Technical focus can shortchange development

In many consumer firms, managements become top-heavy with engineers and scientists.

This creates an environment favoring R&D at the expense of fulfilling consumer needs. The firm must remember that the core of competitive advantage is consumer value, not technical superiority. Therefore, technology development should be a supporting function to marketing and insights division.

However, there are cases are selected cash rich firms to be focused on technology development. Often, these cash rich firms can lead supply side innovation. They can create a technology for a non existing market. The argument is that the consumers do not always understand their own demands in the context of new technology. I suppose consumers did not demand instant messaging in the 1800s. They probably demanded for faster horses.

Summarily, most firms must consider technology as a function supporting product development. A few of these cash rich firms can take the lead to uncover supply side innovation.

Difficult Choices that Singaporeans cannot outsource to the Government

As the elections in 2015 closes, Singaporeans are starting to share their views more aggressively. Dormant political parties have also re-surfaced to share their party’s stances on national level policies.

The path towards growth is a straight forward one. There are only 3 factors to balance: 1. taxes, 2. wages and profit and, 3. subsidies. The size of our tax base is a function of wages earned by workers in Singapore and profits collected by business entities. Subsidies are simply put, negative cash outflow.

If we want to sustain our tax base for national growth without increasing tax rates, we must create better jobs, have more profitable firms in Singapore and be more prudent with introducing subsidies. We cannot create better jobs and grow businesses without managing scarcity of resources and adopting a more open immigration policy.

We have a dangerously low birth replacement ratio which cannot be addressed simply by offering women more child birth subsidies. Highly qualified women have the right to decide to focus on their careers. This trend will continue to erode our tax base. Instead of acknowledging some of these pressing issues, some political parties in Singapore have simply advocated for more social policies. They want more subsidies in areas such as healthcare, transport and retirement. But they also want the incumbent government not to raise tax. Their basis: the Singapore government has a lot of money in their reserves.

I find these policies regressive. I acknowledge that Singapore has to offer subsidies to some groups of low income earners. I also recognise that the definition of the underprivileged group may have to broaden overtime. But we have to do it carefully. After all, an increase in subsidies leads to higher economic burden for a nation. So we must set basic rules and principles for such definition.

Unfortunately, some Singaporeans may have fell for the sweet promises of more subsidies, greater government expenditure and a more manageable population, without a corresponding increase in tax. Singaporeans must decide for themselves, if they should face the hard facts or believe those who simply promise the sky.

Timeless advice on Investing

One should commit at least 20% of your income to savings. Such reserves are badly needed in urgent situations. The accumulation of your savings should be committed in liquid financial instruments. Liquidity is the primary consideration because you want the option to retrieve the money quickly at a low cost.

Some of my friends invest in land related structured products that lock up their money over a long time. Some others invest their money in alternative schemes. Always put your money in traditional instruments such as stock, bonds, exchange traded funds, mutual funds and money market funds.

Investing in a long term affair. Anyone that tells you otherwise isn’t a real adviser. Your returns are a function of cost and risk. The riskier your instrument, the lower your returns. The costlier your investments, the lower your returns. This is pretty straightforward.

There is no magic formula in investing. Diversification allows you to reap benefits of lower risk with the same expected return over time. The cheapest way to diversify is to put 2/3 of your money in stocks and 1/3 in bonds. Some recommend a 60/40 split. This is fine too, as long as you rebalance your portfolio annually. The proof of the benefits of diversification is mathematical. Giants in the financial industry have also urged individual investors to adopt such a simple investing rule. I recommend two books that you need to read; Common Sense on Mutual Funds and The Intelligent Investor.

My opinion is that you do not need a financial adviser. They increase your investing cost. The rules of investing is relatively simple. You do not need to outsource this responsibility. First, select low cost funds. On average, managed funds charge at least 2% over passion exchange traded funds. This reduces your overall returns in the long run by a gigantic amount. Beware of unique fee structures. Some fees can be hidden in sale charges, some in wrap accounts.

William F. Sharpe, a Nobel Laureate in Economics said “The first thing to look at is the expense ratio”. You will definitely earn the highest returns in a low cost index fund. An index fund that mirrors the market will also likely outperform any funds in the long term. In fact, more than 90% of funds fail to outperform the benchmark index. Funds with high expenses will under-perform their benchmark. Funds performance typically exhibit mean reversion. In other words, the worst fund of the year will more likely outperform the best fund of the year in future. To me, past performance means nothing. I will always only look out for index funds with the lowest costs.

Within the equity portion of your portfolio, simply invest in low cost index funds in the U.S and the U.K and in Asia. Avoid synthetic exchange traded funds because there is an additional layer of counter-party risk. Actually, you only need to hold a couple of funds in your entire lifetime. If you hold too many funds, it can be difficult to manage the exposure. Many of your funds will overlap significantly.

Why does GIC borrow from CPF, really?

In his article, “There is no reason for GIC and Temasek Holdings to borrow money from your CPF”, Mr Jeremy Chen upholds the government’s defence that it is not borrowing CPF monies as a cheap source of funds.

He misses the point that if the government were to borrow from the market on a large scale, Singapore’s credit rating would no longer be triple-A.

We can agree with the government’s defence if it were to borrow, say, 10% or 20% of GDP from the market. But if the government were to borrow up from the market up to 100% of our GDP, the credit ratings of Singapore will quickly fall. In turn, this affects how much the government can borrow further.

For the record, Singapore recorded an overall government debt of 105.5% of GDP in 2013.[1]

It is not news that Singapore and Japan enjoy reasonable credit ratings because the national debt of these countries is internal. The rationale behind such a credit rating is that Singaporean and Japanese citizens are unlikely exit their countries en masse suddenly, like in the case of a bank run.

The debates over CPF should rightly be focused on questioning the need for a compulsory annuity scheme for all account holders (see also our article for instance). But Singaporeans are right to also question the flows in the monetary system, not least when it affects their own money in their CPF accounts.

What we really need to fix about the CPF

Giving CPF account holders the free choice to decide what to do with their own retirement savings is the key.

In the midst of all the recent debates on the Central Provident Fund (CPF), and the government’s moves of raising the CPF minimum sum and enforcing a compulsory annuity scheme on all account holders, we must go back to the fundamental principle behind the CPF — that it is a compulsory savings plan for retirement.

The key issue, therefore, is that we must allow CPF account holders the free choice to decide whether to withdraw everything at 55, or opt into an annuity scheme, or opt for something in between.

If CPF account holders think they can benefit from the annuity if they live long well beyond 80 years of age, let them do so. If they want to withdraw their retirement savings in toto to invest in a private scheme that provides for a higher yield of annuities, let them do so.

CPF account holders do not withdraw their savings just for reasons of pleasure and holidays, although it is perfectly their right to do so. Health care costs, for themselves, for family members, for rare diseases, for their children’s further education — these are the things Singaporeans need to spend on in this non-welfare state system.

Compulsory annuity scheme for CPF: where is the justification?

So why is there a need for a compulsory annuity scheme for CPF? Where is the statistical substantiation that a mandatory annuity is needed across the board — is there a substantial enough proportion of the population that has such a dire lack of savings that warrants this? Is there such a substantial proportion of the population that is proven to be absolutely incapable of planning their retirement financially?

Our policy working group has not seen any such analysis or evidencing that typically accompanies government policymaking. Without this information, it is understandable why Singaporeans simply cannot accept the latest changes to the CPF.

Since the government has said that it is helping Singaporeans plan for retirement, then we would need to know — how were the projections for the minimum sum and the monthly annuity worked out? We don’t believe it is out in the public domain.

This brings us to the issue of income replacement rate (IRR) — what percentage of a worker’s income should we replace when he or she retires? Note that the higher the IRR, the greater the present burden on the worker who is at the threshold of retirement. The 2012 Chia and Tsui study on the IRR,[1] typically cited by the government, reported that the median male earner will be able to replace 70% of his wages when he retires, and female workers 64%. But these are the result of their academic study — it is not the government’s planning target, of which we have not been informed.

This makes the compulsory annuity scheme like a straitjacket for a madman — you are forced wear it to restrain yourself, so that you would not hurt yourself and those around you, we are told. But what if you are not a madman in the first place? What if you’ve been wrongfully diagnosed as a madman?

Management of the CPF funds

Then there are the issues about how the government should manage the CPF funds.

Our sovereign wealth funds should raise capital from international capital markets.

The default linkage of CPF funds to the sovereign wealth funds should be severed. This would give us the chance to rethink and restructure our retirement funding mechanisms.

The government has tried to defend the contention that CPF money a cheap source of funds for the sovereign wealth funds.[2] And we are told that government bonds still the most secure, with its AAA rating.

We can agree with this statement if the government were to borrow 10% or 20% of GDP. But note that if the government were to borrow up to 100% of our GDP, the credit ratings of Singapore will quickly fall, leading to very high borrowing rates.

In fact, it is not news that Singapore and Japan enjoy reasonable credit ratings because the national debt of these countries is internal. The rationale behind the credit ratings is that Singaporeans and the Japanese will not exit their countries en masse suddenly, like in the case of a bank run.

As such, we believe it is unfair for the government to claim that CPF is not providing a cheap source of funds.

Changes to CPF must pass through Parliament from now on

In conclusion, it is paramount that CPF account holders must have the choice and flexibility what is to be done with their retirement savings. They should have choice on whether to have their funds invested in the sovereign wealth funds or other instruments such as an equity index, a fixed income scheme, in funds or other such instruments. This would give Singaporeans the freedom of choice over the interest rates they wish to see from their savings, corresponding to their risk appetite.

And if they wish to withdraw all the CPF savings, whether to foot an urgent medical bill for treatment of a rare disease, for their children’s education, or for the holiday they have also dreamt about, they must be allowed to do so.

Finally, all changes to CPF policy must be presented to and passed by Parliament, and not be made a matter for subsidiary legislation. The political climate in Singapore on the CPF issue has reached such a point that the government ignores the voices of the people at its peril.

Is CPF Cheap funding source for Singapore Government?

The contest is Government can get cheap source of fund at below 2.5% in the open market given Singapore’s credit rating.

Authorities may say that they can borrow at below the existing 2.4 to 2.5% CPF rate. Some may agree with the Government given Singapore’s strong credit ratings.

This is especially in the case where Singapore borrows only 10% of 20% of GDP.

But what is unclear is if Government were to borrow 100% of our GDP (Our existing debt levels), the credit ratings of Singapore will quickly fall, leading to very high borrowing rates.

In fact, it is not new to commoners that Singapore and Japan enjoys reasonable credit rating because the national debt is internal. One would argue that local Japanese and Singaporeans will not exit Japan and Singapore respectively, immediately.Polices can also be put in place to guard the exit.

As such, it may be unfair for Government to claim that CPF is not providing a cheap source of funds.