Directing EPF to increase allocation to domestic assets is not a smart idea to me. Most of the long term investors included myself know domestic stock market has been underperforming for many years. Our local stock market performance is exactly look like what Japan had their lost decades. For every professional investor, we know EPF’s dividend rate will decline if they increase allocation to domestic assets accordingly.

The intention of pushing up domestic stock market price is good, but the fact is we should also consider whether this method is sustainable or not. At certain point, I believe EPF may successfully support our domestic stock market from continue falling, however, in long term our domestic stock market will show its fair value. Rather to sacrifice our EPF members welfares, I think our Government should improve domestic stock market by structural reform.

In my opinion, the Government may adopt Japanese stock market lesson. First, we can adopt the stewardship code of Japan. The main purpose of stewardship code is to improve the dialogues between institutional investors and the corporate. Hence, institutional investors can have more influencing power on their invested companies. With this stewardship code, institutional investors are not just a stock picker, but rather a part of the stakeholders to the company and consequently provide more added values to our society. Besides this, it will also help to improve the corporate governance of listed company.

Second, institutional investors can also request the corporate management to implement share buyback or increase dividends payout. We always see some local company has abundant of cash sitting on their book, but eventually the management used the cash for their pet project or secretly siphon to their own pocket. Furthermore the activities of share buybacks or raising dividends payout will support our domestic stock market price as well.

Third, our Government should discourage corporate to issue stock option plan. Warren Buffett once commented stock option is a lottery ticket for the corporate management but disadvantage to shareholders. Stock option plan also increase the number of outstanding share, hence diluted the earnings per share. We always see many Malaysia listed company issues stock option during their great performance time, and then increased stock price volatility during performance downturn. On the other hand in Japan, many corporate has actually changed their stock option plan to stock based compensation plan. This is to make sure the management share a same boat with their shareholders, reduce agency risks.

Finally, we still have to go back to the very basis of economy. We all know our domestic stock market is heavily rely on commodities such as palm oil, oils and gas, or other low value products. We must have a long term plan to create more value added industry, move toward to high end products, gaining the global market shares. However, this is not an easy tasks. At this point of writing, I could not see our nation has a long term plan to make this happens, rather I seen many short-term consolidators in the market, buy and sell by playing financial tactic. To me, it will not help our market in a sustainable way, but then it makes certain group of people get rich quick.

As a conclusion, I put my trust to EPF. For most of the Malaysians, we do not have much choices for money managers. My personal investment experience taught me a lesson that local private asset management firms are not doing well, because those fund managers charge very high fees but deliver minimal returns to their investors, and most of the times the return is negative. Malaysia should increase the number of low cost index ETF funds but this is out of scope of this post.

Original published on:

​https://streetanalystblog.wordpress.com/2023/05/27/increase-allocation-to-domestic-assets-does-not-make-sense/​