Investing CPF savings: Low-cost portfolios are now within easy reach

FOR more than two decades, the idea of an institutional-style retirement investment scheme for Central Provident Fund (CPF) savings has provoked discussion and raised expectations.

For a while, it seemed that the vaunted Lifetime Retirement Investment Scheme (LRIS), as recommended by a CPF panel in 2016, could be the answer for those who wish to invest their CPF savings for a higher rate of return than the default interest rates.

The LRIS was to simplify choices for members by offering simple, low-cost lifecycle portfolios.

But on this front, there has mostly been silence, about seven years since the LRIS was announced. Since then, there has been a sea change in the retail investment environment. Digitalisation has broadened access to information and investment choices. Even more gratifying are the real changes to investment costs. Robo advisers – foremost among them is Endowus – have managed to significantly lower the cost of investment.

Do CPF members still need the LRIS? I believe not.

Blazing a trail

Endowus, the first digital adviser in the CPF Investment Scheme (CPFIS), has blazed a trail in Singapore in its commitment to offer retrocession-free funds. It seeks to onboard the institutional share classes of funds, where the annual management fee is typically half that of retail funds. Where this share class isn’t available, it rebates the trail fee, the portion of the annual management fee paid to distributors.

A second digital adviser, MoneyOwl, is also able to advise on CPFIS savings. It also features only retrocession-free funds, although its offerings are more limited.

These developments make it possible for individuals to invest at significant cost savings. This is no small matter. In the retail market, Singapore is ranked “below average’’ by Morningstar in its 2022 global review of fund costs. It noted that fund costs here are “disappointingly’’ almost unchanged from its last review in 2019.

Costs dilute investment returns, and this dilution is compounded over time. In investing, costs are almost the only lever within investors’ control.

Hence, arguably the biggest boon for the CPFIS has been the recent inclusion of passive index funds by Endowus. Two equity funds by Amundi were made available for the CPFIS recently, and two more passive fixed income trackers are in the pipeline.

The two equity funds are Amundi Index MSCI World fund, which tracks the MSCI World Index; and the Amundi Prime USA Fund, which tracks a US large- and mid-cap index. The funds’ total expense ratios (TERs) are 0.1 per cent and 0.05 per cent, respectively. These TERs are lower than even the exchange-traded funds in the CPFIS.

It is thanks to its retrocession-free model that Endowus has managed to onboard the Amundi index funds. It is now also working to introduce Dimensional Fund Advisors (DFA) into the CPFIS. DFA also pays no retrocessions.

The blame for the dearth of index funds in Singapore is due to the fund distribution landscape where banks and advisers are compensated via retrocessions or commissions. But index funds do not have the margin to pay distributors. Famously, US fund giant Vanguard could not make headway in the retail market here, and exited Singapore in 2018.

Unbundling distributor fees – comprising the sales charge and trail fee – makes for better transparency and alignment of interests with investors, which is what Endowus and MoneyOwl advocate.

Endowus is making headway. Since it rolled out retail platform services in 2019, assets under administration (AUA) have jumped. It now has around S$5 billion in AUA, of which S$1 billion comprises savings under the CPFIS and Supplementary Retirement Scheme.

Endowus co-founder and chief investment officer Samuel Rhee said: “The biggest mistake people make is to think that what Endowus has done for the CPFIS is something that anyone can do or has done. But it’s really special and comes from our deeply missional mindset and vision to do good, and to meaningfully improve the outcome of CPF members through CPFIS.”

Here is an idea of the cost of an Endowus core portfolio for the CPFIS. There are six portfolios with varying asset allocation mixes, ranging from very conservative (100 per cent fixed income), to very aggressive (100 per cent equity).

A 60/40 (equity/bond) portfolio has a TER (fund level) of 0.38 per cent. An all-equity portfolio’s TER is 0.35 per cent. Together with the advisory/platform fee of 0.4 per cent, the all-in cost is 0.78 and 0.75 per cent, respectively.

A MoneyOwl CPF balanced 60/40 portfolio has indicative TERs of 0.4 to 0.42 per cent, and a 0.4 per cent advisory fee. The portfolios are invested in the LionGlobal Infinity Global Stock Index Fund, a Vanguard fund tracking the MSCI World Index, and the United SGD Fund, a global investment-grade bond fund.

In short, all the ingredients that LRIS sought to feature are now available. The catch is that the Amundi index funds are exclusive to Endowus. Still, signing up for an account is easy.

CPFIS’ legacy issues

To be clear, the CPFIS remains saddled with legacy issues that put members who wish to invest at a disadvantage. One, there is still a bewildering number of funds – a total of 227 unit trusts and investment-linked products in the scheme as at end-March.

This is significantly fewer than the 338 funds in CPFIS in 2010. There are now about 90 unit trusts, compared with 159 in 2010. Still, the sheer number of funds means members will need advice on fund selection, asset allocation and rebalancing.

Two, even with so many choices, member are ill-served because the CPFIS is over-populated by actively managed, higher-risk funds. There are just six exchange-traded funds (ETFs), but all are “narrowly focused’’. That is, none give globally diversified exposure to either equities or bonds.

Three, the caps on total expense ratios (TERs) – 1.75 per cent for equity funds, for example – are still too high. Morningstar’s review of Singapore finds an asset-weighted median TER of 1.73 per cent for domiciled funds and 1.79 for available-for-sale funds.

It hasn’t been total silence from the government on the LRIS. In 2021, in a Committee of Supply speech, then-manpower minister Josephine Teo mentioned the LRIS in response to a question. Teo said there is “no magic formula” in investing.

“Higher returns come from taking higher risks… Recent events have altered the investment environment. We need to update our planning assumptions and strike the right balance between risk and return in our design of LRIS.”

This statement is telling on why members need not hold their breath. The LRIS’ proposed design was to comprise diversified, passively-managed fund choices, that were to be combined into lifecycle portfolios. This is an established practice in retirement schemes, informed by decades of historical data on asset classes’ risk and return.

In any case, who is to dispense advice for the LRIS? It is unlikely the CPF itself would take on this role, lest it be blamed for investment losses.

As for the market environment, it is only a snapshot in time for those with long horizons. What matters is to get started early, invest consistently and reap the power of compounding. A portfolio approach and diversification help to mitigate volatility.

The next big question is: How sustainable is Endowus’ model? What’s the risk that it fails to make a profit and has to be wound up?

Rhee maintains that the company, which has embarked on regional expansion, now has scale and “a clear path to profitability’’. Its series A fundraising in 2021 attracted large backers, including UBS. Endowus has taken the long view and will have to secure like-minded backers.