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bakit kaya ang bond fund ng BDO eh  lage pababa ng pababa una ok naman tumataas na ngayon mejo malaki binaba kawawa naman kami naginvest sana umayos na lahat

 

Good day pogingpogi,

 

The bond fund is going down probably for the following reasons:

 

First, the rise in interest rates abroad sent bond prices down so the NAVPU of the fund went down. This decrease caused a panic and people withdrew their money. The withdrawals limited the funds of the fund managers so they weren't able to efficiently adjust their portfolios. Consequently, NAVPUS will still be prone to losses until fund managers are able to purchase enough of the newer bonds to balance out their holdings.

 

In the long run though, you should be ok as BDO is a pretty decent bank.

 

Hope that helps. If you have any other questions, check out my blog.

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TRUST INDUSTRY TAKES ON MARKET CHALLENGES

 

By Gerard S. Dela Pena

Business World, Wednesday May 31, 2006

 

The ecnomic turnaround in the first quarter of the year has raised hopes among investors that investment channels such as trust products would provide better yields. With the economy exhibiting a better performing stock and foreign exchange, as well as a stronger domestic liquidity, it seemed like there was no other way for the trust industry to go but up.

 

Despite recent events that hurt the unit investment trust fund (UITF) business, industry players are still optimistic that the termporary aberrations in the world market can make investing in times of crisis an opportunity to reap future gains.

 

Steep Climb, Sharp Drop

The continued interest rate hikes in the United States have become a major challenge for the local UITF business. Amidst the downtrend of itnerest rates in the Philippines which bottomed out in April due to a "better-than-expected" budget gap, the local economy was not spared from the effects of the uptrend in the U.S.

 

For the past three years, the US has experienced 16 interest rate hikes due to inflationary concerns and tightened spending, creating a negative impact on the world market.

 

As expected, this steep climb of interest rates pulled down the prices of bonds and net asset values per unit (NAVPUs) of UITFs. With this, financial experts predict possible losses of 10% to 15% of principal investments in such funds.

 

Worried over the possible losses, a lot of investors pulled out their investments, making the market all the more volatile as fund managers were forced to sell of their holdings to fund withdrawals, Trust Officers Association of the Philippines (TOAP) President Ma. Lourdes T. de Vera said.

 

"It's the first time in UITF history that there was a reversal of trend (drastic drop and interest rate hike). That's the reason why people got nervous. I hope people will eventually get used to the fact that there are risks associated to the product," she said.

 

However, Ms. de Vera made it clear that an investor may minimize or regain his losses if he were to widen his investment time horizon.

 

"The key to investing is time. The longer you are investing, generally, the better your yields," Ms. de Vera said. "This (massive withdrawal) will eventually simmer down and people will realize that they should be long-term investors so that they may earn their projected gains. If you're a long-term investor, you should be risk-tolerant. You should not be alarmed if the value of your fund is going down. That is only a temporary event."

 

TOAP is planning to impose safety nets on the offerings of member institutions wherein fines will be incurred should the investor redeem his investments before the minimum holding period of a particular fund.

 

The preferred minimum holding period is six months for money market funds and one to three years for bond funds, Ms. de Vera said.

 

Growing Pains

The projected losses in principal investments in UITFs, however, are not an indication that the entrie trust industry is weakening.

 

According to September 2005 date of TOAP, other trust outlets such as employee benefit plans, personal trust, investment management accounts, and pre-need plans post yearly growth of 10.82%, 24.42%, 33.84% and 2.82%, respectively, as compared to end-2004 figures.

 

Ms. de Vera added that not all trust products are affected by market volatility, as these pertain to traditional trust arrangements.

 

And despite the crunch in the world market and its recent introduction, the UITF has posted significant gains, hitting P122.9 Billion by end-2005 compared to P26.4 Billion when it was introduced in June last year. The size of the UITF buisness is pegged at P230 Billion as of March this year.

 

"(UITF) is a new product; there are growing pains, I think, no, the customers as well as the banks know better what the important things to consider are," Ms. de Vera said,

 

Best Practices, Global Standards

But as far as UITFs are concerned, the trust industry cannot simply wait for the volatility in the market to calm down before making the right move to improve the industry.

 

One way to realize this is to create a set of uniform standards across the industry. As of the moment, TOAP has already adopted standards such as having absolute instead of annualized basis in giving quotations, and providing disclosure of detailed information to clients such as name of the fund and institution, investment portfolio, currency, fund classification, returns, minimum term, and risks, among many others.

 

"It took four years to put up BSP Circular 447 which governs the UITF because it has to be of global standard," Ms. de Vera said.

 

In addition, she mentioned a number of practices that can be adopted by trust entities to improve the business.

 

She said that keeping abreast of technology will enable one to be updated on the movements in the world market, allowing a trust entity to act accordingly.

 

She added that keeping tabs on regulations may enable a trust institution to see how it can improve its business and operations in accordance with the new rules imposed by the government.

 

Opportunities

While the industry still has to wait for the volatility in the market to calm down and see the business pick up again, Ms. de Vera said that such challenging times may provide opportunities for investors.

 

"Things do not permanently go up. They have to come down at some time. As of now NAVPUs are down and interest rates are high, so its's practically a good time to get in. I hope the real investors realize that opportunity. The industry will surely come off better after all these events, after all the dust have settled," she said.

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bakit kaya ang bond fund ng BDO eh  lage pababa ng pababa una ok naman tumataas na ngayon mejo malaki binaba kawawa naman kami naginvest sana umayos na lahat

 

Please bear with me. BDO's bond fund, like many bond funds, suffered because interest rates started to go up. Since UITF funds are valued at market prices, it caused the long term bonds to go down in price as the law of supply and demand started to operate. If I was a bond trader, I would rather get a 1-year instrument that gives 7.5%p.a. than a 7-year instrument with the same rate, so bond holders started unloading medium to long term bonds to get shorter term instruments prompting the price of the long term bonds to go down. Then redemptions of panicked investors started to kick in and in order to service these withdrawals, UITF fund managers were forced to sell off more of the long term bonds, further pulling down the price of these bonds, consequently pulling down the NAVPUs as well.

 

If you are one of those who came in at a higher NAVPU than what it is now, and decide to redeem, then you will realize your losses. The better strategy is to wait until the NAVPU recovers, and it will at some point in time because the economic conditions will eventually correct the rise in interest rates, sooner if the BSP decides to intervene. Just give it some time. UITFs were intended for medium to long term investment horizons, meaning that your fund manager has over a year or so to give you investment income higher than money market or time deposit rates.

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MONETARY BOARD REJECTS PROPOSAL TO SUSPEND SALE, THOUGH BSP, BTr moving on UITF By Jun Vallecera Reporter

 

THE Bangko Sentral ng Pilipinas has vowed to restore order in the panic-stricken unit investment trust fund (UITF) market where investors jostle to exit from the P230-billion business as fast as their fund managers would let them

 

While conceding that intervention was an option, the central bank’s policy-setting board stopped short, though, of taking the drastic step of suspending the sale of UITFs. A senior monetary official said intervention was “an option” that, when it comes, could take the form of an open market operation (OMO) just like they do at the local currencies market. “We may do just that,” the official, requesting anonymity, said on Friday.

 

Private banking sources claimed the Bureau of Treasury had intervened on Friday, gobbling up what the market “foolishly” let go in their panic that their investments no longer yielded returns reaching as high as 21 percent only recently. National Treasurer Omar Cruz declined to comment on the matter.

 

OMO, as regulators refer to the term, essentially involves the buying or selling of government securities in this case and is one of several monetary tools at their disposal. “The BSP does not buck the market but we are sensitive to volatility,” the official said, frustrated that a well-designed product as the UITF still falls victim to stress arising from the shortsightedness of some quarters.

 

There had been calls for the BSP to take the drastic step of suspending the sale of UITFs, but the policy-making monetary board rejected the proposal. According to one official who requested anonymity, the UITF bond market is at its core a market for government securities whose main driver is the movement of interest rates. “Therefore, pricing is a function of volatility,” he noted.

 

UITFs sold like proverbial hotcakes in recent months on account of the heightening confidence in the fiscal sector and its ability to balance the budget over the near term. Bond prices went up as interest rates retreated until more recent data, particularly from the large US markets, indicated that the long party may soon be over. Indications the US Federal Open Market Committee may raise interest rates to curb inflation sparked apprehension the BSP’s seven-man monetary board may also hike its own interest rate structure. “What should have been an orderly retreat from the market became a snap-back in which UITF rates fell sharply as panicky investors sold their holdings.

 

“The selldown, which came all at the same time, caused the rates to fall even lower,” officials said. Private bank officials said now should be the time to buy what the market is selling at fire sale prices. “The market’s fundamentals have been saying prices were to fall, and so it’s a good idea to buy them now when UITF investors are being irrational. “It would have been sensible for them to hold on to their investments, to just sit tight and look at the rates again when things have quieted down,” the officials said.

 

Banco de Oro Commercial Bank owned up on Friday to having been affected by panic-driven withdrawals at its P65-billion unit investment trust fund. But its president, Nestor Tan, said the worst is over for the industry that at one point gave out yields as high as 21 percent. “We have been affected by the mass selldown but I believe the situation is now under control. There is no reason to be concerned [for] your principal,” the bank executive said Friday to assure those who still have money in UITFs.

 

Unlike regular bank deposits, UITF investments do not enjoy coverage from the Philippine Deposit Insurance Corp. and in theory at least, one could lose one’s principal investments just as much as one could enjoy returns as high as 21 percent the business gave as recently as three weeks ago. “Past performance is never an assurance of future returns,” Joey Bermudez, president of China Trust Bank, warned UITF investors weeks ago. BDO’s Tan said their UITF business accounts for roughly half the bank’s total trust fund assets of P130 billion. “There were [significant] losses in net asset value [per share] for the people who left early,” Tan noted.

 

This pertains to the unit value of one’s UITF holdings at the time so called participation units were sold at panic prices two weeks ago, compared to their value at the time the original investment was made.

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BSP cautions investors on risks involving UITFs

BY LEE C. CHIPONGIAN

 

Bangko Sentral ng Pilipinas Governor Amando M. Tetangco Jr. said investors of the reserve-free unit investment trust funds or UITFs, which replaced common trust funds, should be realistic and not to expect high returns all the time.

Tetangco said UITFs are considered "hot" products right now, compared to other assets including risk-free government securities. However, buyers of UITF should be reminded that these instruments have no guarantee unlike deposits, which have assured returns.

BSP Deputy Governor Nestor A. Espenilla Jr. agreed saying, "interests (earned) in the past will not necessarily be repeated in the future."

Because UITF accounts are completely free from reserves, the BSP will strictly govern the investments of such funds, which are limited to exchange-listed securities.

At the moment, Espenilla said the central bank is planning to improve its trust governance and to strengthen the independence of a trust unit from the bank proper. "We’re reviewing the trust committees and role of independent directors and to clarify their roles (in overseeing trust investments such as UITFs)," he added.

The BSP has cautioned banks against overselling UITFs.

Espenilla told the Trust Officers Association of the Philippines to fully disclose to investors the risk involved in UITF investments.

As part of safety features, the BSP also require UITF assets to be placed under third-party custody by BSP accredited custodians to protect investors from fund manager misconduct and to allow for an independent valuation of the pooled assets.

UITF managers, in the meantime, are required to fully inform their prospective investors of their investment plans or strategy such as what investments to put the assets into.

"Investors must also understand that their principal is not guaranteed by the trustee and it is not covered by deposit insurance. Investment in UITFs are inherently riskier than deposits but may be rewarded with potentially higher returns compared to a deposit," the BSP said.

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OK lang po yun, just ask. Took me a long time before I got the realtionship between price and yield. Anyway, interest rates are now correcting so we should see an uptrend in the NAVPUs within the next few days. Heavy redemptions (withdrawals) marked the past few days as investors panicked over the declining NAVPUs and chose to realize their losses instead of waiting for the bond market prices to correct. For the first time the financial markets felt the impact of the UITF market as it was the selling of long term FXTNs that drove the market haywire.

 

a lot of the stuff being discussed here are interesting... a bit hard for me to follow and understand the technical jargons. any place (or site) i can visit to get the explanations?

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a lot of the stuff being discussed here are interesting... a bit hard for me to follow and understand the technical jargons.  any place (or site) i can visit to get the explanations?

 

Almost all the big banks have UITF FAQs on their websites. I would recommend ING at the moment but please try here first. I am not an investment guy so you might understand me if I try to explain. Thanks.

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Here be dragons

By Maya Baltazar Herrera

 

The Philippine equity markets have been a fun ride recently. May was a particularly interesting time for the local stock market as it flip-flopped starting by rising steadily after a peaceful Labor Day rally and then erasing practically all its gains by the end of the month.

So-called fixed income vehicles were no fun either. The month of May started with a key official of the Bangko Sentral ng Pilipinas opining that interest rates may have gone too low. This was, predictably soon followed by steep rises in bids at the regular government bond auctions—resulting in the declaration of a two-week moratorium in regular auction schedules. That moratorium ends this week.

Also this week, Bangko Sentral Gov. Amando Tetangco Jr. assured reporters that the market has calmed down and that the central bank need not step in.

The pronouncement came on the heels of the two-week temporary suspension on issues of government bonds. The suspension was a government reaction to the sharp increase in rates in the immediately preceding auction. The increase was particularly worrying as it was accompanied by a widening of the gap between bid and offer rates in the secondary market—an indication that the upward pressure was getting stronger.

There is, of course, a deeper story here.

Elsewhere in this paper yesterday, the honorable governor was also reported as assuring the public that Unit Investment Trust Funds (UITF’s) are a “well-designed product”

The phoenix

One of the resurgent stories of the decade, in fact, is the resurrection of the mutual fund and its almost twin sibling, the UITF.

The story carried in this paper pointed out that in the month of April alone, assets in UITF’s increased from P230 billion to P300 billion.

The fledgling UITF vehicle launched early in 2005 was designed to take over the old Common Trust Funds (CTF), which were not marked to market. This was part of the move to comply with the central bank move toward requiring banks to value tradable vehicles at market.

By comparison, the modern mutual fund industry, in its fourth year in 2003, had only P33 billion in funds under management. The dollar-denominated funds accounted for a scant additional P11 billion equivalent.

What drove this?

Funds 101: Mark to market

First, let me explain what mark to market means.

In the old (CTF) system, if you bought a bond that paid 10 percent over its term, the value of the bond increased slowly at the 10 percent rate (this is often called the coupon rate of the bond). Any change in prevailing interest rates did not affect the value of the bond.

But, let us think about this for a moment. Pretend that you just bought that same 10 percent bond. In particular, let us say you paid one million in order to receive P 1.10 million in one year. Now, this is obviously a simplified example.

Pretend that the next day, you suddenly need to sell it to someone else because you have an urgent need for cash. Now, let us take an extreme case. Let us say interest rates have risen and new issues of bonds have a build in rate of 20 percent. This means that the next day, someone could pay the same one million and expect to get P1.2 million in one year. This is an entire extra one hundred thousand in just one year!

Would anyone pay you anywhere near the one million you paid just the day before and receive only P1.1 million? Of course not! You would need to sell at much less than one million. Conversely, if interest rates were to drop, then your bond would be worth more as opposed to less.

The lesson here, of course, is that movements in market interest rates affect the actual market value of so-called fixed income instruments.

But, this is not the whole story!

Consider a bond that pays 10 percent a year for 20 years. What happens when the market rates rise only 1 percent to 11 percent. That extra 1 percent a year is actually 20 percent more over the period of the bond. Compound interest just makes it worse.

Or, maybe, the dragon?

The real challenge, as Tetangco himself admits is to ensure that investors understand what they are investing in so that as he says: “There will be no surprises no matter how the market behaves “.

In fact, after the original Bangko Sentral declaration in early May expressing concern about how low interest rates had dropped, there was a mad rush to get out of UITF’s. While the final tally has yet to be released, it is believed that a number of banks experienced redemptions in UITFs north of 10 percent.

In fact, insiders said the mad surge into UITF’s was really fed by the steady drop in interest rates prior to May. The question is: How many of those investors truly understand what they were getting into.

Where angels fear to tread

For those of us in the industry, there are questions that need to be asked. How well does the investing public truly understand the new products? To a public long used to thinking of fixed income contracts (bond funds) as safe, how much reeducation needs to go into selling the new mark to market products? For the (very few) funds out there that are still valued at book, how many small investors will fall victim to the large, sophisticated institutional or individual market timers?

Is a seminar, without any sort of examination system truly enough to ensure that those who explain these products to the customer are able to take all necessary precautions? Consider, both the insurance industry as well as the mutual fund industry require an examination in addition to training prior to licensing.

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a lot of the stuff being discussed here are interesting... a bit hard for me to follow and understand the technical jargons.  any place (or site) i can visit to get the explanations?

 

1. What is a fund?

A fund, also known as an investment fund, is a collection of stocks, bonds or other securities owned by a group of investors and managed by a professional investment company.

2. What is a UITF?

Similar to a Common Trust Fund (CTF), a Unit Investment Trust Fund (UITF) is a trust product that pools the money of various investors into a single portfolio managed by a professional investments team of a trust department of a bank or an institution with a trust license. The Fund allows the investor to own participation in stocks or bonds at a fraction of the costs and minimum investment amounts usually associated with these investments. Moreover, the investor need not track his investment daily, nor worry about what stocks or bonds to buy or sell. This is because skilled fund managers with years of asset management experience handle the portfolio day-in, day-out. But unlike the CTF, a UITF must be valued using the marked-to-market method and is not required to keep any reserves with the Bangko Sentral ng Pilipinas.

3. Why should I invest in a fund?

There are several reasons why it would be wise to invest in a fund rather than in securities directly.

Professionally Managed: The fund is constantly monitored by a team of professional investors, making adjustments in order to seek out the fund's best possible performance. Not only is the investor relieved of the burden of constantly researching and monitoring the securities, but also, this responsibility falls on a fund manager or a team whose full time job is to manage the fund. These managers come with a wealth of training and experience under their belts.

Diversification: A fund is typically invested in hundreds or even thousands of different securities. No more than 10% of its assets can be invested in a single security, except for government securities. This diversification spreads the risks over a broad base thereby limiting potential loss.

Affordability: A fund pools together the resources of many small investors so as to create greater buying power than they could achieve by themselves. In addition, economies of scale come in because funds purchase large volumes of a specific security and thus, are able to spread some of the costs like commissions and processing fees over many investors. In essence, an investor is buying shares or units of participation in the fund. Also, funds allow investors to gradually add to their investments over time.

Liquidity: Also, a fund gives investors greater liquidity than do stocks or bond. You can purchase or redeem your shares on any business day.

4. What are the risks involved in investing?

 

A. Market risk- Market risk is the danger associated with unpredictable events that influence the performance of the entire market. Examples of this include economic recessions, natural calamities, and political scandals. This type of risk cannot be diversified out of an investment portfolio, for it affects most or all securities in the market.

 

B. Credit risk- Credit risk refers to the possibility a debtor will default on a loan. This non-payment of the principal usually happens in fixed-income instruments. Investing in bonds with a high credit rating minimizes this risk; keeping a portfolio well-diversified also helps.

 

C. Value of the fund may go up or down - Returns and performance of the fund are not guaranteed, therefore the investment is subject to possible loss of principal. Even if the Unit Trust Fund has provided high returns in the past, historical performance of the Fund is no guarantee of its future performance.

 

D. Not covered by the PDIC - Unlike Bank Deposits, which are insured up to P280,000 by the Philippine Deposit Insurance Commission (PDIC), an investment in a UITF is uninsured. This is because investment in the UITF is not considered a deposit with the Bank.

 

5. How is the fund's risk and return determined?

The risk and return of the Fund is determined in large part by the asset type or types that comprise it. To illustrate, the graph to the right plots the quantified risk and return characteristics of the various types of Funds over a span of five years. Portfolios invested purely in cash or time deposits would generally have the least exposure to risk, as well as the least return. On the other end of the spectrum, portfolios with holdings composed entirely of equities is high-risk, yet high return. A curve called the risk-return frontier may be used to approximate the trade-off between risk and return.

6. What are the different kinds of investment funds? What are their differences?

The risk and return of the Fund is determined in large part by the asset type or types that comprise it. To illustrate, the graph to the right plots the quantified risk and return characteristics of the various types of Funds over a span of five years. Portfolios invested purely in cash or time deposits would generally have the least exposure to risk, as well as the least return. On the other end of the spectrum, portfolios with holdings composed entirely of equities is high-risk, yet high return. A curve called the risk-return frontier may be used to approximate the trade-off between risk and return.

UITF CIF Mutual Fund

Management The Trust Department of a Bank Investment Company

Participation Units of Participation Shares in the mutual Fund Company

Regulator BSP SEC

Valuation Method MTM Accrual or MTM Accrual or MTM

Reserves None Currently 19% for Peso Funds None, but requires IC P50 M paid-up capital

Taxes None Doc Stamps of P1 per P200 par value

Sales License Standardized training from TOAP-accredited trainor None Agents need SEC license to sell Fund

 

Funds are also further differentiated by the types of securities that they are made up of.

a. Money Market Fund - These funds invest in short-term debt securities, which are fixed income instruments with remaining lifetime of less than a year. Such securities a generally stable asset valuation given that they are close to maturity. The return objective of these low risk, low return funds is usually to perform better than the short-term time deposit rates in the market.

 

b. Equity Fund - These funds are invested in stocks. Stocks are shares of ownership in a company issued for the purpose of raising capital. They have a tendency to be volatile, with valuations changing considerably along with company developments and market events. However, the returns on these investments, comprised of both dividends and capital gains, are consistently high in the long run. Equity funds aim to achieve capital growth over a long period of time. These funds provide the potential for high returns but with it comes more volatility or risk.

 

c. Fixed Income (Bond) Funds - These funds are invested in fixed income instruments. Issued by governments and corporations to borrow capital, they are called "fixed income" because they are obligations to repay fixed amounts of interest, plus the principal, in the future. Since the interest returns on these instruments are preset, these securities are less risky than stocks. These funds are conservatively managed than equity funds, and are less subject to variability in returns. The objective is often to preserve capital while producing a moderate income by investing in medium to long-term bonds or fixed income securities issued by the government or corporations.

 

d. Balanced Fund - Balanced Funds are invested in a mix of equities and debt. They combine the growth potential of higher-risk stocks with the less volatile returns of fixed-income securities. Their risk-return characteristics fall between Equity Funds and Fixed-Income Funds.

 

7. What are open-end and closed-end funds?

Open-end funds sell as many units as investors are willing to buy. This makes the fund grow bigger as every new investor buys a unit of the fund.

Closed-end funds sell only a fixed number of shares. After that, the shares are traded on an exchange.

8. What type of fund is best for an investor?

Different types of funds have different objectives. So an investor should choose the fund which satisfies his own needs or preferences.

a. Investment Objective

Capital Growth - some funds are focused on giving higher returns. These funds are typically riskier than capital preservation funds.

Capital Preservation - some funds are aimed at maintaining the investor's invested capital, usually offering smaller returns at a lower risk.

b. Time horizon

 

Another key characteristic would be how long the investor can afford to leave his money untouched in the investment. This affects considerably how much risk or volatility the investor can handle. Generally, the longer the acceptable time horizon, the greater the tolerance for risk.

c. Risk profile

Risk-seeker - the investor prefers investment instruments with high returns even if these vary wildly from period to period

Risk-averse - the investor may opt for stable, predictable performance despite returns that are generally lower.

Example: An investor wishes to build a vacation house for his retirement in ten years. He can afford to keep the money allotted for this locked up for the entire period, and he can tolerate up to moderate risk if his money can appreciate considerably. Given these characteristics, he may want a fund that delivers capital growth.

Towards this objective, he may prefer an equity fund. Equities provide generally higher growth over debt instruments, in exchange for a higher risk exposure. However, even as they are more volatile than other instruments, returns on equities tend to average out in the long-term. An 0investor willing to wait out a ten to fifteen year time frame will have the advantage of a greater probability of high returns at low level of risk.

9. How do you invest in a fund?

In order to invest in a fund, a person must buy shares or units of participation in the fund. The value of one unit can be calculated by dividing the current market value of the entire fund by the number of outstanding units. The market value of the entire fund is equal to the market value of all the securities in the fund. This is known as Net Asset Value or NAV. By dividing the NAV by the number of outstanding units, we get the NAV per unit of participation or NAVPU. The NAVPU is the price the investor must pay for one share or unit of participation.

 

NAVPU = Total Assets of the Fund - (Management Fee + Other Expenses and Liabilities)

Outstanding Number of Units of the Fund

 

10. How is the fund valued?

There are two ways to value fixed income funds, the accrual method and the marked-to-market method.

In the accrual method the value of each asset in the Fund is recorded at its purchase price and coupon payments are accrued or accumulated on a daily basis(less tax expenses). Take note that this does not reflect the actual market prices at which assets in the Fund can be traded.

On the other hand, the marked-to-market method values each security in the portfolio at its end-of-day market price plus the accrued interest (less taxes and fund expenses).

For example:

 

Take a portfolio made up of two bonds:

 

BOND A maturing in 28 years

BOND B maturing in 8 years

 

Both are purchased on Jan. 1, 2005 at $103.

 

Suppose that on Nov. 5, 2005:

 

o

BOND A has a market price of $114, with accrued interest of $10

o

BOND B has a market price of $106 and accrued interest of $8.

 

Under the accrual method, you would take the purchase cost of each:

 

o

$103 for BOND A and $103 for BOND B

o

and simply add the accrued interest for a total NAV of $224 (224=103+103+10+8).

 

Under the marked-to-market method, you must use current market prices

 

$114 for BOND A and $106 for BOND B

 

And again add accrued interest to give a NAV of $238 (238=114+106+10+8).

MTM accounts for all gains and losses of the assets of the Fund on a daily basis. Thus, it reflects the actual net worth of the Fund

1. when the market is up, you can realize the full gains;

2. when the market is down, you can buy at market value, reaping potentially higher gains than you would under accrual valuation should the market come back up; and

3. you know how much your investment in the Fund is really worth, thanks to a transparent fund accounting method that is the convention for investment-managed Funds worldwide.

 

11. How do I earn from a UITF?

Recall that when purchasing units of participation, the price of each unit is determined by the current day's NAVPU. When redeeming units, the amount that the investor shall receive is also based to the current day's NAVPU. So an investor can earn on a UITF when the redemption price is greater than the subscription price.

12. How come I've heard very little about UITFs?

On September 3, 2004, the Bangko Sentral ng Pilipinas (BSP) officially released Circular No. 447, paving the way for the creation of Unit Investment Trust Funds (UITF). Previously, only CTFs and mutual funds existed. Circular No. 447 was the BSP's response to the need to reform the Fund industry and bring it up to global best practices, wherein mark-to-market valuation is used. MTM accounts for all gains and losses of the assets of the Fund on a daily basis. Thus, it reflects the actual net worth of the Fund. An investor transacting units of a Fund that is valued using MTM is assured he is buying or selling the Fund at its true value. The circular took effect last October 1, 2004 and promotes a shift from CTFs into UITFs thereby conforming more closely to global standards.

13. What is going to happen to existing Common Trust Funds?

BSP Circular No. 452 (dated September 22, 2004), together with a number of other official directives, outline the transition guidelines for existing CTFs. These directives mandate that all banks are to cease accepting new participants into their CTFs by December 31, 2004, refrain from accepting additional placements from existing CTF investors effective April 1, 2005, and to submit to the BSP a plan for phasing out by October 1, 2006 all outstanding CTFs. These directives were made to encourage banks to shift their CTFs to UITFs soon. In addition, existing CTF assets need to be delivered to a third party custodian by the end of October, and would likewise become subject to the reserve requirement for deposit substitutes by April 1, 2005. Be informed that reserves kept with the BSP are in cash and low-yielding reserve securities, and can weigh down the performance of the CTF. On the other hand, UITFs are free of such a reserve requirement and may fully invest its assets in the financial markets - earning potentially higher returns.

14. How do you measure each UITF's performance?

The fund's daily Net Asset Values per unit are compared against a benchmark. A benchmark is normally an index or collection of different securities. In choosing the right benchmark for a fund, it is important that the benchmark and the fund are composed of similar securities. In other words, you must compare "apples to apples." Upon inception of the fund, an index placing the fund in proportion to the benchmark is constructed and the selected benchmark is set to have a NAVPU equal to the fund's initial NAVPU. Whenever the fund's value is greater than that of the benchmark, the fund is said to be outperforming the benchmark. If the fund's value is below that of the benchmark, then the fund is underperforming. Usually, the fund's Return objective is to outperform the benchmark, gross of any fees and expenses incurred in its management.

15. How can I monitor the fund's performance?

The Fund Manager usually issues daily fund fact sheets that contain the relevant information such as NAV, NAVPU, the top ten holdings of the fund and even a short report from the manager. Investors can also monitor the fund performance through regular publication of the NAVPu by the Trust Officer Association of the Philippines (TOAP) on a weekly basis in a newspaper of national circulation.

16. When does the investment mature? (No specified tenor - vs. a fixed tenor of most fixed income instruments)

You need to build on the concept of an "expected time horizon" for funds, long term investing/holding capacity with flexibility to pay-out.

a. For a UITF, no exact time horizon exists, but one can maximize benefits and minimize risks of investing in a fund when staying medium to long term (at least 3-5 years).

b. Also, the funds feature the flexibility to exit the investment any time, should the investor require to do so.

 

17. When would be a good time to invest?

One can never time the market; investing should involve a disciplined process. Market Timing is an investment strategy that seeks to place the purchase of investment instruments on the time that prices are low so that when prices go up, the instruments bought can be sold for higher prices and thus the investor can earn from the sale. The ultimate goal then for timing the market is to gain the maximum return by buying at the absolute bottom of the instrument's price and sell at the very peak.

That is why the biggest fear of investors is to enter the market is when prices are high and expected returns are lower.

Market timing is difficult to do. The probability of bad timing is equally present as a good one.

In addition, a good market timing gives only a limited additional return over the long term. In this case, John's return is only 0.73% higher than Jack's, who doesn't time the market and does periodic investment instead.

18. Why ING Investment Management?

 

A. World Class Professional Management

1. ING Investment Management (ING IM) stability

2. Disciplined investment process

3. Excellent track record in funds

 

a. ING IM is a multi-awarded investment manager with years of expertise in fund management.

b. ING IM handles a multitude of funds in variety of industries, years of existence (some funds have been in existence for over a decade).

c. Its funds have won awards from international ratings agencies like S&P, Fitch, and Morningstar.

 

19. Why UITF Funds?

 

A. Performance

UITF Funds are Unit Investment Trust Funds (UITFs) with a solid track record. B. Affordability

1. Investors who can't afford the steep minimum investment amounts for individual bonds or equities, let alone a diversified portfolio, may access these same instruments via a UITF with a much smaller investment outlay. If for example, the minimum placement for BOND A is $ 100,000. The minimum initial participation amount for the ING USD Fixed Income UITF, on the other hand, which is invested in a diversified portfolio of BOND A and corporate securities, would surely be more affordable than this.

 

C. Liquidity

1. Fund participants can make additional subscriptions or partial or full redemptions at any time.

2. Holding period is as short as 5 banking days from entry date into the fund (for the Peso Fixed Income Fund).

 

D. Diversification and access to higher yielding investments

1. Investors enjoy the greatly-improved risk-return profile of a diversified portfolio of investments worth millions of dollars or hundreds of millions of pesos, at a fraction of the amount.

2. Investors also benefit from the higher yields, lower fees, and economies of scale that only professional fund managers can access.

 

E. After Sales Servicing

1. Fund Manager provides adequate investor information about how the investment in the fund is doing by providing daily UITF performance updates

 

F. UITF Status

1. Unit Investment Trust Funds (UITF) are not required to maintain reserves (currently a minimum of 19% for peso-denominated Common Trust Funds, or CTFs) with the Bangko Sentral ng Pilipinas (BSP). Reserves tend to diminish the earnings capacity of a Fund. With the UITF's successful transition into a market regime, they are now 100% invested in the financial markets and thus have an increased potential to generate returns with respect to CTFs.

2. UITFs are exempt from reserves because they have clearer investor safeguards in place compared with CTFs. Here some of them:

 

a. A key difference is that UITFs need to be marked-to-market daily. Investors participate by purchasing units of the Fund at a price called the Net Asset Value per Unit (NAVPU). Under the marked-to-market method, this NAVPU is based on the current market values of the investments in the Fund portfolio, as computed at the close of each banking day.

b. Another safety measure of UITFs is that investments made by the Fund are limited to bank deposits and tradable securities. This provides a safeguard to participants, as the Fund may only invest in stocks or bonds that are liquid and can be bought or sold without difficulty in the market.

c. Other UITF safeguards include reforms to the sales process (such as the full disclosure of investment risks), and the requirement that all portfolio investments be kept in custody by a third party custodian accredited by the BSP.

Edited by Dr_PepPeR
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@dr pepper

 

i'm seriously considering pulling out in my fixed income fund to cut my losses. from what i heard, it would take 2 years for UITFs to recover again. furthermore, there's no indication as of the moment that NAVPS will go up anytime soon. :(

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@dr pepper

 

i'm seriously considering pulling out in my fixed income fund to cut my losses.  from what i heard, it would take 2 years for UITFs to recover again. furthermore, there's no indication as of the moment that NAVPS will go up anytime soon. :(

 

No sir, that is not true. The NAVPUs are based on the market prices of the securities (usually fixed income GS and corporates) and the recovery of course would depend on how soon will the market price of the assets go up. When will this be? Well certainly not tomorrow nor in a week or two but no one can tell. Two years? Maybe but not probable. Look at it this way. Your UITF assets at this point probably consists of cash (10-20%) and the rest will probably be government securities and a few corporate notes like SM Prime, Ayala Corp/Land etc. Now, think what will happen if you just held on to that until everything matures. You will get your principal plus the income it earned right? What I'm saying is if the assets inside your UITF are solid, why realize your loss now just because market prices are low? Why not just wait till the NAVPU goes back up at least to the NAVPU when you subscribed (and it will eventually) then go out if you have to or just keep it in till you see a better NAVPU?

 

I just wish the person who got you into UITF explained the mark-to-market thing fully with you as well as the concept of the UITF. Of course, you do what you have to do, and if you feel you need to pull out now, that is really your call. I hope this helped.

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No sir, that is not true. The NAVPUs are based on the market prices of the securities (usually fixed income GS and corporates) and the recovery of course would depend on how soon will the market price of the assets go up. When will this be? Well certainly not tomorrow nor in a week or two but no one can tell. Two years? Maybe but not probable. Look at it this way. Your UITF assets at this point probably consists of cash (10-20%) and the rest will probably be government securities and a few corporate notes like SM Prime, Ayala Corp/Land etc. Now, think what will happen if you just held on to that until everything matures. You will get your principal plus the income it earned right? What I'm saying is if the assets inside your UITF are solid, why realize your loss now just because market prices are low? Why not just wait till the NAVPU goes back up at least to the NAVPU when you subscribed (and it will eventually) then go out if you have to or just keep it in till you see a better NAVPU?

 

I just wish the person who got you into UITF explained the mark-to-market thing fully with you as well as the concept of the UITF. Of course, you do what you have to do, and if you feel you need to pull out now, that is really your call. I hope this helped.

 

 

if I may add...

 

selling at this time would benefit the bank since they can purchase your UITF at a low price...eventually, when the NAVPU appreciates - the bank gains by selling the shares at a higher price.

 

funds invested in UITFs and Mutual Funds should always be excess cash and the outlook should be long term. pahabaan talaga ng pasensya ngayon kasi wala pang signs na pataas na ang NAVPU...

 

as explained by Dr. Pepper, wait for the bonds to mature and we realize our gains - time is our friend in this kind of investment.

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For those in a quandary on what to do with their UITF/Mutual fund placements, here are some things to consider.

 

First, you should be aware that the short-term prognosis for the bond market is still quite negative. By this I mean that interest rates will probably still go up and that means lower NAVS/NAVPU in the short term. How much will it go down? No one really knows as it will greatly depend on how much interest rates go up.

 

With that in mind, ask yourself if you can absorb another 5 to 10% loss in your money's value in the next 2 months or so. If you can't then you should seriously consider exiting now --- especially if the money you placed into the fund was meant for something else (house payments, tuition). If you can take that loss, then the best action may be to just ride this out and maybe even add to your placement to take advantage of the lower prices.

 

Now, as to when will things turn around, that will depend on two major things -- the skill of the fund manager and the nerves of the investors. In times like this, a good fund manager can actually make a killing as he can balance his portfolio in such a way that it's returns can be maximized. However, his ability to do this will be greatly affected by the nerves of his funds investors. Simply put, any amount that he has to set aside to cover for sudden withdrawals is an amount that he can't use to buy the higher yielding bonds. In essence, the lesser the amount withdrawn by nervous investors, the better the performance of the fund in the long term.

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