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CPF, reducing the expense ratio by 0.25% will hardly move the needle

CPF announced that, if they want the funds approved to be invested with CPF monies, they would have to lower their expense ratio from a maximum of 1.95% to 1.75%. Read it here.

Effective Jan 1, fund managers will have to lower the total expense ratio (TER) on funds and investment-linked products deemed to be higher risk to a maximum of 1.75 per cent from the current 1.95 per cent if they wish to continue offering the products under the CPFIS. Higher risk funds are those that invest in stocks.

TER refers to the ongoing costs of operating a fund, expressed as a percentage of the fund’s average net asset value. The costs may include investment management fees, trustee fees, and audit fees.

For existing lower-risk products such as money market funds that invest in short-term debt securities, the maximum TER allowed under the CPFIS will drop to 0.35 per cent from 0.65 per cent, said the CPF Board.

Why we are harping on this topic is because cost matters. We can argue about efficient market theory all day but what is true is cost matters. Even active funds which are lower in expense ratio tends to outperform.

While active fund managers have shown it hard to beat the benchmark, or that if they manage to do well, it is difficult to stay top for a long duration, cost are fixed. Do well or badly, management fees have to pay.

We talk in a recent article about extremely high management fees of fee based advisors, and that they look to be the new wolves of Wall street, cost in the region of 1.5% can be considered as well.


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