Thoughts on the CPFIS review

APS Asset Management founder and chief investment officer Wong Kok Hoi has strong views relating to the review of the CPF Investment Scheme.

The Manpower Ministry has undertaken the review and results are expected sometime next year. The CPF Advisory Panel earlier released its recommendations, which include a proposal for lifecycle funds under the Lifetime Retirement Investment Scheme (LRIS). The funds are likely to be passively managed to keep investment costs low.

Mr Wong believes it is important to note a number of "first principles'' in investments. One is that alpha is a zero sum game. That is, one manager's loss is another's gain. "If a manager loses S$1 million in alpha, then another manager/s elsewhere must have made it. Alpha is like energy where there can never be a net loss at all times,'' he says.

He believes it is important to review the reasons why funds in the CPFIS have underperformed rather than throw out active investing altogether.

In September, Deputy Prime Minister Tharman Shanmugaratnam said the CPFIS was set up as a way to enable members to earn higher returns on their savings, but it is not "fit for purpose''. Over the past 10 years, 85 per cent of members who put their savings into an investment fund under CPFIS would have been better off leaving their money to earn the guaranteed Ordinary Account rate of 2.5 per cent, he said.

A second principle is the "3 per cent rule'' - that is, bonds will generate a return 3 per cent higher than cash, and equities 3 per cent higher than bonds. "If you take an investment horizon of 40 years, it will be silly to keep money in cash.'' In reviewing results of any investment scheme, he adds that it is important to mind the start and end points of the analysis.

"On the surface 10 years seems a reasonable time, but if you take the past 10 years the start point was 2007, a big bull market, frenzied. If your start point is a market peak, returns will not be great. Two years from now, if you take another look at the 10-year return from the start point of 2008, it will likely show that CPF investors are brilliant.''

The third point is to take a long horizon. For a retirement scheme, he says the horizon should be 40 years.

The fourth is the issue of fees. Mercer has indicated that a passive fund's fee could be 50 basis points a year or lower. Mr Wong believes 50 basis points is still too high for a passive fund. The CPF Advisory Panel's report on the LRIS said: "Other retirement savings systems, depending on the size of the fund, have even managed to lower the annual expense fees to under 0.2 per cent per year. These cost savings would be translated into higher investment returns for CPF investors.''

Last year, BlackRock cut fees on seven iShares "core'' ETFs. The expense ratio for the iShares Core S&P Total US Stock Market ETF was cut to 0.03 per cent from 0.07 per cent previously. The iShares Core MSCI Emerging Markets ETF's expense ratio was cut from 0.18 to 0.16 per cent.