Thursday, August 26, 2010

Trust Fund Investing


Unit invest trust funds (UITFs) are the sophisticated form of paluwagan,  the investment that doubles as a savings plan many Filipinos as familiar with. Ma. Elizabeth Aquino, assistant vice-president and trust officer of East West Banking Corp., describes a UITF as "a collective investment scheme that pools the investments of small investors into a larger fund under professional management.  It is able to access more superior investment opportunities not normally available to individual retail investors."

This kind of trust fund comes with a number of advantages.  One is the low minimum investment required, which starts at P10,000.  Another is that one need not be a finance expert to make an investment.  Because the money is pooled, investors diversify their portfolio and minimize their risks.  The fund determines the best way to park the money, whether it be in commercial paper, bonds or equities.

Ador Abrogena, executive vice-president of Banco de Oro (BDO) trust banking group, says UITFs are perfect for people with no time to study securities.  Investors can choose from a wide variety of UITFs that suit their risk appetite.  UITFs vary depending on the securities these are invested in.  Some are placed only in bonds, some only in stocks, some only in government securities, while others are in various instruments to be more "balanced."   These funds may either be peso-or dollar-denominated.

Another advantage to investing in UITFs is the ease of joining and leaving the fund.  "As it is an open-pooled fund, investors can freely join or withdraw their investment participation as often as allowed under the UITF plan rules," says Aquino.  UITFs are available in participating banks almost everyday, with fees ranging from 0.5 to 2.5 percent per annum of the fund.  The UITF works much like a mutual fund. "Investors share in the gains or losses proportionate to their respective participation in the pool," she says.

Investors' participation is valued using the Net Asset Value Per Unit (NAVPU), which is market-determined and computed  using the daily mark-to-market valuation of net assets divided by the number of outstanding units.  Abrogena says the fund's risk lies in this method, because it causes the NAVPU to fluctuate everyday, making investments held by the fund to gain or lose on any given trading day.

A good example of this was the confluence of events last May, when investors, worried about the coup rumors, the dropping share values in the stock market, and the rising interest rates, redeem their participation in the UITFs.  Many were also put off by the fact that the Philippine Deposit Insurance system does note cover this new investment vehicle.

Aquino says the investment run may have been due to product misunderstanding or misperception.  East West and other banks tried to stand these withdrawals by informing their clients of market developments; the courses of action fund managers were taking for the UITF portfolio; and by doing and honest market forecasting for the rest of the year.

These efforts paid off as the NAUVPUs of East West Bank's unit investment trust funds recovered lost ground last June."In fact, our UITF's performance-where the historical year-on-year and year-to-date yields are among the highest in the fixed-income UITFs-can attest to this" she says.

Aquino advises investors who want to fully appreciate the earning potential of these funds to stick to it longer to allow them to ride out market corrections. Abrogena says UITFs are good long-term investments. "The real value of UITFs in in providing better returns over the long term by allowing investors to take risks according to their own risk tolerance in a vehicle that allows for utmost convenience, safeguarded by sound regulations, and managed by full-time investment professionals."

The type of unit investment trust funds (UITFs) depends on the investments they make. Here are some UITFs in the market today:

1. Money market securities UITFs. These are low risk, high liquidity investments.
* East West Bank's Peso Trust Maximizer and Dollar Trust Maximizer.
   Investments are made in goverment bonds and deposits.
   Minimum investments are P100,000 for peso UITFs and $2,000 for dollar UITFs.
* BDO Peso Money Market Fund and Dollar Money Market Fund.
   Investments are made in low-risk, fixed-income securities with a portfolio wighted average life of not more    
   than one year. Minimum investments are P100,000 for peso UITFs and $2,000 for dollar UITFs.
* BDO Fixed-Income Fund. Investments are made in short-and long-term fixed income securities. Minimum 
   investment is P10,000.

2. Bond UITFs. These entail more risks but promise higher returns in the long term.
* BDO Peso Bond Fund and Dollar Bond Fund. Investment are made in bonds and similar fixed-income
   securities with a portfolio weighted average life or more than one year. Minimum investments are P100,000
   for peso UITFs and $2,000 for dollar UITFs.

3. Balanced UITF. Like bond UITFs, balanced unit investment trust fund are more risky, but promise higher returns.
* BDO Balanced Fund. Investments are made in equities and fixed income securities. Minimum investment is

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