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Let’s Compare Investment Returns

The recent Invest section of The Sunday Times had an article by Fiona Chan that covered the positive returns of the funds under the Central Provident Fund Investment Scheme (CPFIS). Similar articles have also appeared on Channel News Asia’s website.

According to The Sunday Times, the average return on the funds under the CPFIS in 2012 was a healthy 10.35%. Equity funds enjoyed the highest growth on average with 12.27% while Bond funds produced the lowest return with 4.73%. Both types of funds also managed to beat their benchmarks, signalling a good year for CPFIS fund investors.

Most investors would not scoff at an annual return of 12.27%….until you consider that the Straits Times Index (SGX: ^STI) actually grew by 18% in 2012. We have to recognise that using the STI is not an apple-to-apple comparison as most of the funds and unit trusts in the CPFIS have a regional or global focus. But, as investors, we are always on the lookout for the next best alternative. If we can get better returns in our own backyard, why not do so?

Investors could have bought into the SPDR Straits Times Index ETF (SGX: ES3) to get returns similar to the STI. The SPDR STI ETF tracks the movement of the index by buying shares of companies in the same composition as the STI, though tracking errors are unavoidable. Investors in the SPDR STI ETF could have bought it at $2.78 on 3 Jan 2012 and sold it at 31 Dec 2012 for $3.28 for a 15.8% return – while lower than the STI’s return, that’s still 3.53% higher than the CPFIS equity fund averages.

ETFs and Index Funds generally have much lower overall expense ratios as compared to actively managed funds. It is not an easy feat to beat the market – 61 per cent of fund managers underperform the market over 5 years – and the positive effects of any outperformance might be muted or even erased totally due to the high fees involved. Investors in actively managed unit trusts or funds have to bear that in mind.

So, when reading articles or reports about the performance of funds and unit trusts, bear in mind the returns from other sources that could be achieved otherwise. In the case of the Sunday Times article, a 10.35% return on average for CPFIS funds looks great – but not when the STI grew by 18%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Contributor Chong Ser Jing doesn’t own shares in any companies mentioned.