THE much-anticipated Employees Provident Fund (EPF) dividend announcement brought great delight to members of the scheme.
A 6.1% dividend payout for 2021 is remarkable, considering the EPF had to navigate the challenge of a historical withdrawal by members amounting to RM101bil.
Even under ordinary circumstances, most pension and savings funds would not be able to deliver such returns. However, in the past decade, the EPF has consistently delivered an average return of 6.12% (conventional savings). This is why members must take cognisance of the importance of the EPF savings.
It wasn’t too long ago when there were rising concerns among the people about the viability and stability of the EPF due to the leeway granted by policymakers to members to dip into the sacred Account 1 due to the onslaught of the pandemic.
Due to a number of continuous programmes such as i-Lestari, i-Sinar and i-Citra, many people were worried about their retirement nest egg. It wasn’t just the concern on the dividend payout for 2021 but even the capital itself.
For those around me who were worried and contemplated taking their money out from the EPF, I directed them towards Section 27 of the EPF Act 1991 which states that the guaranteed minimum dividend rate is 2.5% per year on members’ savings.
On the EPF’s website FAQ section, it specifically mentions, “As such, members are guaranteed to receive the minimum dividend rate in any situation.” Yet, I know many who actually withdrew the funds without a moment of hesitation upon eligibility.
Naturally, everyone has varying reasons on why they need to withdraw funds from the EPF including difficult circumstances, buying a first property or financing children’s education.
All is well and good if it were for this reason. What is worrying is when I hear horror stories of those withdrawing from the EPF to invest in cryptocurrency, speculative assets, money games or simply splurging on luxury goods only to be left with barely sufficient retirement savings.
Berkshire
Warren Buffett’s letter to shareholders
Coincidentally, about a week ago, Warren Buffett shared his annual letter to shareholders for 2021, a practice he has been undertaking for the past six decades.
Due to his legendary status in the world of investing, it is a must-read for any investor who is passionate about the capital markets. Before going into any deeper insights, a high-level look at the figures as per Table 1 paints an extraordinary picture.
There is really no other investor that can come close to Buffett’s track record. I remembered vividly during the global retail investor mania in 2020, characters like Barstool Sport’s Dave Portnoy called Buffett “washed up” and how he is better at investing. What happened to him?
Well, frequent day trading and being caught up in meme stocks such as GameStop and AMC has landed him a loss of US$1.3mil (RM5.5mil). There were also critics of value and fundamental investing as “dead in the water”.
Individuals like Arkk ETF’s Cathie Wood became the star of the capital markets overnight. It is now obvious who the last one standing is.
Apart from Charlie Munger and probably Bill Gates, time has always been Buffett’s best friend. It is time that allows him to work the magic of compounding in his favour, especially when he believes strongly in investing in good quality companies with wonderful management.
As he repeatedly pointed out in the past and again in this letter, “Whatever our form of ownership, our goal is to have meaningful investments in businesses with both durable economic advantages and a first-class CEO.
“Please note particularly that we own stocks based upon our expectations about their long-term business performance and not because we view them as vehicles for timely market moves. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers.”
The growth of the business is further compounded by the growth in value over time.
Similarity between EPF and Berkshire
Do not get me wrong. I am not saying the EPF is performing as well as Berkshire, but there are certain similarities between both.
In Malaysia, we definitely do not have a vehicle or company like Berkshire, not in terms of size, management or track record. While most listed companies, especially big-cap ones, are usually investment holding companies, they do not function like Berkshire.
That being said, the EPF and Berkshire do share some similarities such as they are both huge in size, their investment horizon is long-term in nature and they consider themselves the custodian of the savings of their members or shareholders.
In 2021, the EPF surpassed RM1 trillion in investment assets, while Berkshire’s current market cap stands at US$ 721bil (RM3 trillion). The EPF was set up in 1951, while Berkshire started in 1964. Lastly, the EPF and Berkshire treat all members or shareholders equally and prioritise managing savings for those who entrust it with them.
The biggest difference is that the EPF is a statutory body, part of the government institution while Berkshire is a corporate entity listed on the stock exchange. Yet, both perform the function of growing the savings of those who park their hard-earned monies with them.
Power of compounding
There will be many opinions and columns dissecting the stellar performance of the EPF such as the why’s and how’s. Even political commentators might chime in as the EPF’s record dividend appears to coincide with the general election. I do not intend to dwell on these and prefer to focus my attention simply on the virtue of savings and the power of compounding.
There is the rule of 72 whereby dividing 72 by the annual rate of return helps derive an estimate of the time required to double one’s money. For instance, if you can generate 8% return per annum of the capital, by the ninth year, you would double your capital.
In the case of the EPF, as mentioned above, the average return was 6.12% over the last 10 years. To double your capital, you would need slightly over 11.7 years. That means if an EPF member had an initial savings of RM 100,000 in 2012, by 2023, he or she would have close to RM200,000 at the current EPF rate of return. This is simply because of the power of compounding whereby it help snowball the returns when the dividend is paid on the initial capital plus the annual dividend paid out every year.
I would like to end with what I feel is the most meaningful advice from a pair of nonagenarians with proven experience in navigating the most ruthless capital market in the world.
“Berkshire, these shareholders would sometimes acknowledge, might be far from the best selection they could have made. But they would add that Berkshire would rank high among those with which they would be most comfortable. And people who are comfortable with their investments will, on average, achieve better results than those who are motivated by ever-changing headlines, chatter and promises.”
With that, I hope readers would be less anxious about keeping a portion of their savings in the EPF and let the EPF work for you after a lifetime of hard work.
Ng Zhu Hann is the CEO of Tradeview Capital. He is also a lawyer and the author of “Once Upon A Time In Bursa”. The views expressed here are the writer’s own.