The lacklustre performance of CPF investments has been well documented across several forums and publications. While market performance has been a contributing factor over the past few quarters, the disproportionately high fees is a one of the key contributors. This consequently makes investing CPF OA monies unappealing. Which begets the question: why invest your CPF when we get a risk-free guaranteed return of 2.5% p.a.?
In March 2018, the Ministry of Manpower announced the removal of sales charges and reduction of wrap fees for CPFIS investments. Come October 2020, there is no longer any sales charges levied, and wrap fees are further reduced from 0.7% to 0.4%. Does that make existing CPFIS investments significantly better? The answer is not as straightforward. Despite the removal of sales charges and lower wrap fees, there are fundamental problems that need to be addressed within the fund distribution industry
Removal of CPF Investment Scheme Sales Charges
CPF members who are investing their CPF OA or SA monies into unit trusts were charged a sales charge of 1.5% for their CPF investments. This meant that for every $10,000 they invested, $150 would have already been paid to their financial advisors even before they invested.
The previous cap on sales charges is exorbitant relative to brokerage charges, which starts at 0.28%. With the removal of the initial sales charges, CPF members no longer incur a significant loss when they start investing.
Wrap Fee reduction and its impact
A wrap fee is defined as a recurring fee charged by a financial platform/advisor to an investor for giving advisory and brokerage services. The fee is charged as a percentage of value of assets under advice by the platform.
On October 2020, the wrap fee for CPF has been reduced from 0.7% p.a. to 0.4% p.a..
Investment returns compounds, so do recurring costs. While it may seem like a small reduction on a percentage basis, over a long period of time, the recurring charges will eventually exceed the sales charges waiver and significantly impact returns. Over a period of 30 years, the wrap fees reduction will lead to >$40,000 difference, from an initial investment value of $100,000.
Understanding the total cost of CPF Investing
How high costs of unit trusts translates into lower CPF investment returns
There are other costs involved that also impact investment returns. The fund management fees of the unit trusts that we invest in also affect investment returns. A study by Vanguard shows that funds with lower costs have outperformed more expensive ones by almost 1% per annum.
Unfortunately the fund level fees of the unit trusts listed on CPFIS remain very high despite CPF’s initiatives to reduce it. In January 2016, the CPF Board implemented the cap on total expense ratio for unit trusts. While some high cost funds were removed from the CPFIS, unit trusts and Investment Linked Products in CPFIS remain relatively expensive.
High Total Expense Ratio of CPF approved funds
The list of CPFIS funds is found here.
The Total Expense Ratio of CPFIS Unit Trusts, is still much higher than that of tax appropriate UCITs ETFs, which can go as low as 0.3% p.a. This problem of high TER remains for CPF, and that drags down the performance of CPF investments for Singaporeans.
The total expense ratio (TER) is a measure of the total costs associated with managing and operating a fund such as an ETF or a unit trust. TER consists of management fees, transactional fees and other operational expenses.
How Endowus makes CPF Investments better
Availability of most diversified CPFIS unit trusts
When Endowus first offered its CPF investment offering in October 2019, Endowus was already compliant to the new structure, by not imposing a sales charge and charging a low 0.4% p.a. wrap.
Endowus also enables access to better performing funds into the CPFIS investable universe. The Infinity US 500 fund and the Infinity Global Stock Index Fund are exclusive to Endowus.
As seen from the above table, the Endowus exclusive funds are more diversified, through greater number of underlying holdings and lower concentration in the top 5 holdings. Over a long investment horizon, greater diversification can bring in higher returns and lower volatility.
Endowus lowers CPF investment costs with trailer fee rebates
Fund management activities are not innately expensive; it is the cost invovled with the distribution of funds that are expensive. The total expense ratio of retail share class of CPFIS products have an in-built trailer fee. These fees are deducted from the investors’ fund assets to pay the distributors (fund platform, financial advisors and banks). By rebating trailer fees and only charging a wrap fee of 0.4% p.a., investing in Endowus is even lower than DIY investing platforms.
Endowus CPF Investing - still the best solution
The fund management and distribution industry is constrained by the trailer fee arrangement that was originally set up to give greater access to investment products. Beyond complying to regulatory requirements, Endowus wants to be aligned to the interests of our clients by being paid only by them. Such an arrangement allows us to collaborate with fund managers and the regulators to bring in lower cost, globally diversified investment products.
As a fiduciary that is fully aligned in your interests, you can be assured that your retirement money is well-managed and optimally invested.