THE recent requirement that retail investors have to pass a test before investing in Specified Investment Products (SIPs) was aimed at ensuring these individuals had a decent understanding of instruments that were deemed either risky or perhaps unfamiliar in local circles.
As a result, SIPs now encompass derivatives like structured warrants, equity-linked notes and extended settlement contracts. However, also defined as SIPs are non-derivatives - namely foreign-listed stocks - which means that retail investors who wish to invest in top overseas blue chips like Apple, Microsoft or Procter & Gamble and have no interest in trading derivatives have to also take the same test.
This has led to calls to exclude foreign-listed stocks from the SIP definition - calls that so far have been resisted.
It's useful to recall that the Central Provident Fund Investment Scheme (CPFIS) was introduced back in 1993 when Singapore Telecom was floated and was aimed at granting individual investors greater control and discretion over the use of their retirement money.
Based on conventional wisdom that equities always outperform bonds over the long run, investors were allowed to use their CPF savings to buy stocks - but only those which were approved by the authorities.
Initially, the criteria for admission to the CPFIS stable was stringent, but over time they have been progressively relaxed to allow investors greater flexibility in deciding how best to park their retirement money.
Since the assumption is that those who have successfully passed the SIP exams are familiar with the products and know what they are doing, then perhaps it is time for the family of CPFIS-approved stocks available to SIP-certified investors to be extended to top blue chips from overseas.
One reason for this is that, as noted before ("Time to raise the bar on CPFIS stocks", BT, Hock Lock Siew, April 14, 2011), there is surely a pressing need for greater quality control in granting CPFIS status.
Currently, only four criteria are used: the company has to be Singapore-incorporated; it has to be mainboard-listed; its shares have to be traded in Sing dollars; and it has to allow investors to attend its meetings.
With these criteria, the door was opened to China stocks listed here (or S-chips, as they are popularly known) to be given CPFIS status.
Currently, at least 20 fall into this category, of which four - Falmac, Oriental Century, New Lakeside and China Gaoxian - are suspended from trading because of various governance concerns.
Also, because of several high-profile problems uncovered within the sector over the past 3-4 years, all S-chips have collapsed and the sector remains depressed.
It is not known how much CPF money has been invested or lost in these stocks. But it is ironic and surely incongruent that, as the rules stand today, investors have to first pass an exam and then are only allowed the use of cash and not CPF funds when investing in top foreign-listed blue chips, but at the same time can plough their retirement savings into possibly dodgy S-chips without having to take any test.
If failed and second-rate China stocks have been admitted as CPFIS investments, then why not leading foreign large-caps which are much less risky - provided, of course, that investors have passed the SIP exam and thus demonstrated they know what they are buying?
If quality is a concern, then maybe only index components should be allowed. So for the US, this might be only the 30 stocks in the Dow Jones Industrial Average; for Europe, the Eurostoxx 50, which comprises the continent's top 50 blue chips; for Hong Kong, perhaps the largest components of the Hang Seng Index; for Malaysia, the components of the KL Composite Index, and so forth.
Whatever the case and assuming the original goal of giving investors greater say and more flexibility in managing their savings, then there really is no reason why CPFIS equities should be limited to locally-listed companies, especially for individuals who pass the SIP exams.