Unit Investment Trust Funds (uitf)

[Dr_PepPeR]

what do you think about UITFs?  should i pull out my funds from them?  I also read somewhere that these UITFs would be taxed further.  Dr. Pepper?

<{POST_SNAPBACK}>

 

It depends.

 

Do you need the money right now or soon? If yes, go ahead becauxe while the trend for NAVPUs is upwards, it is doing so very slowly and will do so for the next 2 to 3 months. But it will not reach its former levels soon, maybe not even this year.

 

Is the NAVPU when you came in higher that the NAVPU now? If yes, when you go out of the UITF you will realize what is essentially a valuation loss. If the NAVPU now is lower, then you can get out anytime with at least your principal investment intact.

 

Are you in a fixed income UITF? Then you can stay in since the assets are mainly government securities and corporate bonds so over time the NAVPU should just about equal the principal and interest on these instruments.

 

As to the taxation issue, the UITF is considered a revocable trust so it is not in itself a taxable entity. The investment outlets are subject to final withholding tax, so if the income of the individual from the UITF is taxed then that is double taxation. Read the following article:

 

UITF TAXATION CLARIFIED

 

The legal/tax counsels of various member banks of the Trust Officers Association of the Philippines (TOAP) have recently done a research paper on the withholding of tax on redemption of participation in the UITFs and have come to the following conclusions:

 

1. UITFs are already paying the taxes required by law. How does the UITF do this? First, UITFs are principally invested in bank deposits, government securities and tradable securities. As we know, for majority of these investments, final taxes from interest are withheld at source. When we get interest from a bank deposit, the 20% final taxes have already been netted out of the proceeds. The same holds true for purchases of government securities. Final taxes are also paid on equity investments traded in the stock exchange. If no taxes on any UITF investments were withheld at source, then the trustee bank is required by law to withhold the 20% taxes. For this reason, when the UITFs compute their NAVpus, these taxes have been deducted and the value of the UITF that is allotted to its participants are already net of taxes.

 

2. There is a question on whether there is an additional tax to be withheld from a trustor redeeming his UITF investment, aside from the taxes already described above. To answer this question, the research paper quoted BIR Tax Ruling 003-05 that says that “a revocable trust is a pass thru entity, and is not, for tax purposes, separate from those who establish or create it by pooling their money for the purpose of investment or reinvestment.” For this matter, the UITFs are revocable trusts because the trustor/participant has the absolute control over his participation in the UITF and there are likewise no beneficiaries separate from the trustors. As a revocable trust, a UITF is a pass-thru entity and not, for tax purposes, separate from the trust/client. The income of such trust/UITF is the trustor’s income . Because the trust already withheld taxes thereon and/or the income tax on the underlying securities are pre-paid, there is no need for a separate tax upon redemption of UITF participation. Otherwise, double taxation would happen. Furthermore, this is consistent to Section 63 of the Tax Code which provides for the taxation treatment of revocable trusts.

 

3. A second type of trust accounts are those which are irrevocable in nature. In an irrevocable trust, the trust may not be revoked for the benefit of a third party. For irrevocable trusts, BIR Tax Ruling 003-05 states that when such trust is created, a separate taxable entity is formed, different from the trustor/client. Taxes paid by the trust is different from the taxes to be paid by the trustor/client. TOAP legal/tax counsels believe that UITFs do not fall under this classification.

[faceoff]

If UITF placement has a negative return (lower NAVPU). Would they still impose a tax? In stocks, whether you win or loss, there is a tax on the selling transaction plus VAT also.

Edited July 7, 2006 by faceoff

[Dr_PepPeR]

If UITF placement has a negative return (lower NAVPU). Would they still impose a tax?  In stocks, whether you win or loss, there is a tax on the selling transaction plus VAT also.

<{POST_SNAPBACK}>

 

I agree with the opinion of the TOAP. For Government Securities, tax is withheld by the Bureau of Treasury; for time deposits and special savings, tax is withheld by the banks and for corporate issues, the paying agent or issuer is the withholding agent for the tax. In stocks or equities, there is the capital gains tax. So as far as I'm concerned, almost all of the investments under UITFs are subject to final withholding tax so there should be no tax imposed on the UITF subscriber. Otherwise that would be tantamount to double taxation.

[faceoff]

Do all banks offering UITF have the same returns when it comes to their NAVPU? Or do some banks offer higher returns for their UITF products?

 

From my perspective, the Peso Bond Fund had a larger decline compared to the other products. With these declines in UITF, the banks now tell their clients that these are long term investment. But the short term return was a loss of 5% or 6% from between April and May this year.

[Dr_PepPeR]

Do all banks offering UITF have the same returns when it comes to their NAVPU?  Or do some banks offer higher returns for their UITF products?

 

From my perspective, the Peso Bond Fund had a larger decline compared to the other products.  With these declines in UITF, the banks now tell their clients that these are long term investment.  But the short term return was a loss of 5% or 6% from between April and May this year.

<{POST_SNAPBACK}>

 

Different banks have investment managers who have their own strategies and internal policies to follow. So even if the UITF had the same asset composition, the timing of the trading of securities would result in different returns for each bank's UITF. Higher/lower returns is relative. Sometimes one UITF will have higher NAVPUs than another peer UITF, other times it will be lower. Look for consistently better performance in the NAVPUs, the longer the trend, the better as it means it is probably better managed than the others.

 

The Peso Bond Funds NAVPUs dramatically went down when interest rates went up. It affected the market value of the long term FXTNs, making it lower and then the market panicked, forcing the UITFs to sell off the long term issues at low prices, bringing NAVPUs even lower. Yes there is a short term loss but remember this is a valuation loss, you do not realize it until you get out or redeem. The UITF was really intended as a long term investment, the banks should have told you that at the start. Sometimes the client cannot also be dissuaded from a 30 day mentality. There is a definite lack of knowledge by the public and even the banks of the nature of a UITF. The BSP is not helping any with its irresponsible press releases.

[faceoff]

Last year the banks were informing their clients that had placements in Common Trust Fund (CTF) that they were retiring the product. In place of the CTF was the the UITF which made clients thought were a good alternative. I think with the CTF all the risks were the responsibility of the banks. You have a placement were the bank gave you a guaranteed return for either 1 month, 3 months or 6 months period. This is like a place-and-forget investment. You don't have to look at it everyday. This suited most people who don't want too much hazzle to look after their money. The bank does that for them.

 

With the UITF the market risk was passed on to the clients. The clients now has to do more work in looking after their UITF investments. Not only do they to find out how good the manager of the fund is but they have to worry about the effects of macro-economic factors on their returns, like interest rate rises. I find myself now going to the bank's website and checking the NAVPU on a daily basis. Any abrupt movements downwards adds to my anxiety. Its like looking at prices in the stock market. At least with equities I'm prepared for the gyration of the prices. With the UITF, its not too clear now what factors affect the NAVPU. Didn't bother to ask about that when the banks started quoting the past historical returns of the funds.

 

I though the increase in US interest rate a contributing factor, but the Fed have increased that 16 times in the past few years and the UITF was not affected until May.

 

When the risks are passed on clients for the UITF, people would tend to shy away from these products. It is just too complicated for simple people to understand the factors that affect these products. Better lower returns in other products than having diminished capital. The decline last May for UITF was really an eye-opener to the public.

[Dr_PepPeR]

Last year the banks were informing their clients that had placements in Common Trust Fund (CTF) that they were retiring the product.  In place of the CTF was the the UITF which made clients thought were a good alternative.  I think with the CTF all the risks were the responsibility of the banks.  You have a placement were the bank gave you a guaranteed return for either 1 month, 3 months or 6 months period.  This is like a place-and-forget investment.  You don't have to look at it everyday.  This suited most people who don't want too much hazzle to look after their money.  The bank does that for them.

 

With the UITF the market risk was passed on to the clients.  The clients now has to do more work in looking after their UITF investments.  Not only do they to find out how good the manager of the fund is but they have to worry about the effects of macro-economic factors on their returns, like interest rate rises.  I find myself now going to the bank's website and checking the NAVPU on a daily basis.  Any abrupt movements downwards adds to my anxiety.  Its like looking at prices in the stock market.  At least with equities I'm prepared for the gyration of the prices.  With the UITF, its not too clear now what factors affect the NAVPU.  Didn't bother to ask about that when the banks started quoting the past historical returns of the funds.

 

I though the increase in US interest rate a contributing factor, but the Fed have increased that 16 times in the past few years and the UITF was not affected until May.

 

When the risks are passed on clients for the UITF, people would tend to shy away from these products.  It is just too complicated for simple people to understand the factors that affect these products.  Better lower returns in other products than having diminished capital.  The decline last May for UITF was really an eye-opener to the public.

<{POST_SNAPBACK}>

 

The shift from CTF to UITF was mandated by the Bangko Sentral under BSP Circular No. 477, so its them you have to thank for that. CTFs and UITFs are the same banana, both are pooled funds under trust, and since they are trust products, there are no guarantees on both principal and income (yes, that's right, even under the CTF, check the fine print). The main differences are UITFs are required to mark to market their assets, and only liquid investments are permitted. The CTFs were valued using the accrual method, so the NAVPUs could be played around and be managed by the banks.

 

CTFs as well as UITFs are supposed to be for the long term investor who does not check how much interest is earned everyday. In a UITF, your fund manager is supposed to let your funds earn over the investment horizon and it is he/she who is supposed to check the NAVPU on a daily basis. The banks are also required to say that historical returns are not a guarantee of future performance.

 

And in the end, you are perfectly correct. If people do not understand what they are getting into, they should not go into it. If the UITF concept is alien to them and they are the 30-day rollover collect interest types, well then they should stay away from UITFs. The problem arises when they want better than time doposit/money market rate for their investments. Like they say, you can't have your cake and eat it too. Want higher rates? Be prepared for the risks.

Edited July 11, 2006 by Dr_PepPeR

[Dr_PepPeR]

Business Mirror

July 26, 2006

 

UITF Remains a Good Product

by Lito U. Gagni

 

In the aftermath of the debacle in the UITF (unit investment trust fund), the officers of the Trust Officers Association fo the Philippines (TOAP) sought to emphasize that the industry remains vibrant and downplayed the May meltdown in the UITF investments.

 

We understand that trust officers are now rethinking for a communication cascade in the risks inherent in the UITFs, a new product that seeks to dovetail the risk profile of the investors. It is the nonrecognition of these risks that played out in the panic withdrawal that gripped the industry in the month of May.

 

That panic withdrawal, aggravated by the stories of losses in part of the principal invested in the UITF, saw the UITF level of investments in a huge decline from P300 Billion to just P100 Billion. As Bangko Sentral deputy governor Nestor Espenilla explained, the investors were faced with a double whammy: as the banks sold the underlying securities for the UITFs, the market value dropped further resulting in bigger losses for the following withdrawals. Still, the trust industry remains conficdent that investors will troop back to the UITFs which are structured to conform with the risk they are comfortable with.

 

It will be a slow return as those who got burned in that May debacle in the UITF realize that the key to safeguarding their investments was to play a long term horizon. This is what the trust industry is hoping would happen given the continued faith on the UITF which went through a long review by the Bangko Sentral ng Pilipinas (BSP). In fact, the BSP came up with a circular precisely to ensure safety nets for investors. We understand that given other investment products in the market, the investors are tricling back into the UITF investments due to the better returns that they give.

 

In a commentary the TOAP prepared on the UITF, the need for an appreciation of the risks on the product was emphasized. The TOAP is now attempting to bridge the "communication bottleneck" so that investors acknowledge the risks that would prevent another May debacle as investors would be aware of the inevitability of the risks. There are four risks that the trust industry listed: interest-rate risk, market/price risk, liquidity risk and credit risk.

 

Changes in interest rates affect the value of fixed income investments such as bonds, which are among the components of most UITFs. When interest rates rise, bond prices fall and conversely, when interest rates decline, bond prices rise. As the prices of bonds comprising a UITF adjust to changes in interest rates, the fund's share price may rise or decline accordingly. Even government securities, although considered credit risk free, are subject to interest rate risk.

 

Market/price risk refers to the risk that the UITF could lose value due to decline in securities prices, which may sometimes happen rapidly or unpredictably. The value of investments fluctuate over a given period because of general market conditions, economic changes or other events that impact large portions of the market such as political events, natural calamities etc.

 

Liquidity risk describes the risk that certain securities in the UITF portfolio may be difficult or impossible to sell at a particular time, or if sold, will affect market prices substantially. This could delay the redemption of investments in UITF until its assets can be converted to cash. Even Government Securities, supposedly the most liquid of fixed-income securities in the Philippine market may be subject to liquidity risk, particularly if sizable volumes are involved. So far, despite the heavy selling of government securities in recent weeks, the market has provided the liquidity needed by the redemptions of UITFs.

 

Credit risk is the risk that a UITF may lose value in the event the issuer of a bond included in its protfolio defaults or could default on his obligation. Such default will drive down the price of the issue and may make the security difficult to sell.

 

As these hapen, the UITF's net asset value per unit could decline. You can be sure that UITFs invested purely in government securities are free from this risk. With the education of the public, the trust industry hopes for a return of the UITF to normal levels.

[sharkhead]

dr pepper, thank you for the very interesting topic.

 

i've never invested in trust funds because of the fine print. i keep my money in my savings account. but that doesn't yield much and with inflation, it just doesn't make sense.

 

i was just wondering what the historical yield of trust funds were for the past years? and will this be approximately the same as that of UITFs which are invested long term, say 2 to 3 years? i know that it's a huge risk but, in your opinion, around how much will UITFs yield?

[brentley]

Dr. Pepper

The minimum deposit for UITF is P100,000. For a period of one year and considering the risk involve, Can i earn after one year or do i need to keep it for 2 years?

Brentley

[Dr_PepPeR]

dr pepper, thank you for the very interesting topic.

 

i've never invested in trust funds because of the fine print. i keep my money in my savings account. but that doesn't yield much and with inflation, it just doesn't make sense.

 

i was just wondering what the historical yield of trust funds were for the past years? and will this be approximately the same as that of UITFs which are invested long term, say 2 to 3 years? i know that it's a huge risk but, in your opinion, around how much will UITFs yield?

 

The historical yield of trust funds with purely fixed income portfolios will tend to follow that of government securities. Yes it would approximate that of UITFs if the investment outlets are more or less the same. Hard to answer such a general question but it would approximate a little more than one year Tbills if kept for a year or more.

 

Fine print is historical yield is not a guarantee of future performance.

[Dr_PepPeR]

Dr. Pepper

The minimum deposit for UITF is P100,000. For a period of one year and considering the risk involve, Can i earn after one year or do i need to keep it for 2 years?

Brentley

 

Different UITFs have different minimum subscription amounts.

 

Yes, you can earn after one year. It simply depends on the performance of the fund. UITFs will normally need a period of at least a year so if you think you want to cash in on the income, simply withdraw/redeem your units. No need to wait for 2 years unless you are waiting for something to be available.

[sharkhead]

The historical yield of trust funds with purely fixed income portfolios will tend to follow that of government securities. Yes it would approximate that of UITFs if the investment outlets are more or less the same. Hard to answer such a general question but it would approximate a little more than one year Tbills if kept for a year or more.

 

Fine print is historical yield is not a guarantee of future performance.

 

Would you have any idea on the historical yield of the non-fixed income UITFs?

[Dr_PepPeR]

Would you have any idea on the historical yield of the non-fixed income UITFs?

 

Yes but what are you looking for? Remember that UITFs only started last year so you only have that period to examine and base your conclusions on. Aside from this, what would you consider non-fixed income UITFs? Some balanced UITFs have 30 - 20 percent in equities while the so called equity UITFs have 50% or more in equities. There is always a fixed income component inherent in such Funds. Are you looking at anything in particular?

[CodenameV]

After my problems with metrobank especially with regards to the transparency, I have decided to move all of uitf's to bdo. some banks like bdo and hsbc/ing have weekly updates and economic outlook that would serve as an indicator of how the trends affecting the direction of where our investments are going. At the very least, i could have trim some of the opportunity loss that i incurred when i pulled out from my metrobank starter fund to preseve some of my gains.

I've talked to the trust departments of bdo and metrobank and the way they deal with investors is very different. metrobank believes that the branch tellers should be the ones to educate and to inform their clients about their uitfs while bdo gives them the option of either being informed thru the branch or email.

I had problems with tellers regarding simple transactions like check deposits so I will have problems with the credibility of tellers explaining such concepts like ROP's, CP's, FXTN's, SSA's, etc.

[Dr_PepPeR]

After my problems with metrobank especially with regards to the transparency, I have decided to move all of uitf's to bdo. some banks like bdo and hsbc/ing have weekly updates and economic outlook that would serve as an indicator of how the trends affecting the direction of where our investments are going. At the very least, i could have trim some of the opportunity loss that i incurred when i pulled out from my metrobank starter fund to preseve some of my gains.

I've talked to the trust departments of bdo and metrobank and the way they deal with investors is very different. metrobank believes that the branch tellers should be the ones to educate and to inform their clients about their uitfs while bdo gives them the option of either being informed thru the branch or email.

I had problems with tellers regarding simple transactions like check deposits so I will have problems with the credibility of tellers explaining such concepts like ROP's, CP's, FXTN's, SSA's, etc.

 

Your experiences simply reflect two different approaches by banks in dealing with their UITF clients.

 

For Metrobank, UITFs are considered branch products, which means the branch is responsible for informing their clients and booking the client's placements with the branch. The Trust therefore does not deal with the individual clients, it does not even know who they are as they are clients of the branches. Any notices, information, payments etc are handed down by the trust department directly to the branches for proper disposition. If you were not satisfied with the branch personnel, that should be their concern, not the Trust Department. If you feel that you were not helped by the Trust Department, it is simply because they do not know you, since you are a branch client.

 

For BDO, they are making up for the shortcomings of the way their branches marketed their UITFs. If you were accommodated by their Trust Department, think of it more as damage control on their part.

 

Of course tellers cannot discuss UITFs with you. They are not capable, nor are they licensed to market UITFs. Yes, you need to be certified to do this and only marketing personnel at the branch who have taken and passed a certification exam are authorized to discuss UITFs. I suggest you talk to the branch manager and he will refer you to the proper person or even do it himself.

[FF]

hi doc ! have a small nest egg in CTF in equi pcib . problem is ... they're moving from ctf to uitfs by october ( cb ruling yata or sec i dunno which) .

 

how does this affect me ? acc to my brnach mgr ... mas maganda raw rates as ytd ng uitf is around 12% p.a. versus the 7 % guaranteed im getting now ...

 

any advice doc ?

[Dr_PepPeR]

hi doc ! have a small nest egg in CTF in equi pcib . problem is ... they're moving from ctf to uitfs by october ( cb ruling yata or sec i dunno which) .

 

how does this affect me ? acc to my brnach mgr ... mas maganda raw rates as ytd ng uitf is around 12% p.a. versus the 7 % guaranteed im getting now ...

 

any advice doc ?

 

Whether you like it or not, CTFs will be wound down by October 26, 2006. If you do nothing, your CTF placement will be moved to a UITF at best or at the worst, they will simply put it in savings. The BM said 12% but that is year to date, not per annum. That means from start of the year to current date, the rate is 12%, if you annualize it (per annum) that is pretty high. You have to remember that is only the historical rate and there is no guarantee that it will perform just as well in the future. But considering your alternatives which is special savings and time deposit, then I suggest you go to a fixed income medium term UITF. At least you will have steady but not spectacular rates of return much much better than special savings or timed deposit. By the way, the 7% is not guaranteed for a CTF, a CTF's return is much more manageable since it is on an accrual basis and not marked-to-market.

[FF]

Whether you like it or not, CTFs will be wound down by October 26, 2006. If you do nothing, your CTF placement will be moved to a UITF at best or at the worst, they will simply put it in savings. The BM said 12% but that is year to date, not per annum. That means from start of the year to current date, the rate is 12%, if you annualize it (per annum) that is pretty high. You have to remember that is only the historical rate and there is no guarantee that it will perform just as well in the future. But considering your alternatives which is special savings and time deposit, then I suggest you go to a fixed income medium term UITF. At least you will have steady but not spectacular rates of return much much better than special savings or timed deposit. By the way, the 7% is not guaranteed for a CTF, a CTF's return is much more manageable since it is on an accrual basis and not marked-to-market.

 

salamat doc pepper ! you da man ! :cool:

[Dr_PepPeR]

salamat doc pepper ! you da man ! :cool:

 

No problem sir. Just ask if I can help you with anything else about trusts.

[guard]

HI Dr Pepper. Any recos on what UITF's can I place my hard earned money? I'm more into the conservative placements. Thanks!

[Dr_PepPeR]

HI Dr Pepper. Any recos on what UITF's can I place my hard earned money? I'm more into the conservative placements. Thanks!

 

If you are the more conservative type, look for money market, fixed income or bond UITF products. These have no stocks or equities and the fixed income instruments they invest in tend to have a mixture of short and long term government securities. Depending on how conservative you are, you can choose among them, depending on their asset allocation, by looking at what are the outstanding investments in their fund. The trust departments of banks will normally have the latest asset allocation on a daily basis. You can ask the branch you are a client of and let them request from the head offce Trust to provide you with a hard copy.

[teban]

hi doc pepper you seem to know the UITF like the back of your hand.

 

if you were to choose which bank does give the best service, and rates for the UITF? i am also planning to get one.

[bRIX]

^ I suggest BDO...

[Dr_PepPeR]

hi doc pepper you seem to know the UITF like the back of your hand.

 

if you were to choose which bank does give the best service, and rates for the UITF? i am also planning to get one.

 

In terms of service, you should go to the bank branch you are more comfortable with. Remember that UITF is the only trust product that is available through the brances so if service is what you're after, choose the branch of a bank that values you as a client. In terms of rates, it depends on the performance of the NAVPUs. My own personal bias is Metrobank but it depends on which UITF product. Their high end peso and dollar funds seem to be doing well.

 

^ I suggest BDO...

 

Nothing wrong with BDO itself but make sure the branch personnel know what they are talking about when you ask them about UITFs. Just my opinion but most of the UITF panic that happened last May was due to the mis-marketing of the UITF products by their branch personnel. Take a look at the performance of their UITFs from May, 2006 as they were one of the hardest hit during that black week of May.