Building a stock portfolio that beats EPF returns

Investing in the stock market can be risky so remember to do your homework and only take calculated risks. (Rawpixel pic)

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

Ian Tai is the founder of Bursaking.com.my, a platform that empowers retail investors to build wealth through ownership of fundamentally solid stocks. It is an essential tool that sifts out stocks that grow profits consistently from a database of over 900+ stocks listed mainly in Malaysia.