UNIT INVESTMENT TRUST FUND
(UITF)
Deputy Governor Nestor A. Espenilla, Jr.
Bangko Sentral ng Pilipinas
1
Outline
Legal Basis for Creation of UITF
Definition
Rationale for Shift to UITF
Salient Features
Investor Protection Measures
May 2006 UITF Experience
Further Enhancements
2
Legal Basis for the Creation
of UITF
Section 83.6 of the General Banking Law
“A trust entity, in addition to the general powers
incident to corporations, shall have the power to
… Establish and manage common trust
funds, subject to such rules and regulations
as may be prescribed by the Monetary
Board.”
3
Common Trust Fund
Different Kinds of common trust funds:
4
–
Common Trust Fund (“CTF”) – for
phase out by 30 Sept. 2006
–
UITF
Rationale for Shift to UITF
Align the operation of pooled funds
under management by trust entities
with international best practices
Ensure differentiation from bank
deposits and other direct liabilities of
the financial institution
5
Rationale for Shift to UITF
6
Sound operations of pooled funds will
enhance the credibility with retail
investors and enable them to evolve as
major institutional players that can
support the deepening of domestic
capital market.
A client has free choice on what suits his
financial objectives, particularly as to
risks and returns and his perceived
expertise of the fund manager.
Governing Regulation
Cir. No. 447 dated 03 September 2004
Regulations governing the creation,
administration and investment/s of
UITFs
7
UITF - Definition
Open-ended pooled trust funds denominated
in pesos or any acceptable currency, which
are operated and administered by a trust
entity and made available by participation
Participation or redemption is allowed as
often as stated in its plan rules
Specie of common trust funds
8
UITF Documentation
Plan Rules / Declaration of Trust - Written
trust agreement
- approved by the Board of Directors
- submitted to the BSP for prior approval
- approved copy of Plan available at the
principal office of Trustee for inspection by
any person having an interest in the fund or
by his authorized representative.
9
UITF Documentation
Minimum elements:
10
Title (product/brand name)
Investment objectives and policies
Investment powers of trustee
Unitized NAVPU valuation methodology
Terms and conditions governing the
admission or redemption of units of
participation
UITF Documentation
Minimum elements:
External audit requirement
Basis to terminate Plan
Liability clause of trustee
Fees/commission and other charges
deductible from fund
Other matters to define clearly the rights of
participants
11
UITF Documentation
12
A copy of the plan rules shall be
available at the principal office of the
trustee during regular office hours for
inspection by any person having an
interest in the fund or his authorized
representative.
Upon request of the client, a copy of
the plan rules shall be furnished to the
interested person.
Salient Features of UITFs
I. Pooled UIT funds can only be
invested in liquid investments and
tradable financial instruments.
13
UITFs’ Allowable Investments
14
Bank deposits (for liquidity purposes)
Financial instruments
Government securities
Tradable securities issued by the
government of a foreign country, any
political subdivision of a foreign
country or any supranational entity
Exchange-listed securities
UITFs’ Allowable Investments
Marketable instruments that are traded in an
organized exchange
Loans traded in an organized market
Other tradable investment outlets/
categories as the BSP may allow
15
Subject to exposure limit to a single person/
entity (equivalent to 15% of market value of
the UIT Fund)
Tradable Financial Instrument
Loans traded in an organized market
Two-way prices are quoted readily and
regularly available from an exchange,
dealer, broker, industry group, pricing
service or regulatory agency
Prices represent actual and regularly
occurring market transactions on an
arm’s length basis.
16
Salient Features of UITFs
II. UITFs may use financial derivatives to
hedge market exposure.
17
Financial derivatives instruments
Solely for the purpose of hedging risk
exposures of the existing investments of the
Fund
18
In accordance with existing BSP hedging
guidelines, Trust Entity’s risk management
and hedging policies
Disclosed in the Plan and quarterly list of
investment outlets
Salient Features of UITFs
III. Full transparency on the pricing of
investments (valued at market daily)
19
Mark to Market (“MTM”)
The market price determines the valuation of
the securities underlying the UITF.
Unlike the CTF, valuation is not on an accrual
basis.
If the investment deteriorates, the trustee shall
provision to reflect fair value in accordance
with generally accepted accounting principles
(“GAAP”) or BSP regulations
If security has no fair market value, then it
shall be assumed to be of no value.
20
Salient Features of UITFs
IV. Beneficial interest of each
participation unit is determined under
a unitized net asset value per unit
(“NAVPU”).
21
NAVPU
Total Net Assets divided by total outstanding
units
Total Net Assets : summation of the market
value of each investment less fees, taxes,
and other qualified expenses
Made available to existing and prospective
participants
22
NAVPU
Daily computation of NAVPU
Weekly publication
Name of the UITF
General classification (e.g., money market
placement, bond, balanced, equity)
UITF’s NAVPU
Return on Investments of the UIT fund
- Actual (not annualized) on a year-to-date (YTD)
23
- Actual year-on-year (YOY)
Salient Features of UITFs
V. Fees and expenses that may be
charged from the UITF are clearly
defined.
24
UITF Expenses
Trust Fees
- inclusive of the routine administrative
expenses
o
o
o
o
25
Salaries and wages; office supplies
Credit investigation/collateral appraisal
BSP supervision fees/internal audit fees
Security/messengerial/janitorial services
UITF Expenses
Special expenses
Requirements
o Preserve/enhance the value of Fund
o Payable to third party
o Covered by a separate contract
o Disclosed to participants
26
Salient Features of UITFs
VI. Trust entity’s staff charged with the
marketing of the UITF shall be trained to
properly market the instrument.
27
Marketing Personnel
–
28
All personnel involved in the sale of
UITFs shall undergo standardized
training program for the purpose of
developing/ improving their ability to Objectively make a judgment on client
suitability
Clearly explain to investors the inherent
risks in investing in UITFs
Marketing Personnel
Conduct of training
In accordance with TOAP minimum
training program guidelines
Undertaken by respective trust entities
Training program regularly validated by
TOAP
29
Salient Features of UITFs
VII. Dealings with counterparties
undertaken in a transparent manner.
30
Dealings with Counterparties
Counterparties are qualified by the Trust
Committee
Counterparties are subject to appropriate
limits in accordance with sound risk
management principles.
Trustee always transparent
–
31
Maintains an audit trail for all transactions
Salient Features of UITFs
VIII. Dealings with related interest follow
the principle of best execution.
32
Dealings with Related Interests
Trustee observes principle of best
execution
- If purchase/sale of securities effected with
related counterparties, trust entity shall
consider at least two (2) competitive quotes
from other sources.
33
Salient Features of UITFs
VIII. An independent third party custodian
accredited by BSP shall be
appointed for UITF investments.
34
Custody of Securities
BSP accredited third party
custodian
Take custody/safekeep investments
in securities
Perform independent marking-tomarket
35
Salient Features of UITFs
IX. UITF may be denominated in any
acceptable foreign currency and are
not subject to the 30% FCDU
liquidity cover
36
Salient Features of UITFs
X. Exemptions from regulations on
reserves, single borrower’s limit and
DOSRI ceilings applicable to trust
funds in general
37
Administration of UITF
Trustee Exclusive management and control of each
UITF under its administration
Sole right at any time to sell, convert,
reinvest, exchange, transfer or change or
dispose of the assets comprising the fund
38
Administration of UITF
Has no other relationship with such fund
other than its capacity as trustee of the
UITF
Backroom operations with adequate
system to support the daily marking-tomarket of UITF’s financial instruments
39
Investor Protection Features
Minimum Disclosure Requirements
Client Suitability Test
40
Minimum Disclosure
Requirements
Evidences of participation
Participating Trust Agreement
Confirmation of Participation
o
o
o
41
NAVPU of fund on day of purchase;
Number of units purchased/redeemed
Absolute peso or foreign currency value
Minimum Disclosure
Requirements
Documentations given to Client
•
Must contain a statement
The contract is a trust agreement not a deposit account.
Not insured by PDIC
No Guaranteed Returns
Losses or income are for the account of the
trustor/investor.
The Trustee is not liable for losses except upon gross
negligence, fraud or bad faith.
•
42
Such statements should be strategically placed near
the space for the investor’s signature.
Minimum Disclosure
Requirements
Printed marketing materials
Name of fund
Name of Trustee of UITF
A trust product, not a “deposit account”
No guaranteed rate of return
No indicative rates of return
Availability of Plan Rules
Customer and Product Suitability Standards
43
Minimum Disclosure
Requirements
Printed marketing materials
May present relevant historical
performance purely for reference and
with clear indication that past results
do not guarantee similar future results
44
Minimum Disclosure
Requirements
Weekly Publication of the NAPVU
Must contain:
Name of the Fund
General Classification
Moving Return on UITF Investments on a year
to date and year-on-year basis
At least one newspaper of national
circulation
45
Minimum Disclosure
Requirements
Quarterly Disclosure Statement
Investment Objective
Investment Policy
Participations: Requirements and Restrictions
List of prospective and outstanding investment
outlets
Admission and Redemption
o Frequency, Date, Time and Other
Requirements
o Pricing/Currency
o Fees/Other Terms Conditions
46
Client Suitability
Investment Objective
Risk Profiling (e.g risk appetite)
Knowledge and Exposure to Financial
Instruments
Previous Investment Experience
47
Investment Options
A CONSUMER has a basic right to
choose where he can place his hard
earned savings.
48
Banks need to compete for this business
against other banks and non-bank
financial institutions by offering deposit
and non-deposit products that meet
customer needs.
Investment Options
?
49
UITF Growth (in Php billion)
324.3
Equity Funds
Balanced Funds
Bond Funds
Money Market
2.8
350.0
0.5
261.6
300.0
Amounts (in Php Billions)
2.4
3.0
0.7
200.0
278.5
120.5
150.0
100.0
35.8
25.7
50.0
-
224.5
2.1
60.9
50
206.8
0.4
250.0
2.1
0.1
1.8
0.1
30.5
22.1
1.5
31 Mar 05
3.4
30 Jun 05
0.1
1.9
171.3
0.3
91.6
44.2
14.7
30 Sep 05
26.5
34.3
42.5
31 Dec 05
31 Mar 06
30-Apr-06
31.8
31-May-06
UITF Rapid Growth
Reasons:
UITFs answered the requirements of investors for
high-yielding investment products that are readily
available and convenient to buy.
51
Philippines interest rates for the past year were on a
downtrend (until April 24, 2006). This positively
affected the UITF NAVPUs, which increase when
interest rates decrease.
In addition to interest
accruals on the investments, yields were improved
with mark-to-market gains. Investors were happy
about their returns.
UITF Rapid Growth
Reasons
Trust Industry banded together on a UITF
educational campaign, guided by BSP Circular
447.
Individual trust institutions had their share in
marketing the products through their branch
network, advertisements, newspaper supplements
and investor briefings.
52
Philippine interest rates
Supreme Court decision, 3
November 2005, upholding RVAT
Missed tax collection target
Gov’t floats the idea of lifting RVAT on oil
53
Philippine Yield Curve
As of 05 June
As of 23 May
As of 02 2May
%
54
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What happened during the
UITF May 2006 Experience?
55
The UITF experience also coincided at a time of growing risk
aversion among global investors, which manifested in the fall of
Asian currencies, the emerging markets, metal and the stock
markets.
As interest rates moved up, NAVPUs of the UITFs, particularly
that of the Bond Funds, moved down as mark-to-market losses
were reflected. While investors in these funds have experienced
volatility in the past, the degree of volatility had been of smaller
amounts and shorter duration (i.e. Hyatt 10, February 2006
Declaration of State of Emergency)
Jittery investors withdrew from the UITFs and fund managers
were forced to sell their bond assets to fund such withdrawals. It
became a spiral: the more the investors withdrew, the more the
fund managers sold the UITF assets, the more the interest rate
increased, the more NAVPUs fell and this became a vicious
cycle.
Is there a future for the UITFs?
UITFs are sound investment and present real
value to investors in terms of returns and
convenience.
UITFs are meant to be held for long periods of
time.
They are a powerful way to mobilize funds for
capital market development.
They can be the answer to increasing the saving
rate of the country.
56
Proposed Enhancements
Ensure proper marketing of UITFs
–
–
–
Enhanced risk disclosure
More effective client suitability testing
More rigorous standards for training marketing personnel
Promote better investor education through various
programs
Accelerate development of domestic capital market
–
–
57
Promote market depth and liquidity
Encourage product diversification and new investment
instruments
Proposed Enhancements
Adoption of
Standards
–
–
Global
Investment
Performance
Obtain worldwide acceptance of standards for calculating
and presenting fund performance
Ensure accurate and consistent data
Certification of UITF marketing personnel
–
58
Course will include understanding of the underlying
investments and workings of the financial market
59