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CPF Investment Scheme to Lower Expense Ratio Caps For Approved Unit Trusts and ILPs

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CPF just announced that unit trusts and investment linked plans under CPF will now have stricter expense ratio caps.

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What Is Total Expense Ratio?

All unit trusts generally have a total expense ratio (TER) which is the annual costs of operating a fund, expressed as a percentage of the fund’s average net asset value. The costs generally include investment management fees, research fees, trustee fees, audit fees etc.

cpfis ter

TER is very important as very high ratios can reduce your returns dramatically. For example, if your annual expected returns from the equities is 5%, a 2% TER will reduce your annual returns to a mere 3%. So this is definitely a good move. In general, TER of most unit trusts have ranged from 1+% to 3+%.

By reducing the TER by about 0.2 to 0.3%, investors can get $200 to $300 in annual savings from a $100k investment.

Does It Make Sense To Invest In CPFIS Unit Trusts and Investment Linked Plans?

First off, we need to understand that CPF OA gives a guaranteed return of at least 2.5% while the CPF SA gives a guaranteed return of at least 4%. So the unit trusts must be able to beat the 2.5% and 4% for it to make sense to invest in them.

The lower risk funds which invest in money market products definitely don’t make any sense at all at this point as interest rates are so low. Gross returns are already sub 1%, taking out an additional 0.35% leaves pretty much nothing.

Similarly, low to medium risk funds that invest in investment grade fixed income are unlikely to beat CPF rates due to low interest rates.

Medium to high risk funds are generally the balanced funds which have some reasonable chance of beating the OA rate of 2.5%. However, even with the new cap of 1.55%, the fund needs to achieve at least 4% gross returns.

Only all equity funds have the possibility to beat the CPF SA rate of 4.0% on a long term basis. However, all equity funds are generally more volatile so there is still a significant tradeoff. Also, a ter of 1.75% is still rather high compared to exchange traded funds which have ter of generally below 1%.

Overall, it is a step in the right direction to make actively managed funds more cost competitive. While the number of approved unit trusts will drop, it will also allow the current funds to gather more economies of scale and lower their TER.

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