BT: CPF members earn $6b in paper profit

Business Times - 30 Jan 2008

CPF members earn $6b in paper profit

Substantial gains made by those who invested in gold, reports GENEVIEVE CUA

THANKS to strong markets for the most of last year, Central Provident Fund members are sitting on paper gains of roughly $6 billion in aggregate value in ordinary and special accounts, according to the latest profit and loss statement for the CPF Investment Scheme.

The data tots up members' historical entry price against the assets' respective market values for the CPF's fiscal year up to Sept 30, 2007. The data gives a broad idea of how members have fared, but there is no indication of for how long each investment has been held.

The most substantial gains in percentage terms were achieved by members who invested in gold, with unrealised gains of as much as 57.1 per cent. The second most rewarding was property funds, which reflected paper gains of 50.77 per cent. Gold, however, is subject to a 10 per cent investment limit. This gives it almost the smallest share in members' investment accounts on an aggregate basis. Property funds are subject to a 35 per cent investment limit, which also applies to stocks in general.

Yesterday CPF officials briefed the press on the progress of steps taken to raise the quality of funds in the CPFIS and to lower the investment costs. The number of funds in the scheme has steadily declined from 444 as at the fourth quarter of 2006 to 387 as at January - a drop of about 13 per cent.

The CPF's new measures, which include a requirement for a three-year track record, top quartile performance, and a cap on expense ratios, were implemented for new funds seeking inclusion in the CPFIS from February 2006. From January this year, all funds have to comply with prescribed expense ratio caps. Those which are unable to comply will not be allowed to take in new CPF money.

To distinguish between those companies that are able to satisfy all the requirements including the expense ratio cap, CPF has created a list of the qualifying funds, called 'List A'. There are currently 46 funds in List A. Another 30 top quartile funds are as yet unable to meet the expense ratio criteria and are put in List B, along with the rest.

The distinction between lists A and B, however, remains a point of contention among a number of fund managers, as Executive Money gathers. One fund manager says: 'Some fund managers do not want to continue to be in the CPF market any longer. They are being asked to try to curb funds with high expenses, but people want to invest in them as they do give you performance. People should still be given that choice.'

The expense requirement is also awkward for funds with a performance fee structure. Ironically, a strong year of outperformance could result in the fund being closed to new money as the effective fees would shoot up.

Does a presence in List A draw investor interest? Another fund marketer is uncertain. 'The distinction between List A and B is in its infancy. I have had some funds in List A and others which are in List B,' he said.

CPF assistant director (investments) Wu Meei said it is possible that more funds may drop off the scheme. 'That depends on their commercial decision,' she said.

While the lion's share of CPF savings continues to be invested in insurance-linked products, the amount invested in unit trusts has just exceeded that in stocks - by a tiny margin. As at the third quarter last year, $4.5 billion was invested in unit trusts, compared to $4.47 billion in shares.

In terms of performance, however, investment-linked policies (ILPs) registered a paper gain of 36.97 per cent against historical costs, compared to 17 per cent for unit trusts, and 27.67 per cent for shares.

As the underlying asset classes for ILPs and unit trusts are similar - a number of ILPs in fact feed into unit trusts - one reason for the differential in unrealised gain could be behavioural. Investors in insurance policies are said to be less likely to trade their funds. They are also more likely to be invested in balanced funds.

As for those who realised their investments in the fiscal year ended in September, 28 per cent made net profits after bank charges and in excess of the CPF Ordinary Account interest rate, compared to 23 per cent in 2006. The proportion with realised losses, however, remained substantial at 43 per cent.

During the period under review, the SES All Index gained 52 per cent, and the STI 44 per cent. The MSCI World Index gained 19 per cent.

CPF also briefed the press yesterday on the progress of initiatives to encourage members to defer withdrawal of their savings in retirement. As part of measures announced last year, savings of $60,000 in combined CPF balances will earn an extra 1 per cent in interest. The drawdown age is also to be raised progressively.

To help members between 50 and 57 cope with the later drawdown age, CPF will pay a one-off 'D-bonus' in May. Some 105,000 letters will be sent out this week to members who were 55 to 57 in age last year.

There is also a 'V-Bonus' or voluntary bonus to encourage members to voluntarily defer their drawdowns to age 65. Of the 10,123 members who turned 63 or 64 between January and February this year, 75 per cent - 7,583 - have deferred their withdrawals.