In our primer on how to optimize your CPF balances, we highlighted five sequential steps that an individual can take (and their respective rationales):
- Voluntary cash top-up to MA
- Voluntary cash top-up to SA
- Transfer excess OA balances to SA
- [As you approach 55 years old] Execute SA shielding
- [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 a person should consider investing their CPF balances, alongside our shortlist of CPF-eligible investments that people deem \”optimal\”.
1) Introduction to CPF Investment Scheme (CPFIS)
2) What's the probability of outperforming CPF interest rates?
3) We would only invest our excess CPF-OA balance
4) Our shortlist of the greatest eligible investments for CPFIS-OA
Appendix: 3-step help guide to open a CPF Investment Account
The InvestQuest View
We believe it's worth investing the part 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 for example stocks would be the most appropriate, given the relatively high historical possibility of beating the 2.5% p.a. CPF-OA rate of interest over periods of at least 5 – Ten years. Lastly, we summarize the \”best\” investment vehicles that people would consider for our own CPF-OA investments.
1) Summary of CPF Investment Scheme (CPFIS)
The CPF Investment Scheme (CPFIS) gives individuals the option to invest their OA and SA balances to boost 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 of age;
- is not an undischarged bankrupt;
- have more than $20,000 inside your OA (the excess can be used to invest)
- have a lot more than $40,000 in your SA (the excess can be used to invest)
The eligible types of investment products under CPFIS are contained in the table below. Details on the particular shares, ETFs, unit trusts, ILPs and bonds which may be purchased under CPFIS may be present in this link.
For CPF-OA, there are limits 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:
- CPF-OA balance
- Net amount withdrawn for investment
- Net amount withdrawn for education
For example, for those who have a CPF-OA balance of $50k, and if you have already used $30k of CPF-OA for investments and another $20k of CPF-OA for education (both of which have not been repaid), your \”investible savings\” could 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 observe that these investment limits don't apply to ETFs or Unit Trusts. Hence, as long as you leave $20k in your OA, the excess can be fully used on these items, which includes popular vehicles like the SPDR Straits Times Index ETF, regardless of 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 must only invest via CPFIS if an investment includes a high probability of returning a lot 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 are focusing on stock-related investments, as we think that:
- Most CPFIS investors have a long investment horizon because of the inability to withdraw CPF funds before age 55
- With government bond yields and credit spreads currently near historical troughs, we feel it may be less probable for bond investments to outperform the two.5% – 4% p.a. CPF interest rates in the medium-term.
Historical Returns of Global Stocks vs Local Stocks (2001 – 2021)
We start looking 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 direct result its \”value-tilt\” which has underperformed \”growth stocks\” in the past decade, along with the dearth of tech-related stocks from our stock market.
Historical performance aside, we all do believe it pays off to invest globally for risk management purposes and never be fully invested in just the local stock market. This will help reduce country concentration risk, considering that many of us have bulk of our wealth tangled 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 are ~50% chance of underperforming the average.
Thus, to evaluate whether it is worth investing your CPF balance, we approached the problem in this manner.
First, shown below are the chance costs of investing your CPF monies. Logically, we should only invest our CPF balance when the stock market can give us coming back that's higher than these thresholds.
- 2.5% per year -the opportunity cost of CPF-OA
- 4.0% per annum – the chance 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 year), we'll further consider return thresholds of four.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 year – the opportunity cost of CPF-OA (inclusive of an assumed 1.5% fund management fee)
- 5.5% per year – 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 in 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 developed 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 modify the probability that we can surpass these return thresholds. Therefore we repeated the above analysis across 3-year, 5-year, and 10-year periods as well.
Probability Distribution of Stock Index Returns (2001 – 2021)
In the below tables, we compiled the probability distribution of returns for that MSCI All Country World Index (global stocks) and also the MSCI Singapore Index (local stocks), across varying 1, 3, 5, 10-year rolling periods of time between 2001 to 2021.
For a 5-year investment horizon:
- MSCI All Country World outperformed the 2.5% threshold 78% from the time
- MSCI All Country World outperformed the 4.0% threshold 68% from 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% from the time
Time in the market matters! Looking at the past twenty years of data, it does seem to imply the longer you are invested in the marketplace, the more likely you are to outperform the CPF-OA 2.5% rate of interest.
Probability Distribution of 10-Year Stock Index Returns (2001 – 2021)
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 instance, looking at the leftmost red column within the first chart, we conclude there was a 13% chance of MSCI All Country World Index returning 3 – 4% p.a.
Actual Return Distribution of CPFIS-OA Investors (Sep 2021 – Sep 2021)
Based on statistics compiled by the CPF Board, the actual performance distribution from CPFIS-OA investors between Sep-2021 to Sep-2021 was:
- Above 2.5% p.a.: 58%
- Between 0% to two.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 always mean that investing your CPF monies is bad. Instead, individuals could potentially have used 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'd 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 much 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 planning to invest our CPF SA balance for two reasons:
- SA offers attractive risk-adjusted return: We can not think of any other asset class that currently offers anything close to 4% p.a. risk-free returns. So, we plan to use our CPF SA as a longer-term bond-like allocation.
- 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 good balance to buy shares, ETFs or unit trusts that are fully invested in stocks. This reduces your odds 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. within 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 rest of the with this longer-term mindset.
4) Our shortlist of the greatest eligible investments for CPFIS-OA
The full listing of eligible investments for under CPFIS might be found here.
Investing is a very personal matter and what is \”best\” for us may be different from what's \”best\” for you. That said, we have shortlisted four options (serving different investment objectives) available under CPFIS-OA that is worth considering:
- For low-cost diversified Singapore stock exposure: SPDR STI Index ETF
- For diversified Global stock exposure: Endowus Core Portfolio (100% Stocks)
- For active contact with Emerging Markets and Asia: Selected Unit Trusts
- For active local stock investors: SGX-listed stocks
We provide more information on each of these options below.
We do accept is as true pays off to invest globally and never be fully invested in only 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 responsibility security is also tied to Singapore's fortunes.
1) For Diversified SG Stock Exposure: SPDR Straits Times Index ETF
The job of the ETF is simply to track the Straits Times Index, which consists of the largest 30 stocks for auction 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.
For more details on this ETF, you are able to 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 ideal 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 purchase global and US stocks), and the other two are actively managed funds (that purchase emerging market and Asia stocks).
Such an allocation between your use of active vs passive vehicles is preferable in my opinion, given that low-cost passive investment vehicles (for example 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 were able to do relatively better in offering non-US stock exposure (check this out article for details).
Details from the four underlying unit trusts utilized by Endowus is included in the tables below.
A benefit of using Endowus is its ability to keep investment costs low. For example, it is common practice for unit trust distribution platforms (for example FSM, DollarDex, POEMs, banks) to receive trailer fees from the unit trust manager (such as Blackrock, Schroders etc). Endowus receives these same trailer fees but passes it back fully to the investor!
For CPF-funded portfolios, Endowus charges a set 0.4% p.a. management fee., along with an approximate 0.71% p.a. blended net TER from the underlying four unit trusts. We feel this to be relatively cost-efficient, bearing in mind that there are no CPFIS-eligible low-cost global stock ETFs.
3) For Emerging Markets & Asia Stock Exposure: Selected Unit Trusts
Previously, we'd performed a fund screen to decide on the \”best\” SGD-denominated stock unit trusts. We filtered unit trusts that met the next criteria:
- Non-US stock exposure: Unit trusts committed to non-US stocks have generally outperformed their passive ETFs peers, on the net-of-fees basis (see this article for details)
- Long History: At least 5 years since fund inception
- Sizeable Asset Base: Fund assets in excess of US$250 million
- 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
- Good Historical Performance: Strong risk-adjusted performance relative the fund's specific category, based on 3-year Sharpe ratios and 5-year historical returns
- Ease of Access: Funds shortlisted are accessible via FSM and Dollardex
- Currency-hedged: Where available, we have selected fund share classes that are SGD-hedged. This means that foreign currency fluctuations (highly relevant to Mutual Funds that purchase non-SGD stocks and bonds), will not add or detract significantly in the fund's total return
The CPFIS-eligible stock unit trusts that met the above mentioned criteria include:
- [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 information on these unit trusts in the below tables, using their relevant benchmarks where appropriate.
4) For Active Local Stock Investors: SGX-listed stocks eligible under CPFIS
Some investors may would rather select their own SGX-listed stocks for his or her CPF investment portfolio.
The full list of eligible SGX-listed stocks may be present in this link.
Summary of where you can purchase these CPFIS investment products
In the table below, we summarize the geographical stock exposures from the shortlisted investment options and where these products may be purchased at. Do observe that you may be able to purchase these specific unit trusts on other platforms that we have not mentioned.
For the selected unit trusts that are available on the Endowus platform, Endowus happens to be the least expensive way to purchase them.
The purchase can be achieved via a recently launched product offering called \”Endowus Fund Smart\”, that allows investors to select their own unit trusts (from the 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.
The InvestQuest View
We believe it's worth investing the portion of our CPF-OA balance that's more than our housing needs, especially if the investment horizon is 10 years or more. Regarding what to invest in, we believe that higher-risk assets for example stocks would be the most appropriate, because of 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, because you will need to log in via your SingPass.
Step 2: Open a CPF Investment Account with DBS, OCBC or UOB
- These would be the account opening application pages for DBS, OCBC and UOB. You are able to only have one CPF Investment Account at any point of time.
- This account is purely to manage 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 listing of eligible brokers), you can link it for 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 compared to local banks. You can also consider Endowus, which can be cheaper than these platforms, depending on the specific fund.