Philequity Corner (June 19, 2006)
By Ignacio B. Gimenez
WHAT TO DO WITH UITF BLUES?
For the past month, I’ve been receiving so many email letters with regard to UITFs similar to the
one below. This is why I decided to devote this entire article to explain what UITFs are, why
UITFs suffered redemptions as of late, and what investors should do in these times of volatility.
“Good evening sir. I always read your column in Philippine Star. Gusto ko sana humingi ng
advise tungkol sa UITF. Mayroon po kasi akong 16 million pesos sa (name of bank) peso UITF
and another 5 million pesos sa (name of bank) peso bond. As of now, bagsak po. Pati principal
po nadala.
What is the best thing to do? To wait until umabot man lang sa principal before I redeem it? Or
kahit talo ako sa principal, redeem ko na? Ang kinatatakutan ko lang baka maubos yung
principal ko. Sa ngayon kasi ang iniisip ko, umabot lang sa principal ko re-redeem ko na.
Waiting for your advise. Thanks.” – email from a reader.
First things first, what is a UITF? UITF is the acronym for Unit Investment Trust Fund. It was
developed at the initiative of the Bangko Sentral ng Pilipinas (BSP) to replace the common trust
fund (CTF). The major difference between the two is that a UITF uses mark-to-market valuation,
i.e. the fund’s assets are valued daily based on the most recent end-of-day prices. Furthermore,
UITF’s are limited by the BSP to invest strictly in tradable and marketable securities (mainly
equities and fixed income securities). By doing so, the BSP aims to align the banks’ operation of
pooled funds to international best practices.
You will notice that UITFs are in most ways similar to mutual funds.
1) Both are investment vehicles wherein clients’ funds are pooled together to form a larger
fund to be used for investment purposes.
2) Both are handled by professional management which has access to superior information,
research and a wide array of investment outlets not available small individual investors.
3) Both have the advantages of lower investment risk through asset diversification and
lower costs & fees for the investor as opposed to individually building a similar portfolio.
4) And, both have the benefit minimal investment requirements.
The major difference between the two, however, is in the legal and regulatory aspects. The UITF
is created by virtue of a Declaration of Trust executed by a bank with a Trust license. Its fund
management and operations are supervised by the BSP and investors get participating units of
investments for their placements. Meanwhile, a mutual fund is a corporate entity that makes
investments on behalf of their shareholders. As such, it is regulated by the Securities and
Exchange Commission and investors directly invest in the shares of stocks of the fund.
VOLATILITY TRIGGERS REDEMP
In our article last week titled “Fear overcomes Greed,” we described how global financial assets
(especially emerging market bonds and equities) suffered sharp declines amid a rise in investor
risk aversion and a tightening of global liquidity. Locally, the bond market sell-off was
exacerbated by massive redemptions from UITFs whose assets reportedly reached a peak of P260
billion in April 2006.
Although no official figures were released yet, it is estimated that some banks suffered as much
as 30 percent redemptions. What triggered this much redemption, according to some investors
I’ve talked with, is the apparent lack of sufficient explanation about the risks involved, especially
market risk associated with fixed income securities. Since the majority of investors in UITFs are
transfers from old Common Trust Fund accounts, most of them do not fully understand the
market risk associated with the mark-to-market valuation of bonds. Unlike CTFs, which use the
accrual method of valuation (so the initial investment always stays intact), UITFs may fall below
the initial investment value depending on the prices of their holdings at a particular point in time.
MARKET RISK IN FIXED INCOME SECURITIES
In fixed income securities, market risk is the risk associated with changes in interest rates. The
price of a typical fixed income security moves in the opposite direction of the change in interest
rates, i.e. as interest rates/yields rise (fall), the price of a fixed income security will fall (rise).
Note that for investors who are willing to hold a fixed income security to maturity, the changes in
the price before maturity should not be a concern. However for an investor who may have to sell
the fixed income security before maturity date, an increase in interest rates will mean the
realization of a capital loss.
Looking at the chart of the 1-Yr/5-Yr/10-Yr MART below, you will notice that interest rates
bottomed in April (and consequently, bond prices peaked) but in just over a month erased all the
gains since October 2005.
1-Year, 5-Year, 10-Year MART
Source: Technistock
In terms of decline in value, we estimate that UITFs invested in bonds/fixed income lost between
6 to 10 percent from their highs in April 2006, while those invested in equities lost between 14 to
20 percent from their peaks.
HOW PHILEQUITY FARED
The latest report from the Trust Officers Association of the Philippines (TOAP) dated June 8,
2006 show that fixed income funds, on the average, were only up by 1.92 percent since the start
of the year. Dollar-denominated funds were up 1.28 percent, while the balanced/equity funds
were up 6.07 percent, on the average.
For the benefit of our shareholders, I am proud to say that the Philequity Group of Funds fared
fairly well even in these times of volatility. In fact, our Philequity Fund, which returned 16.36
percent as of June 8, 2006, outperformed all the UITFs listed in the TOAP report. Using TOAP’s
ranking, our Philequity Money Market Fund, which returned 4.32 percent, would be ranked 7th
out of the 40 fixed income UITFs listed in the report. Meanwhile, our Philequity Dollar Income
Fund, which returned 3.69 percent, would be ranked 3rd out of the 26 UITFs invested in dollardenominated instruments.
UNIT INVESTMENT TRUST FUNDS (UITFs)
MIXED / BALANCED / EQUITY Funds (average)
FIXED INCOME Funds (average)
DOLLAR-DENOMINATED Funds (average)
% Year-to-date
6.07%
1.92%
1.28%
PHILEQUITY GROUP
Philequity Fund
Philequity MONEY MARKET FUND
Philequity DOLLAR-INCOME FUND
16.36%
4.32%
3.69%
Source: Trust Officers Association of the Philippines, PEMI (as of June 8, 2006)
Philequity’s Money Market Fund and Dollar-Income Fund outperformed most of the fixed
income and dollar-denominated UITFs because, as early as two months back, we were already
holding more short-term bonds than long-term bonds. We figured, at that point, that it does not
make sense that the yields of the 5-year, 7-year and 10-year Treasury bonds were nearly the same,
between 6.72 to 7.12 percent. Meanwhile, we also figured that the spread between 10-year and 1year bonds which has fallen to less than 100 basis points (from 300 basis points 6 months back)
cannot be sustained.
TRACK RECORD SPEAKS
I would like to end this article by answering the question of our reader which was posted above.
My first advice is to wait. It’s a bit late to act only now because we may soon see a rebound in
bond prices which are already deeply oversold. However, there is also growing expectations that
the BSP will raise the benchmark overnight rates to curb increased peso volatility. So even if
there is a rally, we may see further pressure on bond prices going forward. In the end, the
question to take the loss now or to wait for the principal to be recovered (at the risk of possible
further losses) depends on your own risk tolerance and investment horizon.
My next advice may be self-serving because I am the president of Philequity Management, Inc.
Choose a fund manager which has a good track record in performing well not only when bond
and equity prices are rising but also when prices are falling. Because in a good market, making
money is a no-brainer, but in a bad market, preserving investors’ capital is what separates the men
from the boys. So if your funds continue to perform poorly, maybe it’s about time that you do
something about it.
For comments and inquiries, you can email us at info@philequity.net or gime10000@yahoo.com.