EXPERT ADVICE: 'Advisers tend to advise their clients to invest in unit trusts as these are professionally managed and may offer more diversification.' - MR SOH, on a possible reason for the growing allocation of CPF funds into unit trusts

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Members placed $4.51 billion in unit trusts as at the end of the third quarter last year, exceeding the $4.48 billion that was invested in shares under the CPF Investment Scheme (CPFIS).

This reflects a striking change in investment sentiment. Shares attracted $6.49 billion of members' money as at end-2004, but this amount has fallen by 31 per cent over three years to the current $4.48 billion level.

It is a different story for unit trusts which chalked up just $2.52 billion at end-2004. This amount has since surged by 79 per cent to the $4.51 billion registered as at Sept 30, according to CPF figures released yesterday.

Unit trusts have had a tough time shaking off their bad reputation for dismal returns - acquired during the market downturns of the dot.com crash and Sars epidemic.

Mr Soh Chin Heng, assistant chief executive of the CPF Board services group, believes unit trusts have become increasingly acceptable because more Singaporeans are enlisting financial advisers to plan their investments.

'Advisers tend to advise their clients to invest in unit trusts as these are professionally managed and may offer more diversification for investors' portfolios,' he said.

Investors' appetite for unit trusts may also have grown in recent years, as investors are keen to tap the sparkling performance of overseas markets such as India and China, said Mr Chris Firth, chief executive of wealth management firm dollarDEX.

'While Singaporeans may be able to do their own research on local stocks, they need fund managers' expertise for overseas investments.'

Also, stock market volatility may have prompted some investors to cut back on shares, said industry players.

Meanwhile, unit trusts may have enjoyed a record inflow in the fourth quarter last year as members rushed to park more funds in these products before new CPF rules kick in on April 1.

These rules will allow up to $60,000 in the CPF Ordinary and Special accounts to earn higher interest rates, but this cash cannot be withdrawn for investments.

Financial advisers say their clients are using CPF funds to buy unit trusts rather than shares, as members will have to plough the proceeds from share sales back into the CPF Ordinary Account after a certain period. But unit trusts can be held as a much longer-term investment and may yield higher returns than CPF interest rates.

However, ballooning unit trust investments may taper off or even reverse after April 1, as there is likely to be a significant drop in the amount of CPF funds available after that date, said Mr Leong Sze Hian, president of the Society of Financial Service Professionals. He reckons about 75 per cent of CPF members have less than $20,000 in their CPF accounts.

The number of CPFIS-approved funds has shrunk from a peak of 444 in the fourth quarter of 2006 to 387 this month after tougher criteria were introduced at the end of 2006.

These laid down new guidelines on a fund's quality and 'expense ratio', which broadly reflects how much of its assets are soaked up by costs.

At the end of the fourth quarter, only four funds fulfilled the criteria and made it to 'List A'. This has since grown to 46, or 12 per cent of the 387 CPFIS funds.

The remaining 341 funds are on 'List B'. The CPF estimates that more than half, or over 170 unit trusts, meet the new requirements for the expense ratio, which took effect on Jan 1.

Funds with expense ratios not lower than half those of the CPF-

approved funds in their risk category will be barred from taking in new CPF money.

List A is likely to expand, said Ms Wu Meei, CPF assistant director for investments. There are 30 top-performing funds on List B that need only to reduce their expense ratios to clear the hurdles to join List A, she added.

graceng@sph.com.sg