As my previous article mentioned, 26% of the total fund (Reported amount RM370 Bil, suspect over RM400 Billions as of this writing) is invested in stock market within Malaysia and some oversea. The recent trend obviously indicates that EPF has been very active in the business arena and stock market, such as recently they extend general offer to buy out MRCB and increasing oversea equity allocation. There are also rumors that the potentially bought out company will be the beneficiary of the mega project EPF join venture with the government in Sungai Buloh that has estimated development value of RM5 Billlions. Though later, EPF cooled down on MRCB deal after many criticism appeared.

With all this moves by EPF, it’s hard not to think that EPF has getting more risk appetite as days go by. Though largely I’m stock investor myself, I’m very much aware of the risk I’m exposed to the market every single day I’m invested. On every investment i make in stock market i will evaluate for several days of weeks plus some observation on the company and movements. How much thought do these fund managers give when investing the EPF money in any assets, especially when the gigantic sum of money is not belong to them, much like any private fund manager such as Public Mutual, they are only investing largely peoples money. How much care they have over peoples money, that is the answer we need to know. Do any of them take accountability and responsibility in person or corporate integrity on the investment decision they make and back it up? If the answer is either vague or unclear, more likely you have no place to cry at when the EPF investment comes back with huge losses, while the so called responsible firm will start to point finger. There are simply no transparency, you might say “Yeah, That’s call Malaysia”. True, but let me put thing into perspective, if you invest in any stock, you as shareholder has voting right in the company’s strategic decisions like appointing new directors. EPF on the other hand, contributors own almost 100% of the fund don’t even get a peek at the company’s balance sheet, and income statement. So, what the hell? In a developing country, this kind of thing which usually deem as outrageous in developed countries is still a norm.

Even EPF loses money in stock market, that’s still not a very serious problem in short term, after all 26% out of 370 Billions is only RM96.2 Billions, besides, EPF has waves of recurring income in hundreds of millions ringgit every month. In the event of EPF making losses, the likely potential problem for EPF to tackle is paying out to the retirees who demands for withdrawal. They can easily solve this by paying these retirees with the recurring incomes, given the total amount of withdrawal does not exceed the total contribution overall for a period of time. For a country with more young working generation this might not be a problem because there are always enough people in the work force contributing to the retirement of some one else. However as the age of the country is catching up, it’s very likely we will see number of retirees increases in ratio to contributors. This has already happen in an ultra modern country like Japan where the age is catching up because many working class chose to be single thus the birth rate is low and the population of young generation simply can’t catch up to the aging old generation. If that’s the case, EPF will have a very hard time catching up to the fund accumulation for any investment returns, the losses in present, even in small percentage will have large crippling effect to future generation in term of ability for EPF to pay back. If that happens, i doubt they will be able to pay even 1 percents of dividend given the money comes in from east and out to west. This is the classic scenario of credit user – use the money now and pay (or suffer) later.

Having said all this, I’m not opposing to any investment moves EPF has done. So far they have done an amazing job (at least it appears to be, in general reporting) with return of 5.65% in dividend for such a clumsy fund size. However, given the non transparent nature of the investment strategy, EPF should always be reminded that the fund need to be taken care of with extreme due diligent – Do not forget that the money is peoples’ hard earned money of their entire life and some people will die losing it. Of course it will be better if the EPF can provide some form of reporting resembling listed corporate annual report including the essential financial statements so contributors can have some understanding of EPF fund’s health as a whole instead of remain ignorant.

Below are the percentage of asset allocation for EPF with actual amount:
1. Loan and bonds – 41% (148.12 Billions)
2. Government securities – 27% (97.35 Billions)
3. Stock market – 26% (94.38 Billions)
4. Money market – 5.5% (19.75 Billions)
5. Property – 0.4% (1.49 Billions)

The percentage in term of income with actual amount from the asset allocated in 3rd quarter 2009:
1. Stock market – 42.71% (2.34 Billions)
2. Loan and bonds – 34.5% (1.89 Billions)
3. Government securities – 20.8% (1.14 Billions)
4. Money market – 1.59% (87.31 Millions)
5. Property – 0.4% (21.37 Millions)

As you might realize at first look, the best performing asset in term of allocated percentage is stock which bring in 42.7% out of total income even though percentage of fund allocated to stock market is only 26%, which is 1.64 income %-to-allocation % ratio. No surprise, as of March of 2009, the market bottoms, EPF with huge monthly cash in flow have been scooping up stocks in bargain price, and by 3rd quarter of 2009, whatever that is lost in 2008 has been reclaimed. While the second performing asset is property market with allocated 0.4% (small it is) giving 1 income%-to-allocated % ratio. In third place, loan and bonds, with 41% allocation, it is able to make up to 0.84 in term of income%-to-allocated% ratio. In term of amount generated, the sequence is stock market, loan and bonds and government securities. Property generated the least income in term of amount also due to the size of allocation.

With the score being calculated for each asset class, it also explains the latest move of EPF. Recently EPF announced to step up investment in oversea equity market to 10% of total fund over the next two years. Equity is the best performing asset class in 2009. Being the biggest shareholder in Malaysian Resource Corporation Berhad (MRCB), EPF further extend a conditional general offer to buy out the company. EPF also joint venture with government of Malaysia to develop a 3000 acres land in Sungai Buloh that after developed will worth around RM5 Billions. Property is the second performing asset.

So now you have some idea of where your money go to, what do you feel?

Excited or worry?

So how do we find out our net worth, actually there are various ways to do the calculation, but the fundamental is the summation of all asset (long and short term) minus liability (long and short term). When calculating asset value most people like to use the current market value of asset, meaning whatever the value of the asset in the market that will potentially be part of your net worth, liability is probably the amount you still owe the bank out of the asset or any other debts. For example Colin’s house might worth $300k in current market, after servicing installment for 2 years he still own $250k, taking the equity value into Colin’s net worth calculation it is $50k only.

Example of assets:

1. House/Apartment/land
2. Stock/bond/unit trust
3. Fixed deposit/saving/cash
4. Automobiles

Example of liabilities:

1. Loan (Principle + Interest) still owe to the bank for house/apartment
2. Loan (Principle + Interest) amount owe to the bank for automobile
3. Retail/credit card debt
4. Study loan (Principle + Interest)

Beside an equity value of $50k from owing his house, Colin had purchased some unit trust since the first year he started working which currently worth $10k plus return, he has around $20k in fixed deposit and $5k in saving account. He also own a car that he completed the full payment which is now worth around $40k in the market after depreciated for 5 years. In total, the asset he owns stand at valuation of $50k + $10k + $20k + $5k + $40k = $125k.

On liability side, beside $250k he still owe for his house, he has credit card debt of $1k and study loan of $30k.

Net worth = ( Long term asset + Short term asset ) – ( Long term liability + Short term liability )

So colin’s net worth = ( $300k + 10k + 20k + 5k + 40k ) – ( 250k + 1k + 30k )
= $375k – $281k
= $94k

However, if we just look at this number – $94k, there is no meaning to it. Is this good or should Colin be doing better? In The Millionaire Next Door, the author formulated a way to calculate the net worth one should be achieving by considering the age and income. Multiply the income with age, divide the subtotal by 10, and calculation result is the net worth score band you should be achieving at your age and income level. If the calculated net worth is lower than the score band, one is known as Under Accumulator of Wealth, otherwise one is known as Prodigious Accumulator of wealth (UAW and PAW is also introduced in The Millionaire Next Door).

In our example, Colin 30 years old is currently earning $5k per month, and an annual income of $60k. Multiply $60k with 30 and divide by 10 we get $180k. So at age of 30 with an annual income of $60k, Colin should already have a net worth of $180k. Even though Colin is seem to be doing fine with his net worth but he is only UAW.

One might argue that it is unrealistic to consider person’s age instead of year of working or ones income will only increase over age (Sorry i don’t even know why the author wants to divide the subtotal by 10) but treat this score band as a objective because i know many people doing very well are scoring only as well as Colin, and that’s also why we are still struggling, because we are not outstanding. So what is your net worth tells you about your ability to accumulate wealth?