Comparison on EPF and stock market investment

WE are one of the fund managers that help investors invest in stocks and shares using their EPF savings.

We always believe investing in the stock market provides better returns in the long run.

Your article “EPF better than stock market” (StarBiz, Dec 3) seems to indicate otherwise.

We ran our database and re-computed the answers based on the methodogy given in the article and we have a different conclusion.

KLCI was at 233.47 as at end of 1985; an investment RM10,000 would have become RM61,894 by the end of 2007 when the KLCI surged by 6.189 times to 1,445.03.

This figure is substantially different from RM46,000 as reported in the article.

Bear in mind that KLCI is just an index and it does not include the dividend paid over the years. Even if we add 2% dividend yield, the return from investing in the stock market will add another 2% to the compounded average return of 8.6% over the 22-year period (1985-2007) or a total return of 10.6%.

One can use different methods to compute, but the answer should not run very far. Not to mention that individual returns may be higher or lower than the performance of KLCI.

We don’t deny standard deviation of KLCI is high but the point is that the investment return from KLCI is substantially higher than the 7% average compound return of EPF over the period.

We would also like to state that the result is only true for the study period. It may not be useful to predict the future return over the next five to 10 years. Bear in mind EPF will not be able to repeat the high dividend given to members in the past in view of lower interest rate now.

Ang Kok Heng
Chief investment officer
Phillip Capital Management Sdn Bhd

Ooi Kok Hwa replies:

Mr Ang used KLCI year-end index whereas I used the average KLCI daily index.

I have computed using his figures. It is true that you will get RM61,894 by the end of 2007, using the year-end index of 1445.

However, he did not mention that if he included the current year-end (2008) index of possibly only 850 level, he will get the fund value for KLCI lower than that from the EPF.

Even if you include 2% dividend yield return, you may get higher return from KLCI versus EPF.

However, based on the Sharpe Ratio, EPF is at any time far better than KLCI (0.85 versus 0.33).

Hence, I disagree with him that KLCI is far superior to EPF. The returns are not proportional to the risks investors need to undertake (The Sharpe Ratio measures returns proportionate to the risks taken). Furthermore, investors need to pay annual management fee of 1%-2% and additional 3% loading for unit trust funds.

Based on 2 standard deviation (2 SD), we are 95% confident that EPF returns will range from 3.7% to 9.7%. However, KLCI returns will range between -51.6% and 72% under 95% confidence interval level. The lowest return from EPF is positive 3.7% versus -51.6% for KLCI.