IT may sound easy, but beating the CPF Ordinary Account (OA)'s guaranteed annual interest rate of 2.5% is by no means a straightforward task for CPF members, who are looking to grow their savings under the CPF Investment Scheme (CPFIS).

Indeed, only 17% of CPF members who sold their CPFIS-OA investments in FY2011 ended Sept 30 made profits in excess of the OA interest rate, according to the CPFIS Profits/Losses FY2011 report. Forty-five per cent of these CPFIS-OA investors actually made losses in FY2011 while the remaining 38% generated profits of 2.5% or less. The same trend could be seen in FY2010, when only 14% of total CPFIS-OA investors netted profits of more than 2.5%.

Despite the uninspiring statistics, many financial advisers still urge CPF members, especially those with insufficient funds for retirement, to invest their CPF-OA savings. "For a start, if our clients' cash resources are not sufficient to achieve their retirement goal, they should invest their CPF monies," says Christopher Tan, chairman and CEO of local independent financial advisory (IFA) firm Providend.

Victor Wong, director of wealth management at IFA firm Financial Alliance, concurs. "Relying on your existing CPF-OA savings, which are compounding at 2.5% a year, is definitely not enough for retirement, Hence, you either have to set aside more savings to build up your retirement nest egg or make your monies work harder for you," says Wong. "In fact, CPF-OA savings are an ideal source of monies to invest for the long term since you cannot touch the monies until retirement." Currently, only CPF-OA savings in excess of S$20,000 can be invested under the CPFIS.

The main problem faced by many CPFIS-OA investors who fail to achieve any meaningful returns with their CPF money is their inability to hold on to their investments over the long term, according to financial experts. Many CPF investors — plagued by their short-term mentality — tend to bail out of their investments when there is a market downturn, which is the worst time to sell.

If they took a longer-term investment horizon, stayed invested throughout up and down market cycles and perhaps added more to their investments during bearish downturns, there is no reason why CPFIS-OA investors can't achieve better returns than the guaranteed CPF-OA savings rate of 2.5% a year, say financial advisers.

"My firm belief is that, over a long-term investment horizon such as 10 years, a diversified portfolio will outperform the CPF-OA savings rate of 2.5% a year," Wong tells Personal Wealth. An undemanding way to build a diversified portfolio with your CPF savings is to invest in CPFIS-approved investments funds, he says. "There are enough good funds among the CPFIS-OA approved funds that investors can take advantage of to build a diversified portfolio." The Financial Alliance director notes that there are around 30 CPFIS-OA approved funds that have outperformed the 2.5% OA annualised return over a 10-year period.

William Cai, vice-president and deputy head of investments at local IFA firm GYC Financial Advisory, agrees. He reckons that over the longer term, equities and balanced CPFIS-OA approved funds have a good chance of delivering better returns than the risk-free CPF-OA interest rate.

"Given 10 years or more, there will be opportunities for the fund managers to exploit the inefficiencies of the market and time also allows the compounding effect of returns to kick in to gain exponential returns. So, I am confident some of the [CPFIS-OA] approved funds will beat the CPF-OA's annual interest rate."

Investment considerations
The decision to invest in CPFIS-OA approved funds will depend on CPF members' risk appetite, financial goals and time frame, says Chris Firth, director and founder of online wealth planning company and fund distributor dollarDEX. "For risk-averse investors, the 2.5% guaranteed on the CPF OA is a good option.

Those comfortable with market volatility and a long time frame could look at the CPFIS-included unit trusts. Not all funds are equal, but some on the list have done well despite the ups and downs of various financial crises over the last decade."

Offering similar views, Tan of Providend says it is important for CPF members to know their targeted returns in order to achieve their retirement goals. "Based on your need for returns, the time horizon you have and the amount of cash you can use to reach your goals, there may not be a need to use your CPF for investments as the CPF OA gives a pretty decent return of 2.5% a year." However, if there are insufficient funds for retirement, CPF members can deploy their CPF monies to get higher returns, he adds.

Other factors to consider when investing in CPFIS-OA approved funds are the transaction costs and fees. CPF agent banks, which facilitate the buying and selling of CPFIS-approved products, currently charge around S$2.50 per 1,000 units (subject to a maximum of S$25 per fund).

There is also a quarterly service charge of S$2 per fund levied by the CPF agent banks. On top of that, CPF investors have to pay sales charges of up to 3% for their fund investments. To be sure, CPFIS-related charges could erode the gains achieved by the CPFIS-approved funds.

But for CPF members who are facing a shortage of funds for retirement and are keen to grow their OA savings via CPFIS-approved products, putting money in diversified CPFIS-OA approved unit trusts is probably "their best option", says Tan.

"Our CPF portfolios of unit trusts invested for our clients since 2003 are achieving returns of 4% to 5% a year, despite the 2008/09 financial crisis," notes the Providend CEO. He adds that the quality and performance of CPFIS-approved unit trusts have also improved in recent years, owing to the more stringent CPFIS admission criteria for investment funds.

Weeding out cost-inefficient and underperforming funds
Since February 2006, new rules have been gradually introduced on CPFIS-approved investment funds to get rid of cost-inefficient and underperforming products so that CPF investors will have the best range of funds under the CPFIS.

Today, unit trusts and investment-linked insurance products (ILPs) admitted to the CPFIS have to be among the top 25 percentile of funds in terms of performance, based on comparison with funds of similar asset class/strategy on a worldwide basis.

In addition, approved CPFIS funds should preferably have a three-year track record and a sales charge of not more than 3%. Furthermore, they have to meet an expense ratio criterion pegged at the median of all funds in the same risk class.

For instance, funds classified under the Higher Risk category should not have an expense ratio that is higher than 1.95%, while funds in the Medium- to High-Risk, Low- to Medium-Risk and Lower-Risk categories should have ratios that are lower than 1.75%, 1.15% and 0.65%, respectively.

Since the start of 2011, many unit trusts and ILPs that failed to meet the stringent CPFIS rules were excluded from the scheme. Currently, there are only about 90 unit trusts and 140 ILPs that meet the new CPFIS admission criteria. They are termed as the List A Funds.

"In general, I would say this pool of CPFIS-approved funds is a good base to start with when you want to choose a portfolio of funds. The criteria ensure that only funds that have shown a consistent track record are considered for inclusion under the CPFIS. This removes the guesswork for most investors, who do not have the time to constantly monitor the funds' performance," says Wong.

"The list of CPFIS-approved funds is definitely a list of above-average funds in terms of quality and performance. The criteria used by CPF are relevant and appropriate to a large extent. The focus of the criteria seems to be on good historical performance, lower cost and long track record, all of which are characteristics we look for when selecting funds for our clients. So, the CPF board does the first level of screening, to a certain extent, for many money managers," says Tan.

But given the stringent CPFIS admission criteria for funds, the flip side is that many good funds are left out of the approved list, he points out. "The list does not offer a wide variety of choices. Hence, it might restrict investors from expressing their views due to the lack of availability of funds." He adds that there aren't many sector, single-country and regional funds under the CPFIS.

Wong of Financial Alliance also observes that funds of certain fixed-asset classes such as high yields or emerging-market debts are omitted for consideration under the CPFIS because they are deemed too high-risk. "It is worthwhile to consider this asset class as the high-yield bond market has developed and matured over the years.

The volatility of this asset class is also lower than some of the single-country and single-sector equity funds in the market. It is a pity that investors cannot take advantage of this asset class, which does well over the long term," says Wong. Nevertheless, there are still plenty of good choices for CPFIS-OA approved funds for CPF investors to choose from, according to financial advisers.

Fund recommendations
One top-notch equity fund approved under the CPFIS is the Aberdeen Pacific Equity Fund, according to Firth of dollarDEX. For CPF investors with an investment time frame of at least 10 years, this Asian equity fund has a good chance of turning in outstanding returns, he reckons.

"The Aberdeen Pacific Equity Fund has averaged more than 10% a year since its inception [in December 1997]," says Firth who is also bullish on Aberdeen Asian Smaller Companies fund, which he is invested in.

"I have a decent sum of money in the Aberdeen Asian Smaller Companies fund. Quantitatively, I like the low beta and low volatility of this fund. I think some fund managers pay too much for glamorous, risky stocks. Often, the boring, unknown stocks are the best investments.

Qualitatively, I think Aberdeen is well-focused on Asian stocks and doesn't have a history of launching "flavour of the month" funds to ride the latest marketing trend," says the dollarDEX founder. Other Aberdeen funds approved under the CPFIS such as the fund house's Global Emerging Markets fund, Singapore Equity fund and Global Opportunities fund are also highly regarded by other financial experts.

"I like Aberdeen's "growth at a reasonable price" stock-selection style, which is geared towards value investing," says GYC's Cai, who recommends the Aberdeen Singapore Equity fund for CPF investors who are keen to get exposure to Singapore stocks.

This fund was the best-performing locally registered Singapore equity fund over five years, turning in gains of nearly 30% over the period as at Aug 17, according to Lipper's fund data. "It is the most consistent performer among its peers and has a long-term track record of more than 10 years.

As a value-based fund, it has lower volatility compared with its peers, hence resulting in a higher Sharpe ratio," says Wong of Financial Alliance, who also recommends the Aberdeen Singapore Equity fund. Cai is also bullish on the Aberdeen Asian Smaller Companies and Global Opportunities funds.

"The small- and mid-cap segment is where you can find undervalued stocks versus large-cap stocks. I don't wish to sound biased, but the record still shows that Aberdeen has done the best for a globally diversified fund." For his part, Tan of Providend likes the Aberdeen Emerging Markets fund, as it has a history of "consistent outperformance over the long term".

"The fund management team is very experienced and the fund doesn't hesitate in taking off-benchmark bets. It is a very bottom-up focused fund that looks for fundamentally strong companies," he says. Another solid performer is the First State Dividend Advantage, which invests in high-dividend-yielding Asia stocks.

"The fund has performed very well over the past few years. Given the current market volatility and uncertainty in global growth, dividend companies are expected to perform relatively better. In addition, First State has a robust bottom-up stock-selection model and a strong investment process, with appropriate risk-management systems in place," says Tan.

Wong is another fan of this First State fund. "Due to the nature of stock selection, the volatility of the fund is quite defensive in volatile periods. At the same time, the fund is able to deliver consistent return in the long term," says Wong.

Adventurous CPF investors who are keen to ride the upside of Asian equities could consider the Schroder Asian Growth Fund, which, according to Wong, should do well during a market upturn. This fund also has a low expense ratio of 1.25%, which makes it one of the most cost-efficient Asian equity funds in the Singapore unit trust market, he adds.

"A combination of the First State Dividend Advantage and the Schroder Asian Growth Fund would be a good mix due to style diversification." For balanced funds that invest in both bonds and stocks, Wong recommends the LionGlobal Singapore Balanced.

This fund, which has roughly 50% exposure to both local equities and fixed income, is the only Singapore balanced CPFIS-OA-approved fund, he notes. "Singapore equities without forex risks are likely to do in well in the long term due to strong fundamentals and corporate governance. Singapore equities also appeal to foreign investors because of the strong performance of the Singapore dollar," says Wong.

For his part, GYC's Cai recommends the Templeton Global Balanced Fund as his preferred mixed-asset CPFIS-OA fund play. "European markets are currently unloved, and I think this fund will do well in the longer term, especially when Europe recovers.

We will have upside on the euro if it does not break up and gains for European equities that currently look undervalued," says Cai. The Templeton Global Balanced Fund currently has around 30% of its assets invested in European and UK stocks and bonds, and 20% exposure to the euro.

In terms of bond funds, Cai likes the LionGlobal Singapore Fixed Income Investment, which he says has a decent fund size of S$250 million and its performance has been "one of the best and most stable" among the Singapore bond funds. Tan of Providend, however, prefers the United SGD fund, which is a Singapore-dollar-based short-duration bond fund that invests primarily in Asian corporate bonds with maturity periods of one to three years.

"The fund provides a healthy yield of 2.5% to 3%, with a duration of two to three years. That seems quite attractive, given the current yield of 1.5% for 10-year Singapore Government bonds with a duration of over five years. Taking into account the risk of an increase in yields going forward, the United SGD fund offers attractive risk-return characteristics," he says.

Bond fund investors can also consider the Schroder Asian Premium Bond Fund, which is the only CPFIS-OA approved Asian bond fund, says Wong. "Asian bonds are likely to outperform high-quality developed-market bonds, owing to their strong fundamentals and the influx of global liquidity." (See table for the performance of all the recommended CPFIS-OA approved funds.)

Pointers for CPFIS-OA fund investing
Although it is tempting to bet on one or two consistently performing CPFIS-OA approved funds, financial advisers warn that such a concentrated investing approach could be too risky. A better approach is to build a diversified portfolio that suits your risk profiles and financial goals.

"First, determine your investment objective and risk profile. Choose a diversified portfolio that suits your risk profile. A rule of thumb is, the higher your risk profile, the more equities you can have in your portfolio. Also, if you are young and have a long investment horizon, you can afford to take on more risk," says Wong.

"Monitor your portfolio on a half-yearly basis and rebalance it once a year so that the allocation between asset classes stays consistent with your risk profile and investment objective." Timing your fund purchases is also important, says Cai. To be sure, equity funds will inevitably be hit during a bear market and investors need to understand the economic cycle that they are in, he warns.

"Pay attention to valuation and avoid buying when equities are expensive. The best time to invest is during a recession, not when it's over. If you choose to invest during the later stage of a bull run, make sure that your risk-management rules are in place as you do not want to get caught in a bear market only to wait for the next bull run to go back to square one.

This requires market-timing techniques either via fundamental or technical analysis or both." All in all, over the long term, it pays to invest one's CPF-OA savings via a portfolio of CPFIS-approved funds, concludes Cai. "I am confident that CPFIS-OA approved equities or balanced funds would do better than the CPF-OA annual return of 2.5% over the long term. I have invested my CPF money the same way as I have invested my clients' funds." — The Edge Singapore

This story appeared in The Edge Singapore on Aug 27, 2012.