Philippine Business Magazine: Volume 14 No. 3 - Capital Markets

Unit investment trust funds add to the investing public’s array of options

By Reuel R. Hermoso

In mid-2006, local banking and financial circles were caught in the maelstrom that resulted from the rapid growth of investment funds, particularly the unit investment trust funds. Since their introduction to individual clients and retail investors in 2004, UITFs have grown by leaps and bounds. From P123 billion in assets under management in May 2005, UITFs ballooned to over P300 billion by March 2006. Presently, the total figure has retreated to more manageable levels in the P100 billion neighborhood.

What are UITFs?

In 2004, the Bangko Sentral issued a directive (Circular No. 447) instructing banks to retire the old common trust funds or CTFs from their product portfolio and to offer UITFs to their clients instead. Actually, UITFs are essentially the same as CTFs. The BSP intent in directing a migration from CTFs to UITFs was to align the creation, management, and investments of pooled funds under management by trust entities with international best practices, and the central bank’s policymakers decided that one of the best ways to assure the investing public that this realignment was for real was to change the name of the product as well, from CTF to UITF.

Fundamentally, there is also not much difference between UITFs and mutual funds. Both are pooled funds invested in various securities—be it stocks, bonds, or other evidences of ownership or indebtedness—for the purpose of achieving whatever investment objective the fund’s founders and administrators have set for the fund. The objective can either be for wealth preservation, capital accumulation, growth, or a balance of these objectives. The funds are administered by a fund manager for and in behalf of the investors.

The main difference between a UITF and a mutual fund lies in the structure of the funds and the relationship established with the investor. UITFs are offered by trust institutions, such as banks holding a trust license, and the management of such funds is handled by the treasury group of the bank offering the fund. When an investor places money in a UITF, he establishes a trust relationship with the bank and is in essence giving the bank legal title to his investment with the expectation that the bank will invest his money prudently. However, since UITFs are not classified as bank deposit products, they are not guaranteed by the Philippine Deposit Insurance Corporation. On the other hand, a mutual fund is an investment company whose funds are administered by a fund manager appointed by the company. The fund manager may or may not be connected to the company. When an investor places money in a mutual fund, he becomes a shareholder or owner of the company.

Valuation

UITFs, like mutual funds, are valued by measuring their net asset value, arrived at by adding up the market values of a fund’s portfolio and subtracting the expenses related to maintaining the fund. The resulting NAV can be further divided by the number of “units” (which is comparable to a share of the investor in the total investment pool) to get the NAV per unit. Because they are valuations, NAVs and NAVpUs are currency-denominated. The Bangko Sentral requires that the NAVpU be computed daily and the resulting figures published the next day in the business section of major broadsheets.

Since the market values of their portfolios can appreciate or depreciate on a daily basis, the NAV and NAVpU of UITFs can also be expected to fluctuate daily. UITFs, like the assets they maintain in their portfolios, may go up or down. This is especially so for more volatile investments like stocks.

When an investor buys into an equity fund (made up largely of stocks), he must bear in mind that the NAVpU of the fund is likely to be just as volatile as if he were invested in the stock market itself. Conversely, the less volatile the portfolio (such as a bond fund invested primarily in government securities), the less volatile the NAV and NAVpU’s daily movements would be. In general, however, the longer an investor’s time horizon is in maintaining any investment, the greater his chances are of achieving better returns. Patience is an important key for any successful investment.

Fund Portfolios

While mutual funds actively trade their investment portfolios, UITFs do not. Managers of mutual funds regularly and actively take on or unload their positions in certain investments in order to achieve higher NAVs and NAVpUs. UITF managers, on the other hand, specify the asset mix that they will maintain for the duration of a fund’s life given the fund’s investment objectives and strategies. For example, an equity fund’s management could state that they intend to keep a portfolio mix of 70% stocks, 15% government bonds, 10% cash, and 5% in commercial debt paper.

In other countries, the listing of securities in their portfolios is printed in their prospectuses and is public knowledge to their investors even before they make their investments. Information of this sort, however, is not readily available from the prospectuses of local UITFs. This may be an area of policy reform that local regulators like the Securities and Exchange Commission and Bangko Sentral may want to explore to promote greater trans-parency and accountability in the governance of these funds to protect the investing public.

In many ways, a UITF is a lot like an index fund that merely tracks the movement of an index like the S&P 500 or the Dow Jones Industrial Average. Once it is set, there is very little change that can be done to its portfolio set over the course of the fund’s life. It is possible that some very slight changes can be made with the objective of rebalancing the portfolio, but by and large, the composition of the portfolio (in terms of how much is equity, debt, cash, etc.) remains fixed.

Choosing a Fund

The number of asset management groups and funds established in the country is growing. For instance, two of the largest asset management organizations in the country—Philam Asset Management and BPI Asset Management—each manage several funds. Philam manages the Philam Fund, Philam Growth Fund, and Philam Equity Fund. BPI has an even longer list, with its BPI Short-Term Fund, BPI Premium Bond Fund, ABF Philippines Bond Index Fund, BPI Institutional Fund, BPI Gold Fund, BPI Balanced Fund, BPI Equity Fund, BPI Global Philippine Fund, BPI International Fund Plus, Philippine Dollar Bond Index Fund, and BPI Global Equity Fund.

In choosing a fund, an investor must decide which investment objective best matches his own needs. Usually, his objective depends on his stage in life. Young people in their twenties and thirties are normally risk-tolerant, so they may go for a growth or capital accumulation fund. Older people are more risk-averse and, especially those who are retired, would likely prefer regular interest payments that bond issuers make. Thus, they would tend to go for a wealth preservation fund.

These are all general statements, however. Some retirees are still able to take on more than the usual amount of risk normally associated with people in their age or status group. Some young people may already be more risk-averse than their peers. The choice of which type of fund to buy into is ultimately up to the individual.

Best Option?

The question that inevitably crops up is: Is a UITF the best place to park your money, or is there a better option?

Again, it would depend on your predisposition and investment philosophy. If the investor has the time, a bit of training, and the interest for it, he could purchase stocks directly instead of buying into an equity fund. Investment guru and star fund manager Peter Lynch believes that even average investors with little or no training or professional experience in managing funds could achieve the same returns, or even better, than professional managers.

Fixed-income funds are a little trickier, since the behavior of fixed-income securities does not normally conform to human intuition due to the inverse relationship between interest rates (and therefore the yields) and the prices of securities. More importantly, there is no over-the-counter market for fixed-incomes, making them available exclusively to institutional investors, such as banks, investment houses, and other financial institutions.
Historically, Filipinos have preferred to invest in hard assets, like real estate, jewelry, and works of art. However, the last 10 years have seen a virtual stagnation in real estate prices, even in prime markets. While there was no nominal diminution in prices, factoring inflation into the picture would paint a dimmer picture of the real estate market. Jewelry is a stable market with not much volatility in prices. In fact, with the recent appreciation in the world prices of gold and silver, jewelry could be a considerably attractive investment option. Works of art, if authenticated and evaluated by the proper authorities, also make for ideal investments.

But hard assets, especially real estate, take considerable time and energy to maintain. Jewelry and works of art need to be maintained by trained professionals, making ownership of such assets quite burdensome. Most importantly, the markets for such assets are not very liquid. They cannot be sold easily if the owner should need funds quickly. Financial instruments such as UITFs, and even their underlying securities like stocks and fixed-incomes, have ready, secondary markets where there are buyers willing to relieve the owner of the instrument in exchange for the fair market value of that instrument.

Future of UITFs

For a developing country, dynamic capital markets are necessary to mobilize savings for productive purposes. As the government and private companies expand operations, they will want to tap and attract the savings of families and individuals by issuing more stocks and offering more innovative and higher-yielding financial instruments. Investment advisers would be in the best position to pool together family and individual savings to purchase these stocks and other financial instruments in order to provide greater overall growth in asset values over a longer period of time.

Thus, UITFs and other pooled fund investments are looking at a bright future in the Philippines. But, as in all cases involving matters of public trust, policymakers must ensure that measures to protect, inform, and educate the saving and investing public are in place and effectively followed.

Reuel Hermoso is an executive assistant at the Bangko Sentral ng Pilipinas assigned to the Monetary Board. Aside from a placement in the Philam Dollar Bond Fund, he does not have any interests in other investment funds in the Philippines. The views expressed in this article are solely his and do not necessarily reflect those of the BSP and the Monetary Board.