Why Even a 0.5% Difference in Fees Matters

DEAR INVESTOR JUAN

Dear Investor Juan,

Your blog is really a good find and very helpful for educating newbies. Thank you very much! Now I am seeking some opinion from you. While checking the UITFs of BDO, BPI and Metrobank, I came to know that BDO have the lowest fee - 1% while Metrobank charges the most at 2% plus others. Am I correct in this or I am missing something?

Regards,
Jovy

Dear Jovy,

Perfect timing, I've been planning to discuss the effect of differences in fees in investment returns. Maybe this illustration can help convince you that even a "small" difference in management fee matters.

Say there are two equity funds (UITF or mutual fund), A and B. The returns of the two funds, before management fees, in years t = 1, 2, 3... are as follows:

Fund A:

rA1, rA2, rA3, ...

Fund B:

rB1, rB2, rB3, ...

So that after 1 year, an investment in A will have grown by 1 + rA1 times, in 2 years by (1 + rA1)(1 + rA2) times, in five years by (1 + rA1)(1 + rA2)(1 + rA3)(1 + rA4)(1 + rA5), and so on.

If A charges an annual management or trust fee of 1%, then the after-fee value of an investment in A after 1, 2, and 5 years are:

After 1 year: (1 + rA1)*(1 - 1%) = (1 + rA1)*0.99
After 2 years: (1 + rA1)*0.99*(1 + rA2)*0.99 = (1 + rA1)(1 + rA2)*0.99^2
After 5 years: (1 + rA1)(1 + rA2)(1 + rA3)(1 + rA4)(1 + rA5)*0.99^5 = (1 + rA1)(1 + rA2)(1 + rA3)(1 + rA4)(1 + rA5)*0.95

Which means that if you invest in the fund for 5 years, 5% of the value of your investment would go to management fees. And if you invest in A for 30 years, your investment will have the following value at the end of the period:

(1 + rA1)(1 + rA2)...(1 + rA30)*0.99^30 = (1 + rA1)(1 + rA2)...(1 + rA30)*0.74

Let's say B charges a 1.5% management fee. A 30-year investment in the fund would result in:

(1 + rB1)(1 + rB2)...(1 + rB30)*0.985^30 = (1 + rB1)(1 + rB2)...(1 + rB30)*0.64

Assuming that the performance of an equity fund does not depend on the skill of the fund manager so that the long-term return (e.g., 30 years) of two equity funds on any given year is the same,

(1 + rA1)(1 + rA2)...(1 + rA30) = (1 + rB1)(1 + rB2)...(1 + rB30)

This means that compared to a fund that charges 1% per year, investing in one that charges 1.5% results in a 14% loss in value (0.64/0.74 - 1) over a 30-year holding period.

The table below compares the effects on value of different combinations of fees and holding periods.

Holding period	1.00%	1.50%	2.00%	3.00%	4.00%	5.00%
5	.9510	.9272	.9039	.8587	.8154	.7738
10	.9044	.8597	.8171	.7374	.6648	.5987
20	.8179	.7391	.6676	.5438	.4420	.3585
30	.7397	.6355	.5455	.4010	.2939	.2146

So to answer your question, for a 30-year investment, a 2% fee will reduce the value of the fund to 55%, compared to 74% for a 1%-fee fund. It means if you invest in the 2% fund, you'd be losing 26% more (55/74 - 1) of the value of your fund.

I hope this answers your question.

Short Answers to Unanswered Questions: Preferred Shares and Other Things

DEAR INVESTOR JUAN

Dear Investor Juan,

Am a regular reader of your blog and while you have some articles there regarding preferred shares, I would like to ask the following regarding the dividend rates that goes with the issuance of these shares:

• How does one company determine the dividend rates for these preferred shares? 
• What do they use as basis for the dividend rates?
• Do public companies have different basis for the dividend rates being offered ("as sweetener") vs.private, non-listed companies (if they wish to issue preferred shares to existing stockholders)?

Would appreciate if you can share your insights on the above matter.

Thank you and more power,

Vic


Dear Vic,

Here are my answers to your questions.

Firms issue preferred stock to raise money to finance projects or other uses. It's like a more expensive alternative to borrowing. The dividend rate on preferred stock is primarily determined by the market: the dividend yield on outstanding preferred shares issued by companies of the same risk serves as a benchmark. The dividend rate also reflects how much return investors are demanding for lending out their funds.

I'm not so sure about my answer to your last question because I'm not very familiar with preferred stock issues by private companies (as I think they are quite rare), but these should have a higher dividend rate than preferred stock issued by a listed company in the same industry and of the same size because of the following reasons:

• An unlisted firm would be subject to less stringent reporting requirements, and would be less transparent, and thus riskier, in the eyes of investors.
• Preferred shares of an unlisted firm would not be tradable in exchanges, and this lack of liquidity would prompt investors to demand a higher return.

***

Dear Investor Juan,

I would like some advise on investing in BDO UITFs. I am currently a college student and really interested in investing at an early age. I am willing to invest about more than 10K in a BDO UITF product. Could you please explain to me the ff.:

1) The fees/charges I have to pay in investing in BDO's UITF.
2) Do you recommend this EIP Program by BDO?
3) Is 10K enough to start investing?

Thank you. 

Louie

Dear Louie,

I would only suggest investing in an equity fund if you don't have any debt, you already have an emergency fund, and you can afford to invest long-term. So if all these conditions are met, then here are my answers to your questions:

1) You don't have to pay anything. All fees and taxes are automatically deducted and paid from the fund's assets and are already reflected by the fund's NAVPU.
2) I'm okay with enrolling in an automatic investment scheme. Deciding which bank you would buy a UITF from is all up to you.
3) Yes.

Good luck!


***

Dear Investor Juan,

Got any good recommendations for a first credit card? I really need to get one soon.

Marvin


Dear Marvin,

Local bank credit cards have lower interest than foreign bank credit cards, so I suggest that you just get one from a local bank that you already have an account with.

Almost-Forgotten Emails (Part 2)

DEAR INVESTOR JUAN

As I was trying to reduce the number of unread emails in my inbox, I discovered a handful of emails from almost half a year ago. Here's my attempt to make up and apologize for the oversight.

***

Dear Investor Juan,

Helpful po talaga yung blog mo. Mejo nagiisip isip po ako ngayon. Kasi ang balak ko po is to invest or purchase ng units every month sa bpi equity ko, im planning 2k-4k per month. And Im planning to do it for a long time. Tapos I have a friend na gusto mg invest sa individual stocks, yung kuya nya kasi ganun yung gngwa. Citisec po yung broker nla and I saw there EIP na 5k ang starting investment then pwd rn mgaadd anytime na gusto mo. Im thinking of investing din sa individual stocks kng san alam ko n tatagal and lalaki p yung company. 

My question is, kung papasok ako sa individual stocks, baba po yung ilalagay ko sa equities ko, and sabay ko po silang lalagyan ng pera monthly ? Should I just focus on equities or I can also try individual stocks? And do you have feedback about Citiseconline? 

Thank you IJ. 

Rek
February 6, 2013


Dear Rek,

Stick to the equity fund. Investing in individual stocks is too risky. There's not fool-proof way to pick stocks that will consistently outperform the market index or diversified equity funds. Also, by investing in individual stocks, you subject yourself needlessly to unique risk, which I have discussed in this post.

Finally, try to convince your friend to move to an equity fund, if it's not too late already.

***

dear investor juan,

good evening sir.
i've been reading your blogs a lot since i stumbled into it last week. i love your blog! it's been a great help.
from reading your blogs, i was already decided this morning on investing 1M on bdo equity funds.
but when i asked for an opinion from a metrobank investment officer about investing in equity funds now,she said it's better if i wait for the market correction. and it's too expensive now.
when i checked bloomberg.com just now,it increased by 1.27%.
what is your take on this sir?
i'd love to hear from you.
thank you.

kristina

February 18, 2013

Dear Kristina,

Well, in hindsight, the investment officer that you talked to appears to be a genius since the correction that he mentioned seem to have happened just recently.

It's kinda funny that so-called experts have a knack of saying that a correction will happen, but fall short of saying exactly when it will happen and by how much prices will go down.

Anyway, with regard to investing in the long term, short term fluctuations--"corrections" included--does not really matter. And if you can't afford a long-term horizon, I suggest investing in something safer like bond or money market funds.

***

Dear Investor Juan,

I have bdo and metro uitf and would like to know if it is a good time to invest with pnb-allied uitf. Pnb-allied uitf performed well for 2012 and I was thinking of bdo-equitable/pci merger,  now the bdo equity fund which I believe was originally equitable-pci product is performing way ahead of bpi or metro equity fund. So my question is in such mergers, does the uitf become better, what do you think of pnb-allied merger in particular will it be good time to invest in its uitf? Though I have exsisting accounts with both banks, the bank personnels/manager is not much help when I inquire saying the merger has just taken effect (feb 9) so no info is given to them.

Thanks,

Maxine

February 19, 2013

Dear Maxine,

I don't have data to support this claim, but I strongly believe that events such as bank mergers have nothing to do with the performance of UITFs. 

The performance of a fund depends on the performance of its constituent assets, and the composition of the fund (of a particular type) is determined by the fund manager. However, US data shows that skill may not be enough to consistently beat the market index. Finally, high fees make it even more difficult for investors to earn market-beating returns. IMO, neither of these factors--the skill of the fund manager and the level of fees--has anything to do with bank mergers.

Almost-Forgotten Emails (Part 1)

DEAR INVESTOR JUAN

As I was trying to reduce the number of unread emails in my inbox, I discovered a handful of emails from almost half a year ago. Here's my attempt to make up and apologize for the oversight.

***

Dear Investor Juan,

I have been visiting your blog for the past few months or so.

I had just cleared all my debts I have incurred while I was in college and my not so fortunate first job.

I was just starting to build up some savings when I stumbled upon your blog.

It was very reassuring knowing I was on the right track while reading your "A Guide for Newbie Investors" posts!

Thank you very much for sharing the things that you know.

I'm slowly trying to read backwards from your oldest post to the most recent ones, I'm even reading the comments!

Currently I am debt free and about 80% on my emergency fund.

As I have yet to actually venture into investing I am still a green horn so to speak and can only hope that you would indulged me and my questions.

• Do you still think UITF's are good vehicles for long term investments? (Already asked on older posts, just checking to see if it still is the case now)
• On the "A Guide for Newbie Investors", its says the next step for me would be to invest in assets with relatively lower risk, I did some checking comparing different funds, and it seems BDO outperforms its competitors every time (at least on the dates I've checked, as far as 2008 and even recent histories). Logically I would choose to invest on BDO, but seeing that their unit price for their balanced fund is currently valued at 3400~. It seems a bit steep and has a high chance that I would lose money even if I intend to invest on a long term basis. Am I wrong?
• Secondly, why is it that BDO balanced fund is valued so high compared to the other balanced funds and yet they still managed to out perform their competitors?   
• This is a silly, please humor me. Should the bank go under, would I still be able to claim my investments?
• Let's say I invested some money at 1000 pesos per unit and opt for the 5 year term, when maturity date came I discovered that the value per unit is 800 pesos. Naturally I wouldn't want to withdraw my investment just yet. Would they(banks) be able to force me into withdrawing my investment? What would happen in this scenario?

Regards,

Green Horn
December 28, 2012


Dear Green Horn,

In general, UITFs are still the best investment vehicle for the "ordinary" investor since they offer a convenient and relatively inexpensive way to diversify. At least until something better becomes available (like lower-cost index ETFs... hopefully).

• Evaluate UITFs based on fees, performance (% change in NAVPU over time), reputation, etc., but not on the actual NAVPU on any given day. It's misleading to compare NAVPUs of different UITFs because even if they are of the same type, their exact composition may be significantly different. If you're concerned whether a UITF is overpriced or not, then you should evaluate whether the stocks and/or bonds that comprise the UITF are overpriced.
• There is evidence that superior fund performance is as likely the result of expert fund management as plain dumb luck.
• If the bank whose UITF you have invested in goes bankrupt, you're still entitled to your units. You are the legal owner of your investment, and the bank is just the trustee of your funds and the UITF is not part of its assets.
• I'm not sure if I completely understand your last question, but if you're talking about a UITF investment, then no, I don't see how the bank can force you to divest from the fund.

***

Dear Investor Juan,

First and foremost, thank you for making planning for investments and future financial security easy to understand. I would just like to ask for your opinion regarding the best possible course of action for me to take right now. I am a 22 year old student and I have recently invested a bulk amount of Php 200,000 in an Equity UITF (November). I have also invested in an Easy Investment Program for the same Equity UITF.

Given the continuous growth of the stock market and the upcoming release of the first ETF's in the Philippines, I would just like to know if I should cash out my UITF's and/or

1) Invest in different company stocks listed in the PSE
2) Redirect my funds to the ETF's expected to be launched during the first half of this year
3) Keep my UITF investment as is

Which do you think has the largest potential for  long-term growth, especially for a student like me?

Thank you very much!

More power to Investor Juan!

Stephanie
January 12, 2013


Dear Stephanie,

There's no infallible proof that fund managers can consistently outperform the index over a long period of time, and we are 100% sure that a 0.5% trust fee is better than 1%. So if a lower-cost (i.e., has lower fees) fund such as an index ETF becomes available, I suggest transferring your investment to that.

Until then, don't redeem your units until you need the money, or have some better use for it.


***

Dear Investor Juan,

I just started last 2011, I all ready have at least Php 200,000.00 in the bank and currently Php 100,000.00 is in a time deposit. I also have a sun life mutual fund I current still paying. My dad want me to put the other Php 100,000.00 in a time deposit but in the current percentage the bank is offering its not worth it (it too low). The bank offered me to invest it in Peso Money market fund , peso bond fund , GS fund , Peso fixed income fund , Peso balanced Fund , Equity Fund. 1st off , I don't really know all of that. I would like to invest if possible but since i can't understand it. I kind off hesitant to invest.

Can you give me an idea on how should i invest? I know that the Philippines economy is getting better and will get better in the near future. I think it is good to invest in stocks. What direction should i go?

Also will the peso dollar exchange rate decrease? I would like to buy dollar if possible and also invest it.

If you have article i can read for reference it would help me a lot. I would like to risk my money but since i don't have an idea I can't. Also that some of the mention fund and bond that the bank is offering the minimum is 100,000.00 and 10,000.00.

Regards

Carina
January 21, 2013


Dear Carina,

It's impossible to accurately predict how the economy will perform in the near future. So-called experts can't do it, and mere mortals like us can't as well. Same goes for exchange rates.

The very LONG term is a different story, however. In 30 years or more, it would be safe to bet that advances in technology and increases in productivity will result in significant economic gains and greater wealth. In 30 years, life should be significantly better than it is today. Well, if it doesn't turn out that way, then we'll have more serious concerns than investment returns.

Given this premise, your investment decision should be determined by your risk preference and your investment horizon.

If you want zero chance that you'll lose principal, then invest in time deposits, t-bills, or money market funds. Also, these investments would be best if you'll need the money soon, like in five years or less.

If you can afford a bit of risk or are investing for the short or medium term, then invest in a fixed income fund or individual bonds.

Finally, if you have a long investment horizon, like at least 10 years, although longer would be better, then invest in an equity fund.

Short Answers to Unanswered Questions: "Stocks" vs. "Equity" Funds and Comparing Investment Strategies

DEAR INVESTOR JUAN

Dear Investor Juan,

I was also second guessing myself about retirement savings. Most of my retirement funds are in stocks. I was already thinking about transferring it to BDO Equity UITF and wasn't really sure if that's the way to go. Is it?

How exactly do I do this? Since the value of stocks that I have is about 850. Do I take out 50 per month and transfer that to the UITF? and how about the monthly savings that I have? (around 35/month) 

Sorry po kung maraming tanong. >_< I am just confuzzled now. I really thought that going into the stock market was the best way to earn make my money grow.

Ning


Dear Ning.

When you say that your retirement funds are mostly in stocks, how many stocks exactly? If your funds are spread across ten or more stocks, then your portfolio may already be sufficiently diversified (within the equity asset class) and you can choose to keep your funds in those stocks. To improve your portfolio's level of diversification, just invest future savings in an equity UITF.

If your funds are invested only in a handful of stocks, then you have significant exposure to unsystematic risk. To lower your risk exposure, sell some of your holdings and either invest in many other different stocks or in an equity UITF. How you do it--"one time, big time" or in installments--is arbitrary since there's no indisputable proof that "dollar cost averaging" is a superior strategy, contrary to popular opinion.

Finally, there's no reason to be "confuzzled." You're right, "going into the stock market" is arguably the best way to make your money grow. "Stocks" are the same as "equities"--investing in an equity fund is basically the same as holding a basket of individual stocks. The only difference is that if you invest in a few stocks you needlessly expose yourself to risk that can easily be eliminated with diversification. Again, I emphasize that for retirement savings, investing in a low-cost equity fund in the long term (20 to 30 years) is the way to go.


***

Dear Investor Juan,

Thank you very much for a very informative blog. 

I started investing only last year with a reputable global insurance company, so what i have is an insurance link investment. lately, i have been hearing a lot about mf and uitf, and my curiosity is awakened. thanks for blogs like yours and tv shows which explain everything, i now understand the pros and cons of these better.

I have been trying to do a mock computation of yields through bdo online, and i noticed that if i put my money, say 500k, from Jan. 2 - May 31, 2013 (method a), my gain would be more or less 68k. but, if i invest from Jan. for 30 days (method b), take it out, then reinvest it again for another 30 days, and so on until May 31, my gain would be about 82k. 

what is your take on that?

thank you so much. may God bless you in your advocacy. more power!

Anonymous


Dear Anonymous,

I'm not sure where the problem is, but you should earn the same returns with the two strategies since in Method B, whenever you reenter the fund you would be buying at the same NAVPU as when you last exited. Actually, if you're talking about an equity fund, then you should earn less with Method B because of early redemption charges.

BDO Equity UITF (EPCIBEQ:PM) Now Charges Front and Back Load Fees? It Turns Out That It Does Not

I'm not exactly sure when it happened, but the last time I checked the fund still was not charging sales fees. Now, according to Bloomberg, it is.

When I saw this, it seemed to me that BDO was taking advantage of the growing popularity of UITFs and stocks, and investing in general. But even if it were true, charges like this are not necessarily bad. If the fund is performing better than its peers to a degree that makes it worth paying extra, then there's no reason not to invest in the fund.

What's confusing is that BDO has ANOTHER equity UITF: the BDO Institutional Equity Fund (BDOEQTY:PM). And this one does not have a sales load.

I'm not sure how different these two are in terms of composition--BDOEQTY is not listed on the page where monthly reports for BDO UITFs can be found, and all I can find is this report from last year.

Based on performance, however, these two funds have performed very similarly in the past 5 years, although BDOEQTY has a slight edge over EPCIBEQ:PM.

Remember, sales loads (i.e., the front load and back load) are not reflected by the NAVPU, so the difference between BDOEQTY and EPCIBEQ would be more substantial if we take these additional fees into consideration. If EPCIBEQ does charge sales load fees. But as you'll see in the updates below and the comments section, it really does not.

UPDATE 22 April 2013, 2:14pm

Some readers have pointed out that there has been no mention of the sales load in the BDO Equity UITF monthly reports. Another reader has called BDO, who told her that BDO EQUITY UITF has NO SALES LOAD. So until we get official confirmation, I'll leave the post as is and keep everyone updated.

UPDATE 22 April 2013, 6:52pm

As you see in the comments section below, one of our good friends at BDO Trust, Ms. Ma. Lourdes T. de Vera, went out of her way to clarify the issue. So EPCIBEQ does not charge sales load fees as indicated on Bloomberg. You'll find her full message on the comments section, but for the benefit of other readers, I will post her message in the post body below:

***


Dear  Investor Juan, 

On behalf of BDO Unibank, Inc. - Trust and Investments Group (BDO-Trust), I would like to inform you that all BDO UITFs, including the BDO Equity Fund, do not charge any sales load (i.e. front or back load fees).  In fact, BDO-Trust prides itself in charging one of the lowest fees in the industry. 

Furthermore, in the event that there will be any such changes in the features or fees of the BDO Equity Fund or any of our funds, we are mandated by Bangko Sentral ng Pilipinas' regulations to go through an approval process which includes a 30-day advance notice to all existing participants or investors (to give them  time to withdraw if they are not amenable to the changes). Such notice has to be posted in our branches and in our website. 

We also wish to inform you that we have  requested Bloomberg to correct the wrong information that the BDO Equity Fund is charging front and back load fees. 

To answer the other question on what is the difference between the BDO Equity Fund and the BDO Institutional Equity Fund, the former is for retail clients while the latter is for tax-exempt entities whose tax-exemptions are supported by Bureau of Internal Revenue (BIR) tax-exemption certicates. 

For additional clarifications, please do not hesitate to call us at tel nos. 878-4265 and 878-4244 or  email us at investments@bdo.com.ph. 

Thank you.


Very truly yours, 

Ma. Lourdes T. de Vera 
Senior Vice President 
BDO Trust and Investments Group  

How UITFs Work

DEAR INVESTOR JUAN

Dear Investor Juan,

patulong naman, nagugugluhan kasi po ako kung bakit sa mga comments nyo sa UITF's particularly equity funds na bakit na tratrade nila yung units nila?dba passive to?nag iinvest ka lang tapos ang mga profesionals na ang bahala mag laro sa money mo? 

Anonymous


Dear Anonymous,

Thanks for your question. Let me start by briefly explaining how UITFs work.

The trust/asset management arm of a bank creates a fund with a pre-defined objective, which mostly depends on what kind of fund it is: equity, bond, money market, etc. This objective limits the kinds of assets the fund manager can invest in.

At the start, the fund is divided into a certain number of units at an arbitrary initial price: say, 1 million units at 1 peso each. The bank then sells these units to investors like you and I; using our example, by selling all 1 million units of the fund at 1 peso each, the bank collects 1 million pesos. These funds are not owned by the bank or its asset management department, but rather just held by it "in trust"--basically for management and safekeeping on our behalf as investors. The fund manager then invests our money in assets that meet the constraints defined by the fund objective, while trying to make decisions that are good for us at the same time. These decisions include buying and selling assets like stocks and bonds at any given time. For this service, the bank charges a certain percentage of the fund that is called the management or trust fee.

So depending on how well the fund manager's decisions turn out, the total value of the fund may go up or down at any given day. The fund's per unit price--its net asset value per unit or NAVPU-- is just the fund's total value minus all expenses (including the management fee and taxes) divided by the total number of units, so that may also go up or down. Since Philippine UITFs are a form of "open ended" fund, the bank may sell more units to other investors at the current NAVPU: while the total fund value will go up because of this, the number of units would increase in such a way that the NAVPU would remain the same.

So in the world of UITFs, there really are two kinds of investors. The first is the fund manager, who we entrust with our money, who we assume knows what he is doing and will do things with our interest in mind. The second type is us UITF investors. The same way our fund manager make buy and sell decisions depending on how prices go up and down, you and I can also buy and sell UITFs depending on how NAVPUs go up and down.

So yeah, the fund manager gets to play with our money. And we can play with our money, too, if we so choose. Or not, it's all up to you and I. :)

4 Steps in Using Lipper Leaders to Choose Investment Funds

(Thanks to Anonymous for sharing this.)

Lipper Leaders is a free online service under the Thomson Reuters brand that lets users screen and sort investment funds (e.g., UITFs and mutual funds) in various markets. In this post, I will take you through Lipper Leaders, how you can use it to choose a fund that best suits you, and some of its limitations.

1. Choose a fund type and classification

"Universe" pertains to market or country, so for most of us it's the Philippines. 

Under "Asset Type," we have the common types of investment funds: equity, bond/fixed income, balanced (under "mixed assets"). Please note that there are no "alternative" or "commodity" listed funds for the Philippines.

"Classification" refers to sub-types under main fund classes, such as different currency denominations for bond funds and geographic reach for equity funds.

The main "Asset Type" and "Classification" combinations that you should be interested in are the following:

Equity - Equity Philippines = for (peso-denominated) funds that are comparable with the PSEi
Bond - Bond PHP = for peso-denominated bond funds
Bond - Bond USD = for US dollar-denominated bond funds
Mixed Assets - Mixed Asset PHP Balanced = for peso-denominated balanced funds

"Fund Family" lets you choose funds offered by a particular bank. If you're looking for the "best" fund in an asset class, it would be best to leave this as "Any Fund Family."

2. Select a time period

Choices are 10 years, 5 years, 3 years, and Overall. "Overall" means since the introduction of the fund. Since UITFs have only been introduced in 2005 (or thereabouts), you'll only get limited results for "10 years." In choosing a time period, I suggest looking at the results for both "5 years" and "3 years" for consistent top performers.

3. Choose "Lipper Leaders" that match you goals

"Lipper Leaders" is just a fancy term for "selection criteria," or fund characteristics that investors should look at in selecting investment funds. Funds are rated in terms of these Lipper Leaders using a scale of 1 to 5, with 5 being the best for investors.

The five Lipper Leaders are:

Total Return = the total (accumulated) percentage change in the NAVPU of the fund over your chosen time period. A score of 5 indicates a high Total Return.

Consistent return = returns adjusted for volatility or risk. A score of 5 indicates consistently high returns

Preservation = ability of the fund to prevent loss of capital. A score of 5 indicates high capital preservation

Expense = a reflection of the fund's cost structure. A score of 5 indicates low fees and costs

Tax Efficiency = involves effects on taxes, but is limited to US funds

In choosing the "best" fund of a particular asset type, you can just leave the Lipper Leader boxes as "Any" and just sort the results later

4. View and sort results

After configuring the options mentioned above, click "Display Funds" to view the results.

The default view is sorted alphabetically by fund name. You can click on any column header to sort by that criteria. Clicking on the "3 Year Return" header, for example, will sort the funds from the lowest to highest return in the chosen period. Clicking it again will sort the funds from highest to lowest, like this.

You can also get more details about a fund by mousing over the fund name:

One limitation of the system is that it does not have information for fund costs, so you would have to get the information manually from monthly fund reports. In choosing a fund based on performance, please don't forget to consider costs because they do matter (remember that front/back sales loads are not reflected in the NAVPU).

Another feature that I would have loved is the ability to download historical NAVPUs, which are necessary in portfolio construction/asset allocation (UITF.ph is not working anymore, anyone know alternative sources?).

Despite these limitations, Lipper Leaders is still a great way to choose funds from the multitude of offerings in the market. I'm sure that in choosing a fund, you may have other considerations than the ones listed above, such as convenience, customer service, or brand strength; still, looking at total returns is a good way to start.

JUST REMEMBER: Lipper Leaders screens and sorts funds based on past performance, and past performance is not indicative of future results.

Short Answers to Unanswered Questions: Insurance Concerns and BDO vs BPI Part "N"

DEAR INVESTOR JUAN

Dear Investor Juan,

I’m 24 years old and is earning a decent income. About last month, I came across your blog and I’m glad I did. I just finished reading your all of your posts. Ever since I started reading your blog, I got into serious thinking about my future and finances. I just started opening investments in BDO and even enrolled in EIP. I’m aiming towards financial stability and having counter measures against the unpredictability that future brings. I’m still learning how to effectively manage my finances and make my money grow.

You caught my interest on your last post about insurances. Now I’m thinking of signing up for one. But I don’t really know much about it. First thing, which insurance company should I signup for? What plan should I go for? I’ve read few of Sun Life Financial’s products information but can’t decide. I’m actually quite confused about this one and I’m hoping you could provide your view about this to help me get a sound decision.

I hope you’d be able to shed some light to this. Thank you for taking the time to read my mail.

jbsalts


Dear jbsalts,

Thanks for your support, it means a lot to me.

To answer your questions, first get details about your employer-provided insurance coverage, which I'm sure you already have, from your HR department.

Get more life insurance only if you have dependents and/or you are the breadwinner of the family, and you think your company coverage is not enough.

For health insurance, you can ask your HR department if you can upgrade your company-provided coverage to include your family members if they don't have health insurance yet.

Regarding Sun Life's Financial products and other variable-life instruments, you might want to check out some of my past posts about the topic. In a nutshell, I advice against such insurance and investment hybrids because getting insurance and investing in UITFs separately is usually cheaper.

I hope I was able to help. Good luck!


***

Dear Investor Juan, 

I'm a newbie investor, I've just opened an equity and bond fund in BPI last January and that's before seeing the track record of BDO vs BPI. I'm really tempted to transfer to BDO cause it looks like BDO fund managers are a lot better. The thing that turns me off a bit is the convenience factor. In BPI I can monitor my investment online, and can subscribe and redeem online as well. If I choose too I can also do that regular subscription plan. I was searching the BDO website (I don't have a BDO account) trying to look for any mention of an online facility for investment but I could not find any, so it looks like I can't monitor online and I would need to go to the branch. I guess I'm just being 'tamad' since as you mentioned I can just do go to bloomberg website and see the latest price and do some math everyday to see If what I'm earning (loss)... I guess I just wanted to get your opinion on the convenience factor of having an online facility for BPI, vs no online.

Prince


Dear Anonymous,

I share the sentiment that one important (maybe the only?) benefit of going with BPI is convenience. However, how much that advantage is worth is purely subjective. Like you said, you're tamad, so maybe the convenience is worth more to you than a person who is not so tamad.

To help you decide, maybe see how much better a comparable BDO fund has performed against your BPI UITF in percent terms ever since you started investing, then multiply that by your initial investment to get a peso amount. Then ask yourself: is the extra convenience provided by BPI worth this much? If yes, stick with BPI; if not, move to BDO. It's like if you need to buy a sachet of shampoo and there's a store beside your house that sells it for 6 pesos and another store 5-minutes on foot away sells it for 4 pesos. Is the extra 10 minutes of effort worth the 2 pesos that you save? Only you can answer that.

(Follow up)

Hi Investor Juan, me again. I did some number crunching using the BDO and BPI investment calculator, and If I've done it right (and the calculators are correct)then below are my result comparing with my 50K investment in BPI and BDO. Summary: Dates Covered (Jan-Feb 2013 & 2012-2009) BDO Bond Fund Ave. Yield: 5.496% BPI Bond Fund Ave. Yield: 4.754% Difference: 0.74% Summary: Dates Covered (Jan-Feb 2013 & 2012-2009) BDO Equity Fund Ave. Yield: 30.402% BPI Equity Fund Ave. Yield: 19.652% Difference: 10.749% My Assessment for myself: For the Bond fund: I'll stay with BPI (for now) The 0.74% advantage of BDO on the Bond Fund does not fully out weight the convenience factor of being able check/subscribe/redeem my bond fund in BPI's mobile app anytime I would like to. On the Equity on the other hand... the 10.749% advantage of BDO over BPI for the same amount of time covered (2009-2012 and Jan-Feb 2013) is VERY significant!!! I shall be opening a BDO account this month! :D

4 Things That You Need To Know about the "Special Expense" Item in BPI UITFs

In one of his recent comments, reader Ken has mentioned a "special" charge of 2,000 pesos per year for BPI UITFs. It was unclear what this expense was for, and how it was applied. To get some answers, I looked at some publicly-available documents and sought the help of BPI Asset Management (BPI AM) representatives. Here are what I found out.

1. The item "special expense" started appearing in BPI's monthly fund reports in December 2010 (after I published my comparisons here and here).

Screencap from BPI Equity UITF November 2010 Report

Screencap from BPI Equity UITF December 2010 Report

I checked the BPI Short Term, Premium Bond, and Balanced Funds and saw the same change in the December 2010 reports.

2. There is no such item in reports of other UITFs. I checked with RCBC, and they have confirmed this. And the latest report for BDO's equity UITF does not show this item.

Screencap from BDO Equity UITF January 2013 Report

Now before anyone panics or makes hasty conclusions, there are many possible reasons for this difference. It may be that by disclosing this expense, BPI AM just wants to be more transparent to its clients.

3. Just as the footnote says, the expense is for "publication" purposes. According to a BPI AM representative, the expense is for the publication of a BPI UITF's NAVPUs in relevant publications (such as Business Mirror). Based on this, it goes without saying that other UITFs that publish NAVPUs in periodicals should incur a comparable cost.

4. 2000 pesos is charged against a fund's net asset value or NAV (not to be confused with net asset value per unit) every year, not per account and not per investor. Based on BPI Equity UITF's latest NAV of around 3.75 billion pesos, the annual fixed expense of 2,000 pesos just amounts to 0.0000533% of the fund's value, so should not be a cause for concern for investors. Also, the expense (like all other non-sales expenses) is already reflected by the NAVPU at any given moment.

Personally, I think this "special expense" for publication is common with many other UITFs, and is really nothing new or something that we should be concerned about. How BPI AM decided to start disclosing it, how it is presented in BPI AM's reports, and how other UITFs don't disclose it, however, may cause some confusion and maybe even concern for potential investors of BPI UITFs. But regardless of whether other UITFs charge a comparable expense or not, at 2,000 pesos per year it is too small to make a difference in any fund comparison exercise.

Monitoring Investment Performance

DEAR INVESTOR JUAN
PERSONAL FINANCE 101

Dear Investor Juan,

Just want to say that your blog is the answer to my prayers hehe investment terms na madaling maintindihan. I'm planning to invest in UITF equity for my daughter's college education. I have a question lang regarding the ROI. Meron ba syang closing balance for the day or talagang based sa NAVPU kung kelan ka naginvest? For ex, 5 years ung 10k mo sa equity, say at 100 napvu. After 5 years 120 napvu on the date of selling ko. Does that mean in 5 years kumita lang ng 2000 ung 10k? Please enlighten me. Thank you.

Here's another question: initial investment ko is 10k then add ako ng add ng 10k every month (making my total investment 120k for one year, how do you compute that? base sa basic accounting ko

month 1: 10,000 at 100 Buying NAVpU, 110 Selling NAVpU = 11,000

month 2: 11,000(from month 1)+10,000 (addl inv) = 21,000 at 110 buying NAVpU, 120 selling = 22909.09

month 3: 22909.09(from month 2)+10,000 (addl inv) = 32,909.09 at 120 buying NAVpU, 130 selling = 35651.52

I'm checking kasi paano computation para pag nakipag-usap ako alam ko yung sinasabi nya at alam ko yun sasabihin ko.

Thank you so much!

Marissa


Dear Marissa,

You're right, if you invest in a UITF, your returns will solely be determined by the NAVPUs at the time you buy and at the moment you sell.

Your computations are correct, but allow me to try to restate them in a (hopefully) simpler way. Let's just assume that you won't sell at the end of every month and just compute for the value of your investment on paper. We can also compute for the percentage return at the end of every month using the formula

Month 0 (beginning of Month 1), NAVPU = 100

Invest 10,000 pesos or 100 units

Total "Money Out" = 10,000
Total Investment Value = 10,000

Month 1 (end of month), NAVPU = 110

Total "Money Out" = 10,000
Total Investment Value = 100 units * 110 = 11,000

Percentage return after one month = (11,000 - 10,000)/10,000 = 10%

Invest additional 10,000 pesos or 10,000/110 = 90.91 units
Total units after additional investment = 100 + 90.91 = 190.91 units

Month 2 (end of month), NAVPU = 120

Total "Money Out" = 20,000
Total Investment Value = 190.91 units * 120 = 22,909.20

Percentage return after two months = (22,909.20 - 20,000)/20,000 = 14.55%

Invest additional 10,000 pesos or 10,000/120 = 83.33 units
Total units after additional investment = 190.91 units + 83.33 = 274.24 units

Month 3 (end of month), NAVPU = 130

Total "Money Out" = 30,000
Total Investment Value = 274.24 units * 130 = 35,651.20

Percentage return after three months = (35,651.20 - 30,000)/30,000 = 18.84%

The computations for percentage return shown here is simple and straightforward, but does not take the time value of money into account. In a follow up post, I will discuss alternative ways of computing for investment returns that takes this into consideration.

I hope I was able to answer your questions. Good luck!

Philequity and BPI's Stock Index Funds: An Objective Comparison

Thanks to the person who made this comment for inspiring this post (unfortunately, it has already been removed by the poster):

There is a passive fund in the Philippines -- its called PHILEQUITY PSE INDEX FUND (Bloomberg Ticker PHILPSE:PM). Unlike the actively managed fund, the starting investment is P 50,000. This fund is not actively traded.

First let me clarify that currently no fund in the Philippines is traded--actively or not. Mutual funds and UITFs are not traded, and investment shares or units may only be sold/redeemed through the fund provider. But that's a story for another day.

Before seeing this comment in my inbox, the only stock index (i.e., PSEi) fund in the Philippines that I was aware of was BPI's Philippine Stock Index Fund. But even if I'm biased for passive investing, as some of you may know, I avoided talking about that fund too much because I thought the minimum investment requirement was too high and the management fee too steep. So maybe you can imagine my *excitement* upon finding out that another index fund was available in the country.

After only a few minutes of cursory online digging, I've uncovered some VERY interesting information about which I can only say... WOW (non-judgmentally, but maybe a wee-bit sarcastically).

As a result, I've come up with a 100% (best effort) objective comparison between Philequity's PSE Index Fund (Bloomberg Ticker PHILPSE:PM) and BPI's Philippine Stock Index Fund (Bloomberg Ticker BPIPHID:PM).

All the information below can be found on Bloomberg; try clicking on the above links or refer to this guide that I posted a while ago.

Minimum and Additional Investment Requirement

	Minimum Investment	Minimum Subsequent Investment
BPI	50,000	10,000
Philequity	200,000	50,000

Fees

BPI

Philequity

Current management fee is the percentage of the investment value deducted annually for management and administrative expenses.

Front load is the percentage of the investment amount deducted at the beginning of the investment period. If you invest 100,000 pesos in a fund with a front load of 5%, you will only receive 95,000 pesos worth of units/shares.

Back load is the percentage of the investment value deducted at redemption.

Both the front load and back load fees are supposed to go to the fund agents, brokers, and salespersons.

Redemption fee is the percentage of the investment value deducted when units/shares are redeemed before a predetermined minimum holding period.

Performance vs. the PSEi (PCOMP:IND)

In the past (1) year, BPI has slightly outperformed the PSEi.
In the same period, Philequity has underperformed the PSEi.

In the past 3 years, both BPI and Philequity have closely tracked the PSEi
without any discernible difference in performance.

In the past 5 years, Philequity has significantly outperformed both BPI and the PSEi

Given the following information, which of the two funds above is more attractive to you?

***

I'm sorry, I know I promised to be objective in this post, but I hope you would allow me this one insinuation.

Looking at the Philequity webpage for its index fund, we see the following comparison against the PSEi.

For the life of me, no matter how I look at the data, I just can't reconcile this implied discrepancy in performance between the Philequity index fund and the PSEi, and the Bloomberg comparisons that we saw earlier. Something's amiss, most definitely. And whatever it is, at worst it is irresponsible, unethical, and unconscionable.

Short Answers to Unanswered Questions: Catching Up with Emails

DEAR INVESTOR JUAN

Dear Investor Juan,

Hello there!

I happen to read some of your entries while self-educating on investing. I am a 19-yr old fresh grad who is very interested to know more about investing. As of now, I am reading stuffs about stocks and mutual funds. I know they are risky and that's why I read a lot. If you are kind enough to send me some ebooks about investing for beginners, I'd really appreciate it.

All the best,
Donna


Dear Donna,

You might want to start with Burton Malkiel's A Random Walk Down Wall Street.


***


Dear Investor Juan,

I have been subscribed to your posts ever since and I appreciate your sharing of your knowledge in finance.

Bloomberg.com used to publish company betas (including PSE listed stocks). These betas could no longer be seen since they have replaced their "portfolio" feature to just a "watchlist".

I have checked Thomson Reuters (Reuters.com) and their betas are wrong since they are based on S&P500.

Do you know of other sites that compute and publish these betas?  I don't have much historical data so it is also hard to compute by myself (plus a bit time-consuming hehe)

Best Regards,
ScIoN


Dear ScIoN,


Sorry for the late reply.

As far as I know there are no locally-published betas for Philippine stocks. There was one study made by Dr. Joel Yu of the UP College of Business Administration on CAPM for Philippine stocks; I think this paper includes estimates for beta, so you might want to check it out. Not sure if the paper is available online, if not you can contact Dr. Yu for a copy, I'm quite confident that he will grant your request (he was my MBA prof, and he's quite a nice guy).

If you're going to do serious analysis, I suggest that you buy data from the PSE and just compute for beta on your own. Easy enough to do with Excel if you have data.


Dear Investor Juan,

Do you know what happens to your stocks if your brokerage firm goes bankrupt?

Thanks,
Eugene


***

Dear Eugene,

If your broker goes bankrupt, you would still own your shares and both you and the broker would have records of your share holdings. And since your broker would not have physical "possession" of your money or shares, it would not be able to use these to satisfy its financial obligations as it goes through bankruptcy. I'm not sure exactly how it would work, but as far as I know you should be able to trade your shares through another broker.

I hope this helps.


***

Dear Investor Juan,

I have saved up a few thousand dollars from working for an international company, recent news says that exchange rate could go as Php 32 to USD 1.

It is tucked away on a regular dollar account, do you think I should convert it to pesos? Or it is far better on dollar denominated UITFs? Or just keep it on my savings account? 

Thank you in advance.

Anthony


Dear Anthony,

Yeah I'm in the same boat with my HKD. 32 to 1? It's possible, but I'm not so sure.

Just based on historical exchange rates, right now the Philippine Peso is very expensive compared to the USD. So regardless of whether the peso will continue to strengthen or revert to its level a couple of years ago, I suggest that you keep your earnings and savings in USD or USD denominated securities, and just convert to peso as needed. The choice between a USD savings account and a USD UITF is an investment decision, though, and would have a different set of considerations.


***

Dear Investor Juan,

Just would like to ask kung maganda bang investment vehicle for an OFW ang UITF? let's say po for 5 year term. gagamitin ko sana as my appliance fund sakaling makabili me ng bahay. Ano po ang maipapayo nyo sa akin, para magamit ko po ito to maximize my investment potential. I already have an emergency fund, meron din po akong Insurance (vul), may EIP po ako, tsaka may nakalagak po akong pera sa SUNLIFE flexilink na nasa equity fund. Thank you po for reading my letter and more power to you.

Regards.
Bob


Dear Bob,

Yes, UITFs in general are good investment vehicles for anyone, not just OFWs, as long as you know and accept the risks involved. Actually, you are already invested in UITF-like instruments with your VUL, EIP, and Sunlife fund. What I suggest is that if you want to invest more in UITFs and mutual funds, just add to your current holdings instead of investing in a new one. Adding more funds to keep track of would just result in additional hassle (and possibly, costs) without any significant additional benefits.

I hope I was able to answer your questions, Bob. Good luck.

Short Answers to Unanswered Questions: Stock Delisting, Pulling Out of a VUL, and Non-Monetary Returns

DEAR INVESTOR JUAN

Dear Investor Juan,

I am an avid reader of your posts and have just started investing 3 months ago. I currently have invested mostly on fixed income peso denominated notes as they I am not yet confident in my skill with stocks. From my readings on your post however I have not come across delisting of stock (maybe I have not read enough) from the PSE:

a. What happens to the stock?
b. Encashment after delisting?
c. Will the price still have a chance to go up?
d. Other concerns an investor should think before purchasing a stock which is going or planning to be delisted?

Sincerely,
Mike


Dear Mike,

Thanks for the question, it's a very good one. There are both negative and positive reasons for "delisting" from the stock exchange--making a stock unavailable for public trading. The "top-of-mind" reason, most probably, is if the company gets into trouble financially, such as if it is forced to go declare bankruptcy. In this case, investors should be able to get early warning from sharp and sustained declines in stock price, public disclosures, and even news reports, although losses may be unavoidable.

In some instances, though, a firm may have very good reasons to delist and revert to being "private," In this case, the firm buys back shares traded in the stock exchange, and public investors would receive a tender offer for their holdings.

In summary, and to address some of your issues regarding the possibility that a stock you own would delist, if it's because of the first reason then you should actually be concerned about whether the firm is capable of sustainable profitability rather than the possibility of delisting. And if the firm chooses to delist because of the second reason, then there's really no reason to worry because you should get at least the market value of your investment (more if the firm has reason to pay a premium for publicly-held shares) if it happens.


***

Dear Investor Juan,

I have started investing some of my savings in SunLife VUL (Equity Bond) since Nov 2007.
And i have started investing in BPI's UITF products, some in ODYSSEY PESO BOND FUND and a little in ODYSSEY PESO CASH MGT FUND, about a year now. I read one of your article or comments about ODYSSEY and about VULs, and it seems its not a good one, should I redeem my investment and invest it somewhere else?

In your own opinion, don't worry I will not blame you in case anything goes wrong, where should I put these investments? Should I just hold it there, and just make new investment. I want to make sure that I am investing correctly.

Thanks,
Aubrey


Dear Aubrey,

According to the "search" function of this blog (a feature everyone would do well to learn to use), I've only talked about Odyssey funds only once, and even then I did not talk about either the Odyssey Peso Bond Fund or Peso Cash Management Fund. After consulting Bloomberg, I see that these funds charge management fees of 1% and 0.75%, respectively, which are comparable to similar products in the market (at least there's no front or back sales load). Just based on this, I have no reason to recommend that you pull out of these funds.

Regarding your VUL... As far as I know another important "cost" of VULs (apart from higher fees) is the cost of getting out of the agreement early. So I suggest that you first contact your agent and ask if you can terminate the coverage and recover the portion of your premium payments that was allocated to the mutual fund, then get back to me with your agent's answer.


***


Dear Investor Juan,

Greetings from Dubai!

Are you having an income directly by posting articles in your blog?

Regards,

Marlo
Accountant



Dear Marlo,

No, I don't. As a matter of fact, I even spend a small amount periodically for extra cloud storage (which is shared among all my Google accounts and websites, actually) and domain name registration. But that does not mean I don't get anything out of what I do.

This blog is very rewarding to me, albeit in a non-monetary sense. First, writing something regularly (~9 times a month!) serves as good practice for writing my dissertation and other "official" writing assignments. Second, this blog gives me an opportunity to not only share what little I know about finance but also learn from the collective experiences of all you readers. And it forces me to learn about things that I don't know, or know very little about, and that's a very good thing. Finally, managing the blog, organizing and processing ideas about personal finance, helps me better manage my own finances to. Haha, so yeah, maybe the blog does offer monetary rewards, if only indirectly.

Short Answers to Unanswered Questions: Reinvesting Earnings, Money Market Funds, and Bond Bubbles

DEAR INVESTOR JUAN

Once again, it's time to catch up with some of your questions...


Dear Investor Juan,

Do you think it is a good strategy to sell units equivalent to the earnings of your original investment after a certain period of time lets say every 4 months? And re-invest on let say stocks?

Anthony


Dear Anthony,

The best way to reinvest earnings is to not redeem any of your units. "Cashing in" a portion of your investment and reinvesting the proceeds in stocks, as you suggested, would make better sense if you're originally invested in a non-equity fund such as a bond/fixed income or money market UITF and you want to diversify your portfolio. Reinvesting redemption proceeds into (more or less) the same kind of security may not make much difference in terms or risk and return to justify the additional transaction costs that you would incur, so maybe it would be better if you just keep your original investment intact.

***


Dear Investor Juan,

Good day!

Let me start by telling you how informative your blog is. I have a number of questions i want to ask you. I have recently invested a good amount of money in BDO's equity, Bond, Fixed-income and money market. The percentage of investments are as follows: 30%, 20% and 50 %. However i still have some money in the savings account. Should i put the remaining amount in a money market which would produce a better return than a Saving account?

I also invested money in foreign denominated funds. These being Dollar money market, Dollar bond fund, dollar medium term bond all at BDO. Moreoever, I have invested in the ALFM euro bond fund of BPI. My concern with this is the recent interest cuts by the Feds and ECB on interest rates have seen interest rates reach new lows. While this would mean that bond prices rise, at what point can the US and Europe sustain these borrowings until the burden becomes to heavy and a government defaults? Wouldnt this produce a bond bubble?

I also would like to ask how these Foreign denominated bond funds would fare in the long run considering that interest rates are set until 2014 in the US and in the foreseeable future for europe? lastly given that these Bond funds are mainly invested in ROP bonds would they be affected by the changing bond prices of the US and euro?

Hoping for your positive response.

Respectfully yours,

student


Dear student,

Wow, that's a lot of questions. Unfortunately, I don't have answers for some of them.

The returns that you get from money market funds is essentially the price of liquidity, of having ready access to cash that you get from a savings account. So sure, invest whatever amount you think you can afford to not be readily available in a money market fund, but remember that we all need to have some amount of cash at hand for various reasons.

If you were already investment in those fixed income funds that your mentioned before the rate cuts, then you should be happy because your portfolio value will already have risen, right?

Decreases in interest rates are a result of the injection of funds into the system by an economy's central bank (such as the Fed), and the central bank does this by buying securities such as bonds, not by selling them or borrowing money. So why would interest rate cuts result in a heavier debt burden for governments? Unless I'm missing something here...

Bubbles are created by unrealizeable/unjustifiable expectations, and bond price bubbles occur when investors bid up the price of bonds to a point where it can't be justified by interest rate cuts. Whether the current rise in bond prices represent a bubble or not is a matter of opinion, though. By the way, the cuts already happened, and prices have already risen, so you should be more concerned if what we have now is a bubble rather than if a bubble will be created.

Finally, I'm afraid I can't answer your last set of questions because I have no idea how foreign exchange rates will move in the future.

I hope that my responses are positive enough, as you hoped.