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Introduction

In our primer on how to optimize your CPF balances, we highlighted five sequential steps that an individual can take (and their respective rationales):

1. Voluntary cash top-up to MA

2. Voluntary cash top-up to SA

3. Transfer excess OA balances to SA

4. As you approach 55 years old Execute SA shielding

5. As you approach 55 years old Execute OA shielding

One aspect that was excluded was the CPF Investment Scheme (CPFIS). In this article, we offer our thoughts on whether an individual should consider investing their CPF balances, alongside our shortlist of CPF-eligible investments that we deem “optimal”.

Article Summary

1. Introduction to CPF Investment Scheme (CPFIS)

2. What is the probability of outperforming CPF interest rates?

3. We would only invest our excess CPF-OA balance

4. Our shortlist of the best eligible investments for CPFIS-OA

5. Appendix: 3-step guide to open a CPF Investment Account

The InvestQuest View

We believe it’s worth investing the portion of our CPF-OA balance that’s in excess of our housing needs, especially if the investment horizon is 10 years or more. Regarding what to invest in, we believe that higher-risk assets such as stocks would be the most appropriate, given the relatively high historical probability of beating the 2.5% p.a. CPF-OA interest rate over periods of at least 5 – 10 years. Lastly, we summarize the “best” investment vehicles that we would consider for our own CPF-OA investments.

Disclaimer: Below, we’ve highlighted what we see as the best CPFIS-eligible investments for our own CPF-OAs. Everyone’s financial circumstance and priorities differ. As always, please do your own due diligence before making investment/financial decisions.

1) Introduction to CPF Investment Scheme (CPFIS)

Main details of the CPF Investment Scheme

The CPF Investment Scheme (CPFIS) gives individuals the option to invest their OA and SA balances to enhance their retirement nest egg. You will be able to invest your CPF OA and SA balances, after meeting the following conditions:

• is at least 18 years old;

• is not an undischarged bankrupt;

• have more than $20,000 in your OA (the excess can be used to invest)

• have more than $40,000 in your SA (the excess can be used to invest)

The eligible types of investment products under CPFIS are included in the table below. Details on the specific shares, ETFs, unit trusts, ILPs and bonds that may be purchased under CPFIS may be found in this link.

For CPF-OA, there are limits on how much you can invest in certain product types

• For the purchase of “single stocks + corporate bonds + property funds” using CPF-OA, the limit is capped at 35% of “investible savings”

• For the purchase of “Gold-related investments” using their CPF-OA, the limit is capped at 10% of “investible savings”.

What are “Investible Savings”?

“Investible savings” is the sum of three parts:

1. CPF-OA balance

2. Net amount withdrawn for housing

3. Net amount withdrawn for education.

For example, if you have a CPF-OA balance of $50k, and assuming you have already used $30k of CPF-OA for housing and another $20k of CPF-OA for education (both of which have not been repaid), your “investible savings” would be $100k.

This means you would be able to invest up to $35k of CPF-OA into “single stocks + corporate bonds + property funds” and $10k into “Gold-related investments”, given the investment limits of 35% and 10% respectively.

For CPF-OA, there are no investment limits for ETFs or Unit Trusts

Do note that these investment limits do not apply to ETFs or Unit Trusts. Hence, as long as you leave $20k in your OA, the excess can be fully used on these products, which includes popular vehicles such as the SPDR Straits Times Index ETF, despite the ETF being 100% invested in stock.

2) What is the probability of CPFIS outperforming CPF interest rates?

We’re focusing on stock-related investments in our analysis

Investing comes with risk. CPF members should only invest via CPFIS if an investment has a high probability of returning more than the prevailing CPF interest rates (2.5% p.a. on OA balances and 4% p.a. on SA balances).

In our analysis, we will be focusing on stock-related investments, as we assume that:

1. Most CPFIS investors have a long investment horizon due to the inability to withdraw CPF funds before age 55

2. With government bond yields and credit spreads currently near historical troughs, we believe it may be less probable for bond investments to outperform the 2.5% – 4% p.a. CPF interest rates in the medium-term.

Historical Returns of Global Stocks vs Local Stocks (2001 – 2020)

We first look at the historical annualized returns of global stocks vs local stocks, using MSCI All Country World Index and MSCI Singapore Index respectively (see table below). From here, we can see that long-term investors could potentially outperform 2.5% – 4% p.a., assuming that investment costs are kept low.

Yes, MSCI Singapore has underperformed significantly, partially a result of its “value-tilt” which has underperformed “growth stocks” in the past decade, as well as the dearth of tech-related stocks in the local stock market.

Historical performance aside, we do believe it pays off to invest globally for risk management purposes and not be fully invested in just the local stock market. This will help reduce country concentration risk, given that many of us have bulk of our wealth tied up in our residential property while our job security is also tied to Singapore’s fortunes.

Factors to consider when thinking about whether it’s worth investing your CPF balance

Looking solely at “average annualized returns” can be misleading, since an investor’s experience could differ quite materially. After all, we shouldn’t forget that there’s ~50% chance of underperforming the average.

Thus, to evaluate whether it is worth investing your CPF balance, we approached the matter in this manner.

First, shown below are the opportunity costs of investing your CPF monies. Logically, we should only invest our CPF balance if the stock market can give us a return that’s higher than these thresholds.

• 2.5% per annum –the opportunity cost of CPF-OA

• 4.0% per annum – the opportunity cost of CPF-SA

Second, one investment option for one’s CPF balance is stock funds. As stock funds have annual fund management fees (usually 1.5% per annum), we’ll further consider return thresholds of 4.0% and 5.5%. We’d be interested in seeing what’s the probability of the stock index outperforming these higher thresholds.

• 4.0% per annum – the opportunity cost of CPF-OA (inclusive of an assumed 1.5% fund management fee)

• 5.5% per annum – the opportunity cost of CPF-SA (inclusive of an assumed 1.5% fund management fee)

Third, we looked at the probability distribution of returns for MSCI All Country World Index and MSCI Singapore. Specifically, we retrieved data from the past 20 years, looked at ALL the 1-year periods within those 20 years (periods starting 31 December 2000 etc.), calculated the return for each of those 1-year periods, and then came up with the “probability distribution” of the returns. Don’t worry, it’s less work than it sounds.

Lastly, we guessed that the “length of investment period” may affect the probability that we can surpass these return thresholds. So we repeated the above analysis across 3-year, 5-year, and 10-year periods as well.

Probability Distribution of Stock Index Returns (2001 – 2020)

In the below tables, we compiled the probability distribution of returns for the MSCI All Country World Index (global stocks) and the MSCI Singapore Index (local stocks), across varying 1, 3, 5, 10-year rolling time periods between 2001 to 2020.

For those who want to invest their CPF-OA monies, the stock index return thresholds to note are 2.5% and 4.0% (to factor in 1.5% p.a. of potential investment costs).

For a 5-year investment horizon:

• MSCI All Country World outperformed the 2.5% threshold 78% of the time

• MSCI All Country World outperformed the 4.0% threshold 68% of the time

• MSCI Singapore outperformed the 2.5% threshold 79% of the time

• MSCI Singapore outperformed the 4.0% threshold 64% of the time

For a 10-year investment horizon:

• MSCI All Country World outperformed the 2.5% threshold 100% of the time

• MSCI All Country World outperformed the 4.0% threshold 87% of the time

• MSCI Singapore outperformed the 2.5% threshold 87% of the time

• MSCI Singapore outperformed the 4.0% threshold 76% of the time

Time in the market matters! Looking at the past twenty years of data, it does seem to imply that the longer you are invested in the market, the more likely you are to outperform the CPF-OA 2.5% interest rate.

Probability Distribution of 10-Year Stock Index Returns (2001 – 2020)

In the below two charts, we illustrate the distribution of historical returns for global stock vs local stock returns, assuming a 10-year investment horizon. The horizontal x-axis shows the 10-year annualized return ranges, and the historical probability of getting a return within that range is written above each column. For example, looking at the leftmost red column in the first chart, we conclude that there was a 13% chance of MSCI All Country World Index returning 3 – 4% p.a.

Long-term global stock investors generally outperformed CPF returns. For global stock investors with an investment horizon of 10 years or more, the likelihood of underperforming 2.5% – 4.0% p.a. returns in the past twenty years was low.

Actual Return Distribution of CPFIS-OA Investors (Sep 2014 – Sep 2020)

Based on statistics compiled by the CPF Board, the actual performance distribution from CPFIS-OA investors between Sep-2014 to Sep-2020 was:

• Above 2.5% p.a.: 58%

• Between 0% to 2.5% p.a.: 17%

• Made losses: 25%

This means that 42% of individuals would have been better off, had they not invested their OA balances!

The above statistic does not necessarily mean that investing your CPF monies is bad. Instead, individuals could potentially have been using the “wrong” investment vehicles, which are not aligned with the longer-term objectives of CPF.

Later on in Section 4, we shortlist what we deem to be the “best” CPF-eligible investment vehicles.

3) We would only invest our excess CPF-OA balance

To reiterate again, you should only invest your CPF monies if you are relatively confident of getting a better return than CPF interest rates (OA: 2.5% p.a. / SA: 4% p.a.).

Would we invest our CPF-OA and CPF-SA?

Personally, we’re NOT intending to invest our CPF SA balance for two reasons:

1. SA offers attractive risk-adjusted return: We can’t think of any other asset class that currently offers anything close to 4% p.a. risk-free returns. So, we intend to use our CPF SA as a longer-term bond-like allocation.

2. Limited investment options: As SA is meant for retirement needs, CPF Board limits the use of SA funds to “lower risk” investments. This means that you would NOT be able to use your SA balance to buy shares, ETFs or unit trusts that are fully invested in stocks. This reduces your chances of outperforming 4% p.a.

For our CPF OA balance, we’re considering to invest it, with a view that stocks have a high probability of beating 2.5% p.a. over the longer-term (as we had discussed earlier in Section 2). Of course, it would be prudent to set aside what is needed for housing first, and investing the residual with this longer-term mindset.

4) Our shortlist of the best eligible investments for CPFIS-OA

The full list of eligible investments for under CPFIS may be found here.

Investing is a very personal matter and what is “best” for us may be different from what is “best” for you. That said, we have shortlisted four options (catering to different investment objectives) available under CPFIS-OA that is worth considering:

1. For low-cost diversified Singapore stock exposure: SPDR STI Index ETF

2. For diversified Global stock exposure: Endowus Core Portfolio (100% Stocks)

3. For active exposure to Emerging Markets and Asia: Selected Unit Trusts

4. For active local stock investors: SGX-listed stocks

We provide more details on each of these options below.

We do believe it pays off to invest globally and not be fully invested in just the local stock market. This will help reduce country concentration risk, given that many of us have bulk of our wealth tied up in our residential property while our job security is also tied to Singapore’s fortunes.

1) For Diversified SG Stock Exposure - SPDR Straits Times Index ETF

The job of this ETF is simply to track the Straits Times Index, which consists of the largest 30 stocks listed on SGX. Do note that the index is largely skewed towards financial and property sector stocks, which comprise close to two-thirds of the index.

Source: Bloomberg, retrieved 12 February 2021

For more details on this ETF, you can refer to this link.

2) For Diversified Global Stock Exposure - Endowus Core Portfolio using CPF-OA (“Very Aggressive” – 100% Stocks)

Endowus offers various core portfolios for CPF-OA to cater to different investor risk appetites. However, we have decided to focus on their “Very Aggressive” portfolio, as its 100% stock allocation could be suitable for long-term investors keen to maximize investment returns. Details on this portfolio may be found here.

To summarize, the portfolio comprises of four unit trusts, two of which are low-cost passive tracker funds (that invest in global and US stocks), and the other two are actively managed funds (that invest in emerging market and Asia stocks).

Such an allocation between the use of active vs passive vehicles is preferable in my view, given that low-cost passive investment vehicles (such as ETFs and passive tracker funds) have generally offered better performance for US stock exposure, on a net-of-fees basis. On the other hand, actively managed unit trusts have managed to do relatively better in offering non-US stock exposure (see this article for details).

Details of the four underlying unit trusts used by Endowus is included in the tables below.

Source: Bloomberg, retrieved 12 February 2021

A benefit of using Endowus is its ability to keep investment costs low. For example, it is common practice for unit trust distribution platforms (such as FSM, DollarDex, POEMs, banks) to receive trailer fees from the unit trust manager (such as Blackrock, Schroders ect). Endowus receives these same trailer fees but passes it back fully to the investor!

For CPF-funded portfolios, Endowus charges a flat 0.4% p.a. management fee., in additional to an approximate 0.71% p.a. blended net TER from the underlying four unit trusts. We believe this to be relatively cost-efficient, keeping in mind that there are no CPFIS-eligible low-cost global stock ETFs.

Endowus Promo Code / Referral Link

• Receive a $20 management fee rebate, when you use our** Referral Link to open a New Account.**

• This is equivalent to S$10k managed free for 6-months.

• Affiliate fees that we receive will support the running of our site!

3) For Emerging Markets & Asia Stock Exposure - Selected Unit Trusts

Previously, we had performed a fund screen to select the “best” SGD-denominated stock unit trusts. We filtered unit trusts that met the following criteria:

1. Non-US stock exposure: Unit trusts invested in non-US stocks have generally outperformed their passive ETFs peers, on a net-of-fees basis (see this article for details)

2. Long Track Record: At least 5 years since fund inception

3. Sizeable Asset Base: Fund assets of more than US$250 million

4. Low Fees: Total Expense Ratio of less than 2% per annum and fees are deemed to be low-moderate relative to funds within the same category

5. Good Historical Performance: Strong risk-adjusted performance relative the fund’s specific category, on the basis of 3-year Sharpe ratios and 5-year historical returns

6. Ease of Access: Funds shortlisted are accessible via FSM and Dollardex

7. Currency-hedged: Where available, we have selected fund share classes that are SGD-hedged. This means that foreign currency fluctuations (relevant to Mutual Funds that invest in non-SGD stocks and bonds), will not add or detract significantly from the fund’s total return

The CPFIS-eligible stock unit trusts that met the above criteria includes:

• Asia ex-Japan - Schroder Asian Growth Fund

• Asia ex-Japan - First Sentier FSSA Dividend Advantage Fund

• Emerging Markets - Fidelity Emerging Market Fund

• Greater China - Schroder ISF Greater China Fund

• Greater China - Fidelity Greater China Fund

• Greater China - First Sentier FSSA Regional China Fund

We include details of these unit trusts in the below tables, with their relevant benchmarks where appropriate.

Source: Bloomberg, retrieved 12 February 2021. TER of Fidelity Greater China Fund is estimated.

4) For Active Local Stock Investors - SGX-listed stocks eligible under CPFIS

Some investors may prefer to select their own SGX-listed stocks for their CPF investment portfolio.

The full list of eligible SGX-listed stocks may be found in this link.

Summary of where you can purchase these CPFIS investment products

In the table below, we summarize the geographical stock exposures of the shortlisted investment options and where these products may be purchased at. Do note that you may be able to purchase these specific unit trusts on other platforms that we have not mentioned.

Source: IQ compilation. Fund factsheets, as of 31 December 2020.

For the selected unit trusts that are available on the Endowus platform, Endowus happens to be the cheapest way to purchase them.

The purchase can be done via a recently launched product offering called “Endowus Fund Smart”, which allows investors to select their own unit trusts (from a list that has been curated by Endowus).

We had also published an article previously on this new offering (article link), if you are keen to find out more. Do note that our Promo Code can also be used for Endowus Fund Smart.

Endowus Promo Code / Referral Link

• Receive a $20 management fee rebate, when you use our Promo Code to open a New Account.

• This is equivalent to S$10k managed free for 6-months.

• Affiliate fees that we receive will support the running of our site!

The InvestQuest View

We believe it’s worth investing the portion of our CPF-OA balance that’s in excess of our housing needs, especially if the investment horizon is 10 years or more. Regarding what to invest in, we believe that higher-risk assets such as stocks would be the most appropriate, given the relatively high historical probability of beating the 2.5% p.a. CPF-OA interest rate over periods of at least 5 – 10 years. Lastly, we summarize the “best” investment vehicles that we would consider for our own CPF-OA investments.

Appendix: 3-step guide to open a CPF Investment Account (CPFIS)

Step 1: Complete the CPFIS Self-Awareness Questionnaire

• The Questionnaire may be accessed here. Status of completion is tracked, as you will need to log in via your SingPass.

Step 2: Open a CPF Investment Account with DBS, OCBC or UOB

• These are the account opening application pages for DBS, OCBC and UOB. You can only have one CPF Investment Account at any point of time.

• This account is purely to administer your funds. You will still be transacting via your brokerage platforms, and you can select “CPF” as the mode of payment.

• Note that for CPF-SA investments, there is no need to open a CPF Investment Account.

Step 3: Open a brokerage account

• If you already have existing brokerage accounts that allow for CPF-eligible stock/ETF investments (see full list of eligible brokers), you can link it to your CPF Investment Account to start investing.

• If you are looking to transact CPF-eligible unit trusts, platforms such as POEMs, DollarDex and FSM offer a wider range than the local banks. You can also consider Endowus, which may be cheaper than these platforms, depending on the specific fund.