If you are keen to sign up for an account with Endowus, do consider using my referral link which enables both of us to have $10,000 of funds advised free for 6 months (a $20 value, to be precise). I receive no compensation from Endowus or any other party in writing this post.
Investing CPF - why even?
I shed some light on my revised views of the CPF in an earlier post, including my re-think of the CPF Ordinary Account (OA) as a quasi-cash "Housing Account" while the Special Account (SA) functions as the primary retirement vehicle. One of the questions I raised was whether 2.5% (the current OA interest rate) is a reasonable rate of return for the long term, and I briefly commented that I was not very keen on the CPF Investment Scheme (CPFIS). That may change with Endowus coming into the picture...
Meaningful statistics on CPFIS are like hidden pieces of a treasure hunt on the CPF website, but some broad observations:
- 4.0 million CPF members as of September 2019
- 940,000 CPFIS-OA members as of Q3 2019 (and a further 297,000 CPFIS-SA members, which I won't be focusing on for the time being)
- "Total cost of current holdings in CPFIS-OA" has been steadily dropping from 2008 to 2016, and the drop seems to have slowed down, but the graph by CPF is actually very misleading because the x-axis is inconsistent (originally by year, then by quarter).
This means that less than 1 in 4 CPF members has opted in for the Investment Scheme for their OA, not even taking into consideration that some CPFIS-OA accounts may have been set up but were never used. Even assuming that all CPFIS-OA accounts are active, I find an average of $17,500 of "cost of current holdings" per account as of Q3 2019, which doesn't seem high and is significantly lower than ten years ago ($29,250 in 2009) or even five years ago ($22,000). In fact:
- Out of the $142b in CPF members' OAs, only $16.6b (less than 12%) is invested as of Q3 2019, as compared to a whopping 37% in 2009 ($26.15b invested out of $70.6b)
Clearly, popularity of the CPFIS-OA appears to be waning, and I think this can be attributed to three main reasons:
- Perception that 2.5% p.a. interest rate is "good enough". Relative to deposit account interest rates which have been nowhere close to even 1% for recent memory, 2.5% risk-free seems to be attractive, something which I do not deny.
- Hurdles in investing CPF monies. In addition to the hassle of setting up CPFIS itself, there are quite a number of fees involved, some of which are frankly absurd. For instance, DBS charges $2 per counter per quarter, subject to a minimum of $5. So that's instantly $20 of "service fees" per year even if you have just one counter, and it creeps up to $80 per year for someone attempting to diversify with 10 counters. I have no idea what "services" are actually offered.
- Fear. CPFIS may be subject to losses, and there is no guarantee of principal by CPF. Poor investment decisions could lead to significant losses, then panic, then withdrawal of funds (and realisation of those losses just as the market recovers...) For CPF members who continue to see both the OA and SA as their retirement vehicles, it is understandable to have a low degree of tolerance towards such losses, but if one adopts my suggested lens and sees the SA as the primary retirement vehicle, then sensible investing of CPF monies, in particular the OA, could yield positive returns while managing the impact of any volatility on retirement planning.
What does Endowus bring to the table?
In a nutshell, it is a low(er) cost method of investing CPF monies in a diversified unit trust portfolio, with a stock-bond allocation of the investor's choosing. Endowus operates under an MAS Financial Advisers license (rather than a Capital Markets Services license), so never directly handles clients' money. All funds and holdings are parked with UOB Kay Hian in the client's name. For CPFIS-OA members who use Endowus, the following three fees apply:
- Access fee: Endowus selects best-in-class unit trusts for the various portfolios (e.g. 60/40 or 80/20) and also handles portfolio creation and rebalancing. For their services, they charge an access fee of 0.40% for assets under advice (~AUM).
- Fund-level fee, which will also apply when buying a unit trust through other platforms (e.g. Fundsupermart), except that Endowus rebates trailer fees. Basically, out of the $X that a unit trust fund manager collects, a proportion is paid to the typical platform as a trailer fee (sort of like a commission), and the remainder, which we'll call $Y, is kept by the UT fund manager. Since Endowus promises to rebate 100% of trailer fees, the client effectively only pays a fund-level fee of $Y, instead of $X.
- Agent bank charges, which apply to any sort of CPFIS arrangement. Basically, the "service fees" I mentioned earlier. One key advantage under Endowus is that because the client is holding one portfolio, the client only pays one quarterly service charge overall, even though he owns multiple unit trusts within that single portfolio. This is a clever workaround to reduce (although not totally eliminate) the somewhat frivolous fees charged by DBS, OCBC and UOB.
For purposes of illustration, we can use the funds which are part of Endowus's CPF portfolio as of writing (end-Nov 2019):
- Schroders Global Emerging Market Opportunities Fund
- Natixis Harris Associates Global Equity Fund
- Lion Global Infinity US 500 Stock Index
- First State Dividend Advantage
- Legg Mason Western Asset Global Bond Fund
- Eastspring Singapore Select Bond Fund
- United SGD Fund
Observation 1: Assuming that all 7 funds are available to retail investors, establishing a DIY 7-fund portfolio would incur 7x of the agent bank quarterly service fee, and any buying/selling of the funds (e.g. for rebalancing purposes) would incur agent bank transaction fees as well. Under Endowus, it will be counted as one portfolio, hence only incur a single quarterly service fee, and rebalancing-associated costs are not borne directly by the client but instead are covered by the separate 0.40% access fee.
Observation 2: Using the Schroders Global Emerging Market Opportunities Fund as an example - the annual expense ratio is around 1.66%-1.68%, which is what an investor would incur if owning the fund directly. But because Endowus rebates 100% of the trailer fees, this is brought down to 1.08% (source), and even after including the 0.40% access fee, the total of 1.48% is lower than the direct-purchase option.
Observation 3: Interestingly, observation 2 does not always apply - the Legg Mason Western Asset Global Bond Fund has an annual expense ratio of 0.87%, and through Endowus, the fund-level fee after trailer fee rebate is 0.57%. After including the access fee, the total of 0.97% is not as competitive as buying this fund directly. Endowus appears to have the comparative advantage in equity funds rather than bond funds, which is not surprising given that equity funds usually have higher fees to begin with (and hence can offer large trailer fees). Investors may wish to consider this when choosing their portfolio allocations.
Endowus is pretty upfront in acknowledging that the best way to preserve CPF capital is to stick to the risk-free 2.5% p.a. offered by the OA (assuming it never changes). Endowus is focusing on appealing to CPF investors looking for higher returns, by offering a fuss-free option supported by a non-intimidating user interface, and access to certain types of funds which may not be easily available to retail investors. Sure, the model does resemble that of a fund-of-funds setup, but I think the commitment to rebate 100% of trailer fees plus the very reasonable access fee of 0.40% make a very good value proposition.
I've initiated my account setup process and am waiting to explore the platform a bit more, but in the meantime a big question in my head is: what profile of CPF investor would Endowus be best-suited for?
My quick sensing is that young investors are unlikely to have much CPF OA monies available for investment, because a large majority of them may prefer to use CPF OA for housing needs, and still have to put up a $20,000 minimum balance before being able to invest the rest of their OA. Yet, these younger investors might be more receptive to what Endowus offers as an option to invest CPF monies. Older investors probably have larger CPF balances on average, yet may be a little harder to convince, because they might feel more reassured with "big bank" products, i.e. something offered by DBS, OCBC, or UOB, and may be willing to tolerate the higher fees as a trade-off for the reassurance they get investing through one of these better-known channels.
It'll be interesting to guess at what is Endowus's strategy here. While they also offer cash and SRS portfolios, their key comparative advantage at the moment is being able to offer a CPF portfolio, a feature which is currently unmatched by the competition. Is the investor base ready to come to the table with a new-found appetite for investing their CPF monies? How does one identify the "total addressable market" in this scenario? Will leveraging on the UOB Kay Hian tie-up help to reassure some would-be investors? Time will tell, but certainly I think this is a step in the right direction. Having more options is always better than having few or none, and based on what I've heard, read, and observed, Endowus provides a very compelling option for investing CPF monies.
Endowus (and investing in general) is not about generating out-sized returns; leave that philosophy for a small, high-risk portfolio if you absolutely must, but don't let that active, risky portfolio form the backbone of your financial planning. Instead, build on what is often viewed as restriction - CPF monies are locked up and one cannot use them other than for housing (OA) and medical costs (MA) - and flip the perspective over to the positive, e.g. lock-in until age 55 means peace of mind, if done correctly from the start. In that context, Endowus potentially plays the role of a smartly-rebalanced investment/retirement platform suitable for CPF members, and is a first-mover in this untapped area.
[If you are keen to sign up for an account with Endowus, do consider using my referral link which enables both of us to have $10,000 of funds advised free for 6 months (a $20 value, to be precise). I receive no compensation from Endowus or any other party in writing this post.]
Post-edit: While there is a strong temptation to compare this to the DBS digiportfolio, I have consciously refrained from doing so since the latter is not a CPF-eligible product. I may touch on it in a separate post on cash-based investment options.
Endowus is pretty upfront in acknowledging that the best way to preserve CPF capital is to stick to the risk-free 2.5% p.a. offered by the OA (assuming it never changes). Endowus is focusing on appealing to CPF investors looking for higher returns, by offering a fuss-free option supported by a non-intimidating user interface, and access to certain types of funds which may not be easily available to retail investors. Sure, the model does resemble that of a fund-of-funds setup, but I think the commitment to rebate 100% of trailer fees plus the very reasonable access fee of 0.40% make a very good value proposition.
Who will Endowus be suitable for?
I've initiated my account setup process and am waiting to explore the platform a bit more, but in the meantime a big question in my head is: what profile of CPF investor would Endowus be best-suited for?
My quick sensing is that young investors are unlikely to have much CPF OA monies available for investment, because a large majority of them may prefer to use CPF OA for housing needs, and still have to put up a $20,000 minimum balance before being able to invest the rest of their OA. Yet, these younger investors might be more receptive to what Endowus offers as an option to invest CPF monies. Older investors probably have larger CPF balances on average, yet may be a little harder to convince, because they might feel more reassured with "big bank" products, i.e. something offered by DBS, OCBC, or UOB, and may be willing to tolerate the higher fees as a trade-off for the reassurance they get investing through one of these better-known channels.
It'll be interesting to guess at what is Endowus's strategy here. While they also offer cash and SRS portfolios, their key comparative advantage at the moment is being able to offer a CPF portfolio, a feature which is currently unmatched by the competition. Is the investor base ready to come to the table with a new-found appetite for investing their CPF monies? How does one identify the "total addressable market" in this scenario? Will leveraging on the UOB Kay Hian tie-up help to reassure some would-be investors? Time will tell, but certainly I think this is a step in the right direction. Having more options is always better than having few or none, and based on what I've heard, read, and observed, Endowus provides a very compelling option for investing CPF monies.
Endowus (and investing in general) is not about generating out-sized returns; leave that philosophy for a small, high-risk portfolio if you absolutely must, but don't let that active, risky portfolio form the backbone of your financial planning. Instead, build on what is often viewed as restriction - CPF monies are locked up and one cannot use them other than for housing (OA) and medical costs (MA) - and flip the perspective over to the positive, e.g. lock-in until age 55 means peace of mind, if done correctly from the start. In that context, Endowus potentially plays the role of a smartly-rebalanced investment/retirement platform suitable for CPF members, and is a first-mover in this untapped area.
[If you are keen to sign up for an account with Endowus, do consider using my referral link which enables both of us to have $10,000 of funds advised free for 6 months (a $20 value, to be precise). I receive no compensation from Endowus or any other party in writing this post.]
Post-edit: While there is a strong temptation to compare this to the DBS digiportfolio, I have consciously refrained from doing so since the latter is not a CPF-eligible product. I may touch on it in a separate post on cash-based investment options.
