Question: I wanted to ask more about pooled funds, specifically equities and balanced funds. I would also like to know if I can invest in these with small amounts on a regular basis.—Val Baguios, International Organization for Migration (IOM) staff
Answer: In my last column, I gave a general introduction of pooled funds, particularly bonds or fixed income funds. I will now discuss other general funds—equities and balance funds.
Equity funds, sometimes referred to as growth funds, are pooled funds invested primarily in equities via the stock market. The bulk of the investments made, say 90 percent, is invested in stocks that are traded by the investment manager. In the Philippines, nearly all of the equity funds are invested in blue chip stocks, or those that are considered premium, seasoned and resilient such as PLDT, Ayala, San Miguel, SM and several banks. The decision on where and when to invest and when to sell is left with the investment manager, who may opt to take a passive approach of buy and hold or an aggressive stance. He may also opt for a combination of the two.
Generally, the objective of an equity fund (also known as stock fund) is long-term growth through appreciation of capital, although dividends may also be an important source of returns. It is believed that the stock market will give the most growth in investment provided there is enough time for stocks to appreciate and that proper trading of stocks are being executed. However, equity funds may also be the most volatile among pooled fund categories, as they mirror the gyration of the stock market. Equity funds are the most risky among the pooled funds in the Philippines.
The Philippine Stock Market Index or Phisix is the benchmark when it comes to equity funds. I notice that the performance of the equity funds (in UITF and mutual funds) has generally been better than Phisix, that the fund managers are doing a swell job. Equity investing is a good way to hedge against inflation as its potential return should be better than inflation. However, I also have to emphasize that it also offers the most risk.
Balanced funds are funds invested in both equities and fixed income/money market securities. According to Investopedia.com, a balanced fund is “a fund that combines a stock component, a bond component and, sometimes, a money market component, in a single portfolio. Generally, these hybrid funds stick to a relatively fixed mix of stocks and bonds that reflects either a moderate (higher equity component) or conservative (higher fixed-income component) orientation. In other words, balanced funds are combination funds that are designed to generate moderate returns with moderate risks. The funds normally have set limits on investments in asset classes, say a 60-40 mix in favor of fixed-income instruments vs stocks. Some funds have more flexibility in terms of investment mix, so the fund manager has better elbow room as long as his moves stay consistent with the objectives of the fund. I’ve noticed that some balanced funds carry more equity investments when the stock market is doing well. The balance, however, shifts to more fixed income or money market instruments when the stock market turns bearish. This way, the fund can maximize growth during upswings in the market and moderate losses during downturns. It is imperative that you review the objectives of the balance fund or any fund to ensure that the funds will be consistent with your objectives and risk profile.
All pooled funds carry no guarantee. They are not deposits and will not be covered by the PDIC even if the funds are coursed through the banks (in the case of Unit Investment Trust Funds). Returns and risks of all pooled funds are shouldered by the investor and the only obligation of a fund manager is to ensure that his actions are consistent with the funds’ objectives and that he is using sound and professional judgment, devoid of any unethical or unlawful investment management practice. Philippine pooled funds are being offered as mutual funds, Unit Investment Trust Funds (UITF) and Variable Life Insurance. Mutual funds are being offered by mutual Fund Companies and are being regulated by the Securities & Exchange Commission (SEC). Mutual Funds are being sold by investment solicitors who are licensed by the SEC or through brokers. UITFs are being offered by universal banks, so they fall under the supervision of the Bangko Sentral ng Pilipinas.
UITFs were being offered as Common Trust Funds (CTF) before until the BSP mandated banks to make all of them as UITFs. Mutual Funds and UITFs are identical in many ways, only differing in the agencies that regulate them. I notice that UITFs are slapped with lower investment management fees and other fees associated with said investments.
Variable life insurances (also known as Unit Linked Insurance) are life insurance products with investment component attached to it. The investment funds in variable life insurance have the same characteristics as mutual funds and UITFs, but with a life insurance benefit. By design, the growth in a variable life insurance product will be lower than mutual funds or UITFs. Since premiums are needed to be paid for the life insurance protection, not all of the premiums are invested in a fund. However, in case of death of the investor, a variable life insurance will give a higher fund because of the added insurance. The regulatory body that oversees variable life insurance is the Insurance Commission.
Investing in pooled funds simplifies the investment process in general, since there is professional doing the investing. If you invest on a regular basis, you can benefit from peso cost averaging. However, I urge you to first establish your reason in investing and determine your objectives, then find out what your risk appetite is. Read the prospectus and proposals thoroughly and consult independent advisers if you need help.
“Money is put into risky investments that turn sour, and everything is lost. In the end, there is nothing left to pass on to one’s children.”—Ecclesiastes 5:14, NLT
(Randell Tiongson is an advocate of life and personal finance. He is a director of RFP Philippines. For questions, write to randell@randelltiongson.com or visit www.rfp.ph or e-mail info@rfp.ph.)