Last week, Singapore’s Central Provident Fund (CPF) released their annual profit and loss statistics for the CPF Investment Scheme, Ordinary Accounts (CPFIS-OA). Before we jump into that, let’s do a quick recap. The guaranteed returns for the Ordinary Account (OA) is currently at 2.5%, while the Special Account (SA) is at 4%.
What do these figures mean? As an example, $1,000 compounded annually at a 2.5% interest rate will result in $2,100 at the end of 30 years. At 4%, the same $1,000 will become $3,240. At 8%, your $1,000 will become $10,060.
In ChannelNewsAsia’s coverage of CPF’s report, they noted that 78% of CPF investors made returns higher than OA interest rate in FY2016. While this sounds promising, we still have to consider the many factors that go into placing your savings into the CPF Investment Scheme (CPFIS).
To even be eligible to invest, you have to be at least 18 years old, and your OA and SA must contain at least $20,000 and $40,000 respectively. Read more about eligibility in our previous article.
Assuming that you have cleared the requirements for investing with the CPFIS, you must now choose your investment vehicle. CPFIS will most likely not be the only place where you put your excess cash to work, especially after some years of employment.
Many investors forget to consider that all of their available funds, including their CPF savings are essentially one portfolio, and they often concentrate their funds in one asset class. You should avoid this error by looking at the entire portfolio of CPF and external investable cash to diversify and rebalance as required.
However, an investor may find it difficult to consider all the variables at one go, like how much to allocate into the OA and SA, what instruments to choose, as well as how to decide on external funds. To make it simpler, one should first decide on the overall asset allocation plan (e.g., 60% equity, 40% bonds).
Then, the investor can start with the account with the most restrictions on investable instruments, and choose the best instrument for that account while still keeping in line with the asset allocation plan.
In our case, SA is the one with the most restrictions, followed by OA, and lastly external funds. Hence, let’s look at the categories of investments currently available for SA followed by the potential categories that we could invest in:
We can safely eliminate the Singapore government treasury bills and bonds because they yield less than the 4% guaranteed interest of SA. Annuities and endowment plans do guarantee their pay-outs, but their guaranteed portion often does not exceed 4%.
Unit Trusts (UTs) and ILPs are left. They are investment instruments that allow an investor to take on equity risk (often higher risk), therefore raising the possibility of beating the 4% return.
A (Non) Choice
Looking at the list of ILP funds1 and UTs2, investors seem to be spoilt for choice. However taking a closer look, there are only 56 ILP funds and 16 UTs available to SA and with performance data that one can use to make a more informed choice.
For ILPs, the average 1-year return for 2016 is 3.83%, which is already lower than SA’s guaranteed 4%. After taking into account the average fees of 1.23%, the average 1-year performance is reduced to only 2.61%.
For UTs, the situation is helped by lower fees, but they still fared worse than 4%. The average 1-year return is 3.76% with the average expense ratio of 0.86%, giving an after-fees performance of 2.90%.
After fees, only 10 of the 72 ILP funds and UTs made more than the SA rate. This 14% figure is much lower compared to 79% of investors who made more than OA rate. Although not an apple-to-apple comparison, it is indicative of how difficult it is to beat the 4% risk-free rate.
After going through this process of elimination, investors should definitely reconsider whether it is worth deploying their SA funds in any investment at all. They might just be better served by keeping their money in their SA instead.