Retirement Asset Allocation

As we had mentioned in tactical asset allocation: “A fundamental justification for asset allocation is the notion that different asset classes offer returns that are not perfectly correlated, hence diversification reduces the overall risk in terms of the variability of returns for a given level of expected return. Therefore having a mixture of asset classes is more likely to meet the investor’s goals.”

We shall see from a real world example of how retirement asset allocation is being done with EPF (Employees Provident Fund) of the Malaysian Government.

Note: The EPF is a social security institution formed according to the Laws of Malaysia, Employees Provident Fund Act 1991 (Act 452) which provides retirement benefits for members through management of their savings in an efficient and reliable manner. The EPF also provides a convenient framework for employers to meet their statutory and moral obligations to their employees.

Retirement Asset Allocation

In a newspaper report on 16th October 2009, there is this paragraph stating that:

“A higher dividend may be expected from the Employees Provident Fund (EPF) this year as it recovers the bulk of its investments overseas after a 14% year-to-date improvement in the Dow Jones Industrial Average, which closed above 10,000 points on Wednesday.”

As shown in above statement, investments overseas is part of the retirement asset allocation.

EPF CEO Tan Sri Azlan Zainol said, “in relation to our equity investments, we will continue to remain vigilant on the development of the global and local markets.”

Retirement Asset Allocation Case Studies

Below is the excerpt from the news report that shows how retirement asset allocation in the EPF is doing:

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In a statement issued on March 16, the EPF had said that in accordance with accounting best practices, it had made allowances of RM4.69bil for diminution in value of overseas and local equities (of which RM3.2bil was allocated for overseas stocks) compared with RM520mil the year before.

“Our policy is to provide in full for every diminution in value in our investments overseas,’’ Azlan had told StarBiz then.

An analysis of the EPF dividend over the last five years, split into equity and fixed income, had revealed that without making any provisions, the dividend could be much higher.

The EPF had invested RM16bil on a staggered basis in five major markets – the United States, Britain, Australia, Singapore and Japan.

As at the end of 2008, the fund had invested RM87.9bil in equities, which was 25.7% higher than the previous year.

Since the beginning of this year, the FTSE 100 index has gone up by 18.3%; Nikkei 225 (15.6%); S&P/ASX 200 (30.6%) and Straits Times (54%) while the FTSE Bursa Malaysia KL Composite Index (FBM KLCI) has improved 42.2%.

In sharp contrast, the figures at the end of last year showed that the fund’s overseas investments had deteriorated by 19.5% and by 18.4% domestically.

This was triggered by the 39% drop in the FBM KLCI; Dow Jones (-34%); FTSE 100 (-31%); Nikkei (-42%) and Singapore (-49%).
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Since the EPF is some sort of retirement fund for the public who contributed to the scheme, it is a no joke business.

To know more about asset allocation and asset classes, check out Tactical Asset Allocation and Dynamic Asset Allocation.

To know more about investments basics, check out investments for beginners and online investing for beginners.

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