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Should I: use the CPF Investment Scheme (CPFIS)?

by Apoorv Trivedi on
Should I Featured Image

The Bottom Line

If you are able to invest for more than 10 years and don’t need the funds for a mortgage down payment or for education before that, you should invest your CPF-OA (but not CPF-SA) in Unit Trusts via Endowus.

However, you should invest the CPF-OA funds only after you have invested all your spare cash in the bank and then you should only invest these funds in a globally diversified, low cost portfolio. Investing a small portion in gold may also be acceptable.

The long-term return on such a portfolio is highly likely (but not guaranteed) to exceed the guaranteed rate of 2.5% on the CPF-OA. In our opinion, the expected return from this switch is high enough to make it worthwhile even for fairly risk averse investors. The 4% guaranteed rate on CPF-SA is too good to give up right now.

Our pick
Endowus
The best platform to invest CPF-OA Funds

On Endowus, you can easily invest all your money, including eligible CPF funds, in low-cost, globally diversified passive portfolios that are appropriate for your risk appetite.


Should I invest my CPF Ordinary Account (CPF-OA) Funds?

Or should you be happy with the rates paid by the CPFB on those funds?

We answer that with possibly the most hated phrase here at moolahgeeks: it depends.

It depends because while the returns on CPF accounts are guaranteed by the full faith and credit of the Singapore government, all the worthwhile approved alternatives are risky. There is no guarantee that they will do better than the risk-free rates the CPF Board (CPFB) is offering you.

It depends because everyone has a different appetite for risk and also different ability to take this risk.

However we think that it is possible to lay out a basic framework to guide that decision that’s a lot better than just saying it depends.


The decision framework

You can ask yourself 3 questions to decide whether you should invest your CPF funds.

Duration How long can you invest these funds for? And the answer is simple. For anything less than 5 years, leave the funds in CPF. If you are able to invest for 10 years or more, the risk-reward for investing in the approved alternatives starts looking pretty good. Anything in between, the answer is less clear.

Why does the duration matter? Because the markets are volatile and its difficult to predict the performance in the short term. Its not any easier predicting the long term either but historically markets have usually done well over longer periods. Of course, historical performance is not indicative of future performance. But its all we have.  More on this below.

Purpose How are you planning to use your CPF funds? Are they for your retirement? Or do you plan to use them for education or buying a house? This is really another way of asking the first question. If you are keeping them for retirement, you can probably invest for a long time (unless you are close to retirement).

On the other hand if you are planning to make a down payment for your mortgage with it, there is no point risking your buying ability on short term market movements. Take the guaranteed rates.

Opportunity Cost Are your non-CPF funds fully invested? If not, you should first invest those, since you are probably earning a lot less than 2.5% keeping money in a bank.

Every investable dollar of your non-CPF money should be invested before you consider investing your CPF. That means everything except 6-12 months of your living expenses.

Optimizing return also means that the hurdle for giving up the 4% return on CPF-Special Account (CPF-SA) is a lot higher and we would generally advise against that.

This is also because the CPFB does not permit higher risk investment option for CPF-SA funds, which means the chance of beating the 4% guaranteed rate is lower.


Historical returns & Expected returns- the hard bit

How to compare the guaranteed returns you get on CPF with the risky returns available in the market? A simple method is to focus on expected return of the risky investment.

If the gap between the guaranteed return and expected return is high enough, the risky investment should be preferred. How high is high enough? It depends. On you. But we do have a tentative answer a little lower.

There are many ways to calculate expected return and a common one is to simply look at the historical returns. Historical performance of the market is not a guarantee of future performance but it is useful in setting reasonable expectations.

Over at Endowus, they have a fantastic post looking at historical returns in the market.

Disclaimer: This is not a sponsored post and we are not getting paid or otherwise incentivized to write this article or link to their article. Also see our disclosure at the top of the page.

However, it really is a very thorough analysis of the market returns from 1990-2019 compared to the returns on CPF-OA, with lots great data and pretty charts.

The TL;DR version of the article is that if you stayed invested for 10 years, the traditional 60% Equity, 40% Bond portfolio (the 60|40 portfolio) has outperformed the return on CPF-OA nearly 85% of the time over the last 31 years.

Over 15 and 20 year periods the 60|40 portfolio has always outperformed the CPF-OA return. The success rate over shorter time periods is lower.

The tables below shows the average return profile of a 60|40 portfolio over different time periods and the success rate of such a portfolio against the CPF-OA guaranteed return.

Period Average Annual Return of the 60|40 Portfolio
1 year 6.66%
3 years 6.50%
5 years 6.36%
20 years 5.68%
15 years 5.51%
20 years 5.69%
Source: https://endowus.com/insights/this-is-why-we-advise-invest-cpf

60|40 Portfolios success rate vs CPF-OA
60|40 Portfolios success rate vs CPF-OA (Source: Endowus)

But this is still a risky expected return. Its more, but how do we decide how much more is enough?

There is no accepted answer in finance theory for this as far as we are aware. So what follows is quite speculative.

One possible approach to convert a risky return into an equivalent risk-free return is to run it through a utility function.

The bottom line is that there are many many utility functions and each individual has a different function, depending on their own risk appetite and circumstances. So the results below are simply to provide an intuition. You shouldn’t take them as a precise estimate or recommendation.

You can read more about utility functions here and about the function we used here.

We used the following utility function:

Utility = Expected Return – 0.5 * Risk Aversion Coefficient * Square of Portfolio Volatility

where Risk Aversion Coefficient is simply a measure of risk aversion on a scale of 1 (low risk aversion) to 5 (high risk aversion). We used a coefficient of 4 for a relatively risk averse investor.

Portfolio volatility is the annualized standard deviation of returns of the portfolio. We used 10%.

The results in the table below show that even for a fairly risk averse investor, the additional return over CPF-OA in the market is worthwhile because the risk free equivalent utility of risky returns is higher is than 2.5% across all durations.

Period Average Return Investor’s Risk Aversion (1-lowest, 5-highest) Portfolio Standard Deviation (Volatility) Investor’s Risk-free Equivalent Utility
1 yr 6.66% 4 10% 4.66%
3 yrs 6.50% 4 10% 4.50%
5 yrs 6.36% 4 10% 4.36%
10 yrs 5.68% 4 10% 3.68%
15 yrs 5.51% 4 10% 3.51%
20 yrs 5.69% 4 10% 3.69%

Both, the  average return and the utility analysis, would suggest that you should always invest the CPF-OA funds.

So why do we not recommend investing CPF-OA for shorter durations? Because the market can be quite volatile in the short duration and a bad outcome can have a big impact on your plans.

For instance, say you have S$100K in you CPF-OA for the down payment on a S$500K house you plan to buy in 2-3 years. Getting hit with the worst 3 year returns would really hurt your ability to buy the house you wanted and also give you very less time to make the shortfall up elsewhere.

Impact on your ability to buy a house after the worst period of returns
Poor short term returns can really hurt your ability to make important decisions

The impact is much lesser over the longer time periods and you have more options to make up the shortfall in CPF-OA.

If you have a higher risk appetite or your financial situation allows you to weather a bad period in the market without impacting the big decisions, then you can consider investing the CPF-OA even on a shorter horizon.

On the other hand, investing the CPF-SA funds doesn’t look compelling, at least under this utility function. And we agree – a 4% risk-free SG$ return is simply too good to pass up on.


Where should I invest my CPF-OA funds?

There are many eligible investment options under the CPF Investment Scheme (CPFIS). However many of these aren’t practical.

Investment products included under CPFIS You can invest using your CPF savings from
OA SA
Unit Trusts (UTs) Yes Yes

Higher Risk UTs are not included

Investment-linked insurance products (ILPs) Yes Yes

Higher risk UTs are not included

Annuities Yes Yes
Endowment policies Yes Yes
Singapore Government Bonds (SGBs) Yes Yes
Treasury Bills (T-bills) Yes Yes
Exchange Traded Funds (ETFs) Yes No products currently available

Higher risk ETFs are not included

Fund Management Accounts Yes No
Fixed Deposits (FDs) No products currently available
Statutory Board Bonds No products currently available
Bonds Guaranteed by Singapore Government No products currently available
Up to 35% of investible savings can be invested in:
Shares Yes No
Property Funds Yes No
Corporate Bonds Yes No
Up to 10% of investible savings can be invested in
Gold ETFs Yes No
Other Gold products (such as Gold certificates, Gold savings accounts, Physical Gold) Yes No

For instance there are no Fixed Deposits or Statutory Board Bonds available and the yields on Treasure Bills and Singapore Government Bonds are lower than the yield on CPF-OA rate.

We would rule out shares, property funds and corporate bonds for most people because those are limited to the ones based / listed in Singapore. That leads to too little geographic diversification and potentially too much concentration in single names (esp. for bonds), which is not advisable.

We would also rule out the insurance products i.e. investment-linked insurance products (ILPs), Annuities and Endowment policies for most people.

We will do a separate piece on this later. In brief, our concern is that all these products bundle together the insurance and investment products. That makes it difficult to figure out how much you are paying and for what. And that means you are probably overpaying for one or both things.

While it is difficult to paint every product with the same brush, chances are you would be better off buying two separate products – one for investment and one for insurance rather than a bundled one that does neither very well.

That leaves us with only Unit Trusts, ETFs and Gold (ETF / Certificate / Physical).

You can only invest 10% of the investible CPF-OA funds in Gold. While we are not huge gold bugs, having a small position in Gold is probably fine as a way to diversify your portfolio.

You can buy gold via the SGX listed SPDR Gold Shares ETF or through UOB via their Gold Certificates or Gold Savings Accounts. The Gold Savings account option looks cheaper, if you’re investing more than about S$4K, with 0.25% fee vs. the 0.40% expense ratio for the ETF. However unless you are an existing UOB customer, this would require a visit to the branch.

Unit Trusts vs. ETFs Ordinarily we are huge fans of ETFs over Unit Trusts because of their much lower expense ratios. That is true here as well.

While the avg. expense ratio for the ETFs approved for CPF-OA is 0.35%, for approved Unit Trusts it is nearly 1.43%. That is a huge gap.

However, the CPFB has only approved 6 ETFs listed on SGX for CPF-OA and four of these ETFs invest only in Singapore based / listed assets. The other two invest in Gold and Asia ex-Japan REITs. That doesn’t provide much opportunity for diversification.

Also while the average fee on approved Unit Trusts is 1.43%, there are a few approved funds that charge much lower fee.

For instance, the Infinity Global Stock Index Fund (SGD Class C) fund, which aims to replicate the MSCI World Index, charges an expense ratio of 0.475%.  We think the additional diversification is definitely worth the additional fee here. Similarly the Legg Mason Western Asset Global Bond Trust fund, which invests in developed market bonds, charges an expense ratio of 0.88% – expensive but probably still worth it for diversification.

Bottom line, because of the limited choices and opportunity for diversification among approved ETFs, we would prefer investing our CPF-OA through unit trusts.

Endowus vs. FSMOne We picked Endowus as the best Robo-advisor in Singapore largely because it is the only Robo that allows you to invest CPF-OA funds in globally diversified, passive, all-in-one funds. But is it the best option to invest the CPF-OA funds?

We think so, although the gap vs. an alternative like FSMOne (FundSupermart) is a lot less than we would have imagined and Endowus is actually more expensive if you just look at the fees.

The reason is that Endowus charges an access fee of 0.4% for advised CPF-OA portfolios but rebates all the trailer fee, which were 0.3% for a 60|40 portfolio.

FSMOne, does not rebate the fee, but doesn’t charge a platform fee for CPF-OA Investments either.

We found that all the funds present in Endowus’ core portfolio were also available on FSMOne with the largely the same annual expense ratios.

Funds in Endowus' 60|40 Portfolio
All the funds in Endowus' 60|40 Portfolio...
Fees on FSMOne for funds included in Endowus' 60|40 portfolio
... are available on FSMOne with largely identical fees
Endowus rebates 0.30% trailer fee but charges 0.40% access fees
Endowus rebates 0.30% trailer fee but charges 0.40% access fees
FSMOne does not rebate trailer fee and does not charge access fees
FSMOne does not rebate trailer fee and does not charge access fees

Which means Endowus is actually 0.1% more expensive than FSMOne if you invest in identical portfolios on the two platforms.

What that 0.1% buys you though, is the ability to invest easily in a portfolio tailored to your risk appetite, automatic periodic re-balancing and a much friendlier user interface.

On FSMOne you would need to create the weighted portfolio of the funds by yourself, since FSMOne doesn’t have ready made portfolios for CPF-OA.

We have also noticed that Endowus will occasionally recommend replacing a fund because they identified a lower cost alternative. This would not happen on FSMOne.

Endowus can recommend cheaper funds to use in the portfolio
Endowus can sometimes recommend cheaper funds for the portfolio

Therefore, all things considered, we believe Endowus is also the best option for investing your CPF-OA funds right now.


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