday.

He said overseas investments also provided high returns, contributing 41.4 per cent of the total income, despite only making up of only 28 per cent of total investments last year.

“Our historical chart has shown that global assets give us the necessary diversification and exposure to growth, which is vital for the fund to continue to perform and provide the kind of return that our members expect,” he said.

He said diversification into overseas markets also helped the fund compensate for any downturn in any of its investment market and continue to grow.

As of last year, EPF has presence in 30 markets, primarily in the developed market, North Asia and Asean.

On Shariah Savings, Shahril said, they had, as of last year, attracted about 700,000 contributors with a total size of RM68 billion from RM100 billion allocated for the savings.

The total Conventional Savings and Shariah Savings have about 14 million contributors and total fund size of RM768.51 million, he said. He said Shariah assets made up 47.5 per cent of the fund’s total asset exposure and contributed 42.9 per cent of total income last year.

“Shariah investments’ underperformance was attributed to oil and gas and mobile telecommunication sectors,” he said.

Nevertheless, he said, Shariah investments contributed 36 per cent to conventional savings dividend distributions on top of 100 per cent contributions to Shariah savings.

On Saturday, EPF announced 6.9 per cent dividend for conventional savings with a payout amounting to RM44.15 billion and 6.4 per cent dividend to Shariah savings, with payout amounting to RM3.98 billion. — Bernama

Amongst the millions of questions regarding financial matters, the most popular one is undoubtedly “How do I save my money?”. Here are 3 common ways that could help you save a sizable amount for when it’s time to retire.

1) Contribute to EPF, do NOT withdraw

For Malaysians, EPF is undoubtedly the easiest way to save your money. Your personal contribution of 11% aside, your employer’s mandatory contribution of 13% (for employees earning less than RM5,000 monthly salaries) makes it a total of 24% of your monthly wages saved under your name each and every month.

To top it off, EPF’s average return of 5% per year is significantly higher than any fixed deposit interests in the market right now.

Tips: Firstly, get employed at a company that contributes to EPF. Try to keep your money in your EPF account for as long as possible because there simply aren’t any other bank deposits with higher interest rates in the market. If you can help it, DO NOT use any of your EPF sub accounts to pay for your home or buy a computer, so you can take full advantage of EPF’s high interest rate to maximize your returns.

2) Put your money aside the good old fashion way

Saving your money requires determination and discipline. If you aren’t already doing so, try putting aside a small percentage of your salary every month-end and save it in a separate bank account, preferably one without any easy withdrawal facilities (eg. ATM).

When you have a moderate amount, transfer the money to a high-interest fixed deposit account so it can generate greater interests whilst stopping you from accessing the funds every time you feel like getting a new handphone or a new pair of shoes.

To find the best fixed deposits in the market right now, check out our fixed deposit comparison table.

Tips: Like many other things in life, saving is an endeavour that many find hard to adopt especially in the beginning. To ease yourself into your money-saving journey, you may wish to start off with a moderate amount (say 5-10% of your wages) so that it does not affect your cash flow to the extend of making you give up altogether. Over time, you can try to increase the amount as the act of saving becomes a habit. Also, when it comes to saving, it helps to start as young as possible so you can reap the benefits of compound interest over the long run.

3) Use your money to invest in something

If you have moderate tolerance to risk, are not close to retirement age and have a sizable amount in your savings or fixed deposit account, you’ll probably want to consider using some of the monies you have for investment purposes.

Be it in shares, gold or real estate; investment is a great way to save even MORE money because the potential returns are usually much greater than, say, putting your money into a bank. The downside, however, is that investment involves RISKS – the risk of non-performance from your investments, or in certain cases, the risk of total evaporation of value for your investments caused by adverse market conditions.

Tips: Not all categories of investments are born equal, so you are advised to do your homework well before you engage with any kind of investment. For example: properties are considered medium-risk investments; they generally enjoy consistent growth but they also have low liquidity (i.e. not easily turned to cash). Shares, on the other hand, are considered high-risk investments; they are prone to fluctuations in value caused by volatile market, which basically means you could potentially GAIN a lot or LOSE a lot. Whichever form of investment you choose, it is best to make a genuine effort to learn about it before you commit.

Love this article? You might also wish to read about the importance of diversification in investment.

How To Save Money: 3 Common Methods

By Ching . 3 April 2013 . Money Management

Average Savings for EPF Members by Age, 2011

Average Savings for EPF Members by Age, 2011

Click here:

http://mystockfolio.blogspot.com/2012/10/average-savings-for-epf-members-by-age.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MyMalaysiaStockfolio+%28My+Stockfolio%29

EPF: Lump-sum or partial withdrawals at 55?

EPF: Lump-sum or partial withdrawals at 55?
Written by Celine Tan of theedgemalaysia.com
Wednesday, 31 August 2011 00:12
KUALA LUMPUR: Upon reaching 55, most people prefer to withdraw all their savings in the Employees Provident Fund (EPF) but more and more people are opting for flexible withdrawals (partial or monthly payments).

According to the EPF, last year, 235,931 employees made withdrawals at age 55 and 70% of the withdrawals were full withdrawals. The number of flexible withdrawals increased by 41.67% to 82,690, compared with 2009.

Choosing between withdrawing a lump sum and making a partial withdrawal depends on many factors. Financial planners say you can ask five questions when crunching the numbers for your retirement plan, not at 55.

1) What is your behaviour towards money?


Your EPF savings can be the single largest disbursement of money you will see in your lifetime. “It is something that most individuals look forward to throughout their working life. It gives them a sense of fulfilment when they receive it since they believe that it is then possible to achieve their life goals,” says K Gunasegaran, founder and licensed financial planner of Wealth Street Sdn Bhd.


If you are quick to spend money without a plan, think twice before withdrawing the whole. “Those who are not used to having large sums of money tend to get emotionally charged. It can lead to splurges on big-ticket items such as luxury cars. While the money is rightfully yours and it is not entirely wrong to benefit from your retirement savings, be aware of the consequences. If you know that you are an emotional spender, it is best to drop the idea of a lump-sum withdrawal because you have to make smart choices with the money,” says Gunasegaran.


2) Can you generate higher returns at a higher risk?
The primary concern of retirees is whether their retirement savings can sustain them throughout their golden years and generate sufficient returns to outpace inflation.

Headline inflation, as measured by the Consumer Price Index (CPI), increased to 3.3% on an annual basis in May, according to Bank Negara Malaysia (BNM). From 2005 to 2010, the average inflation rate in the country was 2.77%, reaching a historical high of 8.5% in July 2008 and a record low of –2.4% in July 2009.

For the past 59 years, from 1952 to 2010, the EPF has declared annual dividend rates of between 2.5% and 8.5%. In the past 10 years, the highest dividend payout from the EPF was 6% in 2000 and the lowest dividend payout was 4.25% in 2002. “If you are conservative and expect the EPF to continue providing decent annual dividends, opt for flexible withdrawals,” says Wong Keng Leong, practice manager and licensed financial adviser representative at Standard Financial Planner Sdn Bhd.

Headline inflation, however, is not necessarily a reflection of the rise in a household’s real cost of living. This means that the returns on your retirement savings should far exceed the reported CPI figures.


“Also, the EPF promises a minimum dividend of 2.5% per annum. If you think that you or your financial adviser or fund manager can surpass the average returns made by the EPF, consider a lump-sump withdrawal to boost your retirement nest egg,” says Gunasegaran.

When doing so, observe the associated costs such as sales charges or management fees levied by the financial professionals and financial institutions. If you decide to retain your retirement savings with the EPF, there will be a small charge that differs from year to year.


3) Would you still be paying debts at age 55?


If you will still be servicing high-interest debts at age 55, consider using your EPF savings to pare down or settle the loans. This is especially so if the interest levied is higher than the returns generated by your savings.

“High-interest debt includes credit cards [interest rate ranges from 13.5% to 17.5% a year] and personal loans [interest rate ranges from 8% to 12%]. Holding any of these debts negates any investment gains unless you are able to get superior returns on your investment over the years. Withdrawing your retirement savings, be it in a lump sum or partially, to settle your high-interest debt is a smart option but ensure that there is still some money left for your retirement, says Wong.

There is no fixed rule on how much debt you should settle. “How much you should pay off depends on the quantum of your savings. Also, it is good to check whether your debt can be restructured to reduce the interest you have to pay. If so, evaluate the financial benefit of settling this debt with a lump sum withdrawal of your EPF savings,” says Gunasegaran.


4) Do you want to control your retirement funds?

Contributors have little control over how their savings are managed and invested by the EPF, which has sole discretion on how to invest the money that they receive and the dividend (over the minimum amount guaranteed) to declare.


“If you want to take full charge of your retirement savings [either on your own or with professional help], you can do so at 55. When you take a lump-sum payment, you are able to invest in investments that may not be available to you if you were to retain your savings in the EPF [withdrawals can be made to EPF-approved local equity funds],” says Wong, who observes that most of his retired clients withdrew all their EPF monies at 55 as they were comfortable with managing their own money.


A key benefit of withdrawing your retirement savings in a lump sum is that it allows you to expose your loved ones to managing money with a long-term perspective. “At the point of death, most of us will not want to leave a large sum of money to loved ones who cannot manage it. In all likelihood, the money will be spent sooner than planned. Withdrawing your retirement savings in a lump sum at the point of retirement allows you to slowly educate your young-adult children on how to manage a big sum of money. Let them know where you keep your savings and what you are doing with it. This is an alternative to receiving a lump sum from the EPF when you are no longer around,” says Gunasegaran.


5) Do you have a plan to access your money?


If you are 55, under the EPF’s monthly payment withdrawal scheme, the board will transfer the total amount into a special account and put monthly payments into your bank account.

If you opt for a lump-sum withdrawal, how will you draw down your money to fund your lifestyle? There are two options to evaluate. Wong suggests that you should plan a draw-down strategy that includes either a quarterly or half-yearly redemption. “Note that some instruments allow you to make periodical withdrawals but may impose charges.”

On the other hand, Gunasegaran thinks that it is more advisable for retirees to put their retirement savings into annuity-like insurance plans, under which they will receive annual payments after a certain number of years.

http://www.theedgemalaysia.com/personal-finance/192209-epf-lump-sum-or-partial-withdrawals-at-55-.html

Dividend growth challenge for EPF

Dividend growth challenge
By Rupinder SinghPublished: 2011/03/14

The Employees Provident Fund (EPF) will find it tough to consistently pay high dividends as uncertainty over the prospects of major economies could have a big bearing on open economies like Malaysia, economists said.

They expect the EPF dividend payment to ease to around 4 per cent to 5 per cent this year, from nearly 6 per cent in 2010.

Malaysia Rating Corp Bhd (MARC) chief economist Nor Zahidi Alias said as external trade and portfolio flows influence financial market performance, the Malaysian financial market could experience some knee-jerk reactions if risk aversion starts to escalate.

Nor Zahidi Alias said he would not be surprised if the present market correction continues in the next few months, especially when the overall sentiment is soured by the still struggling European economies and persistently high unemployment in the US.

"Such developments will no doubt have negative repercussions on Malaysia's external sector. Therefore, paying consistently high dividends will be challenging not only for the EPF, but also for other asset managers," he said.

Among the macro factors that will affect EPF's performance in 2011 are the country's gross domestic (GDP) growth, inflation, oil prices, interest rates and ringgit exchange rates.

"Based on the moderate gross domestic product (GDP) growth anticipated at between 5 per cent and 6 per cent this year, we expect EPF's dividend payout to also ease to the 5 per cent average level," RAM Holdings group chief economist Dr Yeah Kim Leng said.

Over the last 10 years, EPF's dividend payout ranged between 4.25 per cent and 5.8 per cent annually with an average of 5 per cent. The highest dividend rate ever paid was 8.5 per cent in 1983 and 1986.

Last year, EPF's top-of-the-range payout of 5.8 per cent corresponds to a strong rebound of the economy where the GDP expanded 7.2 per cent following a contraction of 1.7 per cent during the global financial turmoil in 2009.

EPF's major challenge, Yeah said, is to find investible instruments for the RM10 billion-RM12 billion net contributions that it will receive this year.

Besides that, he said, the pension fund would find it hard enhancing or rebalancing its portfolio towards safe and higher yielding asset classes to achieve the highest possible returns without compromising its mandate of capital preservation.

EPF is one of Asia's largest pension funds with a total asset of RM440.5 billion as at December 31 last year.

Allianz Life Insurance Malaysia Bhd chief investment officer Esther Ong estimates EPF dividend payout to be between 4 per cent and 5 per cent this term.

She said it may not be easy for EPF to sustain its performance this year unless some gains earned in better years previously are being used for distribution this year.

Ong believes that due to a more challenging macro environment, higher rates are expected for the bond portfolio.

"Meanwhile, we anticipate a more moderate return from equities given rising inflationary risks and the more moderate economic recovery path could result in lower earnings growth compared to last year," she noted.

In retrospect, equities were the largest contributor to the EPF's gross investment income in 2010, representing 45.45 per cent of its total gross investment income.

A total of RM10.94 billion was earned by EPF from equities last year, reflecting a significant 125.69 per cent increase from RM4.85 billion earned in 2009.


Read more: Dividend growth challenge http://www.btimes.com.my/Current_News/BTIMES/articles/epf08/Article/index_html#ixzz1GZ2W7IPy

Sometimes, investors are puzzled why the EPF trades regularly between buy and sell.

Sometimes, investors are puzzled why the EPF trades regularly between buy and sell.

The presumably unclear direction of trades is because the provident fund also appoints external fund managers (EFMs) who have the full discretion to buy or sell. As such, sometimes the EPF could be buying a stock but their EFMs could be selling the same stock on the same day.

In certain cases, one EFM buys but another EFM could be selling at the same time or a few days later. Hence, the disclosure by the EPF is a combination of trades by its internal fund managers as well as that of EFMs.

Due to the difference in opinion between the EPF and its EFMs, there is no clear signal of the direction of this powerful domestic fund.

The fund could be big, but they are not "united" and they are in fact competing with each other. This is also a way to generate liquidity in the market. .

Even if the fund is buying a particular stock persistently, we observe that the stock price may not seem to rise substantially.

This may be linked to the way the orders are placed - that is, they tend to buy lower after a completed trade.

Read here.

Bursa Malaysia: Follow the 'smart money'

---

It is probably wise to follow the "smart money" in investment. When smart money buys, we buy. When smart money sells, we sell.  What is smart money? How do we know which is smart money? When do we know smart money has started buying? Also, how do we know that the smart money is really "smart"?

What is smart money?

Smart money is a fund that is supposed to be influential and has a strong impact on stock prices. It is supposed to be well informed and know exactly when and what to invest.

Its actions may also move prices. Because of its reputation as a market mover, it is able to attract many followers who also join in the purchases, causing stock prices to move further. If smart money can make money most of the time, then tracking the investments of smart money and following its footsteps can be a profitable strategy.

In this article, we will discuss several types of smart money, some of which are really "smart" but some may have limited impact on the market.

Accumulation by owners

Purchases by owners of listed companies are deemed to be influential. As owners, they are required to make disclosures to the exchange after each purchase, and their transactions are regularly monitored by the market players.

Owners are supposed to know what happens in their companies. They know the prospects of the company. The future direction of the company is literally in their hands. There are many plans that they have for the company, which may not have been brought to the board for consideration. In many instances, preliminary discussions on deals are engaged by the owners privately.

Many dealmakers prefer to talk to owners who can make immediate decision on a deal, as getting the board's approval is probably just a formality if the owners have already agreed to the deal.

On the other hand, if there are troubles ahead, owners are definitely the first to sense them. If the company is not doing well or if its earnings are not improving, it is unlikely that the owners will buy the stock. They will probably wait for a better time to buy. At least, this is the perception of investors.

Investors will also feel more confident to participate in the stock if the owners have the confidence to buy the stock. Even if the stock price does not go up after a series of purchases by the owners, there is no pressure for other shareholders to sell.
On the other hand, if the market comes to know that an owner has been disposing of his stock in the market regularly or in large quantities, they may become very uncomfortable and wonder what's going wrong. Is there something that the owner knows that the public is not aware of? As such, disposals by owners will have more impact than their purchases.

However, owners of listed companies may have multiple objectives and it could be difficult to read their minds.

? First, the owners may own a big percentage of the company and what they are buying could just be a small fraction of what they own. They may just want to support the share price to instil confidence in the market.

? Second, if the owners pledged their shares to banks (owners' shares under nominees are likely to be pledged), they may need to support the share price to prevent force-selling by banks if the share price falls below a certain level.

? Third, owners prefer to invest in their own shares. Even if their stock is undervalued, there is no guarantee that it will go up, as there could be other stocks that are more attractive to fund managers.

? Lastly, owners may also give a false impression of their action, as they may buy smaller quantities under their names but at the same time sell larger amount using nominee names, which is not uncommon in this part of the world.

As such, following this type of "smart money" may not be very reliable. Therefore, we need to know the character of the owners and whether they are credible or not.

Purchases by the EPF

The Employees Provident Fund (EPF) is the largest local equity investor in our stock market. It was reported that the EPF accounted for as much as 50% of the total traded volume during certain periods. Since the EPF is a large player, its actions have far-reaching impact on prices of many stocks.

Since most of its investments exceed 5% of the stock's paid-up capital, the EPF make regular disclosures on their purchases and disposals. Sometimes, investors are puzzled why the EPF trades regularly between buy and sell.

The presumably unclear direction of trades is because the provident fund also appoints external fund managers (EFMs) who have the full discretion to buy or sell. As such, sometimes the EPF could be buying a stock but their EFMs could be selling the same stock on the same day.

In certain cases, one EFM buys but another EFM could be selling at the same time or a few days later. Hence, the disclosure by the EPF is a combination of trades by its internal fund managers as well as that of EFMs.

Due to the difference in opinion between the EPF and its EFMs, there is no clear signal of the direction of this powerful domestic fund. The fund could be big, but they are not "united" and they are in fact competing with each other. This is also a way to generate liquidity in the market. As such, relying on the trades of this "smart money" for direction may not be very reliable.

Even if the fund is buying a particular stock persistently, we observe that the stock price may not seem to rise substantially. This may be linked to the way the orders are placed - that is, they tend to buy lower after a completed trade. This is different from the trading style of foreign fund managers, which we shall discuss later in this article.

Actions of local institutions

Although other local institutions are smaller in size than the the EPF, they could be more focused when it comes to buying a stock. Generally, purchases on big-cap stocks by local institutions may not have much impact on the stock price.

Since big-cap stocks are widely owned by most local funds, such as mutual funds, insurance companies and asset management companies, for every purchase to lift the stock price, there could be several funds waiting to sell to the buyer. Local institutions are competing with each other to achieve maximum returns as they have their own stakeholders to answer to.

As the market continues to rise, more and more local institutions are seeking investment opportunities in undiscovered stocks and unpolished gems. Research houses are competing with each other to identify growth stocks with good earnings prospects and "good story" to satisfy the appetite of local funds and entice them to buy.

Most of these stocks are the tightly held mid- to small-cap stocks, where the valuation is generally much cheaper than that of the big-cap stocks. If the "story" is compelling, more funds are likely to participate in the purchases. If there are also private placements from the owners or by the company, a stock may attract even more interest and can move quite fast.
A stock may be attractive from various angles, but if there is no liquidity, most funds are hesitant to participate due to the lack of liquidity to get out when the need arises. When funds started to buy a stock, the rise in the share price is likely to bring out some sellers, which will lead to improved liquidity. The subsequent improvement in liquidity will in turn attract even more funds to partake in the "game". If there are sufficient "followers" the stock price will continue to climb; otherwise, it may just fizzle out a short jerk.

As such, local institutions could be a useful "smart money" to follow if they start to have position in smaller cap stocks. A neglected stock may turn out to be a star performer if the stock has been successfully promoted. There are a number of such well-promoted stocks which have performed very well this year.

Share buyback 

In the case of share buyback schemes by certain listed companies, this provides yet another hint to investors that the management believes the stocks are undervalued. Although share buybacks may not be very popular among listed companies in Malaysia, there are a number of listed companies that buy back their own shares regularly. The impact on the stock price will depend on how aggressive the share buyback is conducted. The degree of "aggressiveness" depends on the percentage of shares being bought back and the proportion of the share buyback against the daily traded volume.

From our observation, share buybacks seldom have much impact on stock price. Such repurchase of own share will definitely reduce the free-float of the stock in the market, but moving the stock price to a higher level is another issue. Share buyback may clear off some of the weak holders and place the stock in a good position to run if other strong buyers emerge. But for the stock to attract strong buyers, it must deliver results and show growth potential.

Buying by insiders 

Insiders are those who hold key positions in a company or those who have access to information not known to the public. Insiders include directors of the company, company secretary, senior management, corporate lawyer, auditors, merchant bankers who handle important corporate information for the company.

Because key personnel have unfair advantage over the public, it is illegal to trade on insider information, which unfortunately is very difficult to prove. To reduce the incidence of insider trading, blackout periods for the trading of stock are imposed before the release of important announcements and these include the announcement of quarterly results, right/bonus/split issues and other material announcements, which may have a strong impact on the share price.

The purchases made by insiders are difficult to detect. A sudden share price movement of a stock is usually suspected to be related to insiders who may use nominees to avoid detection. The only way to detect possible insider trading is through technical charts, which may reveal such activities from price movement as well as changes in volume. Otherwise, it is difficult to identify this type of "smart money".

Syndicate buying

A syndicate is also another influential force, as it normally focuses on a handful of stocks. The objective of such a syndicate is to make money. They may act independently or with the help of the owners or top management. They may or may not play based on insider information. If there is a stock worth buying with the intention to sell at a higher level, they will be interested. Stocks selected by a syndicate could be purely because of cheap valuation or some impending news, which could be entirely conceptual.

Although syndicated play could be powerful, their movement is very secretive and hard to predict. As a syndicate is out there to make money, they will use all sorts of tactics to achieve their objectives. The tricks may include dissemination of untimely rumours just to lure in other punters to help them to stir the market. Unknowing speculators could be drawn in by their own greed.

Going along with a syndicate is a risky game, as they will not disclose their game plan. They can play one game on the surface but at the same time be selling quietly at the back.

Inflow of foreign funds

Perhaps the most influential smart money is foreign funds. Foreign funds come in droves, which is more powerful than if they act individually. The movement of foreign funds, or simply hot money, follows certain investment themes for investment purposes. Their investment duration is normally fairly long to achieve maximum profit. One of the factors driving the flow of foreign funds is the direction of the US dollar. When the US dollar weakens, this hot money will flow to emerging markets and to Asia, causing market here to rise (See charts).

There is a number of reasons why following the footsteps of foreign fund managers are more reliable:

? Purchases by foreign fund managers are more dynamic, as they normally push up the share price when buying. In this way, not only can they obtain the quantity of shares required, they can also record immediate price appreciation.

? The quantity allocated to each stock is normally larger, as foreign funds are normally bigger in size and hence have bigger allocations.

? Unlike local funds, which probably have two dozen or more stocks, foreign funds normally select a handful of local stocks to invest.

Summary
The strategy of investing by following the "smart money" must be very selective, as many of them are either not very effective or not reliable. It is better to follow foreign funds, which are more powerful and less deceitful.

Source: The EdgeDaily

Written by Ang Kok Heng

Monday, 20 December 2010 11:01

Ang has 20 years' experience in research and investment. He is currently the chief investment officer of Phillip Capital Management Sdn Bhd.