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I have a love-hate relationship with CPF – Singapore’s compulsory social security savings scheme designed to help Singaporeans save enough money for our housing, retirement and medical needs.
By forcing people to save through deducting a portion of our monthly salary each month into various CPF accounts, we can be more certain that we have enough money to pay for those expenditures when the need arises.
If you’re below 35 years old, the CPF Ordinary Account (OA) is allocated 23% of your wage, while the Special Account (SA) and Medisave Account (MA) is allocated 6% and 8% respectively. The allocation rates changes according your age, and as you grow older, your OA allocation is reduced while your SA and MA allocation increases.
While the CPF pays interest on your cash – 2.5% on your OA and 4% on your SA and MA, and an additional 1% interest on combined balances below S$60K, the interest rate paid on your OA barely beats inflation in Singapore, estimated to be around 2% annually.
Low fees are key to a successful long-term plan
We have heard a lot of stories about how conventional unit trusts sold by banks and many insurance agents come with high fees that go to commissions.
As I mentioned above, fees could take the form of sales charges between 1.5% to 3% which are levied when you make the first purchase.
There are also wrap fees and fees on the fund level, which include things like trailer fees. These are usually included in the fund’s total expense ratio.
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Transferring my OA savings to SA
One way to grow your cash savings faster locked in CPF is to transfer money from your OA to SA, which is irreversible, earning 5% per annum.
Given the reliability and attractiveness of CPF interest rates in the context of declining bond and fixed deposit yields globally, I thought that earning 5% in interest annually on my untouchable funds was worthwhile.
Considering my personal circumstances – I am into my third year of working, attached but not looking to buy a BTO flat in the next three years, stashing my initial years of OA contributions into SA made a lot of sense, since I had no immediate need for a house downpayment.
With my early OA to SA transfer, my SA will now generate an additional 4 digit in interest every year, risk-free (in the absence of political risk), by planning early and managing my cash needs over the next few years.
Over the next few years, I will be rebuilding my OA funds in preparation for my housing downpayment, which could be supplemented with cash if needed.
The drawback of this approach is that the OA to SA transfer is irreversible – my funds sitting in SA will be locked up for a very long time, till I am 55 (that’s close to 25 years!), and I can no longer use those funds for my home downpayment and mortgage payments.
Endowus CPF’s offering
Perhaps the solution I needed was a flexible investment option that yielded higher on a risk-adjusted basis than the 2.5% risk-free rate CPF OA was offering.
I came across Endowus, an independent financial advisory firm that offers investment services for CPF by building globally diversified portfolios at a cost lower than the industry average.
Globally diversified portfolios
The case for investing in a globally diversified portfolio is a tried-and-tested formula backed by Nobel Prize-winning research for building long-term wealth, as it is positioned to withstand large market fluctuations and provide a stable set of returns over time.
Endowus’ partners with leading asset managers like PIMCO, Dimensional Fund Advisors, First State Investments and Vanguard to build globally diversified passive portfolios at institutional scale – meaning investors can invest in funds typically only available to large institutions like sovereign wealth funds.
The problem with existing CPFIS investment options for OA is that they are limited to high-fees unit trusts that underperform the market or narrowly-focused ETFs – 3 out of the 4 ETFs currently available are limited to the Singapore market.
Endowus promises investors radically lower fees than the industry average by rebating 100% of trailer fees for cash portfolios – fees earned by financial advisors, banks or platforms to sell you their products (usually 50% of a fund’s annual management fee), and taking away sales charges, distribution commissions, transaction charges completely.
For their CPF investment option, they charge a flat 0.4% access fee which includes advice, brokerage, wrap, transaction, custodian, and rebalancing.
Endowus also occasionally looks out for better products in the market to ensure that your costs stay at the lowest possible. As long as the new products fully reflect the asset allocation views that they hold, at a lower cost, they would be willing to switch it out. For example, they switched out the developed world equities portion of their portfolio for half the total expense ratio in April 2020.
The fact that they are only paid by us, the investors, and not by the fund managers (they fully rebate the trailer fees), their interests are aligned with ours.
Investing mum’s CPF OA savings with Endowus
My mum – like many Singaporeans – owns a portfolio of mainly SGX-listed stocks and REITs. Among her holdings are companies like Metro, DBS and Mapletree Logistics Trust. In addition, she has her own investments in various unit trusts and ILPs.
With 3 years till retirement age, she is willing to take some risk to earn a higher rate of return, cushioned by her decades of savings, fully paid HDB and children who have all grown up. She has already met her FRS and has a sizeable amount of savings left in her OA.
Together, we recognised that her CPF OA savings could be put harder to work given the average Singaporean woman life expectancy is 85 years old. That means she still has more than 30 years to go draw down her retirement savings!
30 years… is a long time.
Many Singaporeans are at risk of running out of money before they pass away. By investing in the MSCI All Country World Index (ACWI) in 1990, the total returns is close to 3 times that of what was left when invested in the CPF OA alone.
Even with the worst 20-year period, you can see that a 100% global equities portfolio still returned higher than CPF OA.
With the above knowledge that her CPF could be invested to earn higher risk-adjusted returns over time through diversified portfolios, between this and less desirable alternatives, she was extremely eager to give Endowus a try.
Endowus CPF portfolio
CPF investing is a hard business, because the CPF board sets out strict requirements on funds that you’re investing your hard-earned CPF monies in.
For example, funds have to be in the top 25 percentile of funds in the global peer group, with good performance and have low total expense ratios.
With so many choices available for funds, investors who are looking to invest their CPF money can rely on Endowus’ expertise to build different portfolios of varying risk levels with the best CPFIS-included funds.
These include funds from the like of top portfolio management companies like First State (First State Dividend Advantage), Schroders (Schroders Global Emerging Market Opportunity) and Lion Global (Lion Global Infinity US 500 Stock Index Fund) – giving you a range of investment options across active and passive funds at low cost.
The new Endowus CPF portfolio as of April 2020 consists of the following underlying funds and corresponding weightage.
You can see that the net total expense ratio (TER) for some of the global equities funds are extremely competitive, even if you compare to DIY solutions out there. For example, the global equities portion (Infinity Vanguard Global Equities) is comparable to the best UCITS ETF (iShares Core MSCI World UCITS ETF, IWDA), which has a TER of 0.22% but denominated in USD.
Of course, you cannot compare them directly because we are talking about CPF here, and not cash, which means you are constrained in terms of investment options set out by the CPF board, which has to first approve the funds, and then who can administrate the investment process.
Endowus protects investors through a series of mechanisms
We have seen roboadvisors collapse, like in the unfortunate case of Smartly, which had to force liquidate their clients’ holdings.
Endowus manages this risk in a series of protection mechanisms, that when taken together as a whole, are comparable to institutional level safeguards to protect your funds.
First, Endowus never touches your funds.
When you create an account with Endowus, you create an account in your own name with UOB Kay Hian, which is one of the largest local broker. When you call your CPF money for investments, Endowus makes the instructions through UOB Kay Hian, which in turn will make the instructions to CPF and your agent bank.
UOB Kay Hian is also the custodian of your funds, which holds your positions and funds in your own name. That means you don’t have to force liquidate your positions if Endowus goes bankrupt, and you can continue holding your positions and manage them through other financial advisors if needed.
Risk management and self-awareness is still key
Not everyone can stomach a 30-40% drop in retirement savings, and not everyone has spare cash in their CPF OA to invest. If you’re looking to only preserve your capital, then you’re encouraged to just leave your monies in CPF OA.
But for those who are looking to obtain a higher risk-adjusted returns over time on their CPF OA or SRS monies, especially since they cannot touch it for a long time, Endowus is an great solution for those looking to grow your wealth through globally diversified portfolios suitable for your risk appetite.
They have a variety of portfolios for people of different risk appetites from 100% bonds to 100% stocks and everything in between.
If you’re a more conservative investor you can opt for a conservative 20% equities 80% bonds portfolio, which should also outperform CPF’s return.
Do note that in order to invest using your CPF funds, you can only do so with funds above the first $20,000 in your CPF OA and above the first $40,000 in your CPF Special Accounts (SA).
For those who believe in the power of building long-term globally diversified portfolios which you can compound your returns through low fees, Endowus has a great offering that you should definitely check out.