Trust trade now bigger, stronger

MANILA, Philippines—The Philippine trust industry has hit the P2-trillion mark in assets under management as some of the wealth created by one of Southeast Asia’s fastest-growing economies find their way into higher-yielding financial instruments.

It’s a fee-based business involving assets that have become nearly as large as the consolidated lending portfolio of the country’s commercial banks, which stood at P2.3 trillion net of placements at the central bank as of the end of 2010.

The industry’s phenomenal growth over the last few years was due largely to the expansion of the economy that boosted corporate and household earnings and the strong performance of the capital markets, which bolstered the value of the assets held in trust.

This growth was also fueled in part by the rising financial literacy in the country, where an increasing number of residents were willing to move some of their funds from the safety of bank deposits to instruments that carry higher risk but offer higher returns.

The trend appears set to continue, supported by the country’s rising young and savvy population.

“Young people are slowly starting to become more sophisticated,” said Theresa Marcial Javier, group head of BPI Asset Management and Trust Group, which manages around P485 billion in assets. “This is because they better understand what they invest in. They are aware of the fact that if they simply put their money in a savings account, the currency loses its value because of inflation.”

Over the last seven years, the trust industry posted a compounded growth rate of 18 percent, Javier said.

The assets managed by universal and commercial banks’ trust and other investments management accounts hit P2.065 trillion as of the end of September 2010, up from the P1.746 trillion as of end-2009, according to the latest data of the Bangko Sentral ng Pilipinas.

Trust operations began in the Philippines in 1918 when Philippine Trust Co. was set up to manage the properties of the Americans during their early occupation of the country, the Trust Officers Association of the Philippines (TOAP) said in its website.

The banks’ trust operations grew to become a multibillion industry in the 1990s as more people discovered the more sophisticated asset and trust management services available in the country. Employee benefit, pre-need and personal trust are among the different types of trust accounts.

Trust, previously focused on institutional investors and high net worth individuals, is now open to a broader market through participation in unit investment trust funds or UITFs.

Introduced in 2005, UITFs replaced the common trust funds (CTF), which were phased out to align the management of pooled funds with international practices and differentiate them from bank deposits.

UITFs are pooled funds administered by a trust entity, such as banks. They are open-ended, meaning clients may come in or redeem their investments any time, subject to the guidelines spelled out in the UITF declaration of trust. Funds from clients with similar investment objectives are pooled into one fund, which the trustee invests in various types of securities.

These are marketed to retail investors for an investment of as low as P10,000. UITFs are still small compared with the other trust accounts, but they have been growing. Of the trust industry’s P2.06 trillion in assets under management, UITFs accounted for P112.5 billion as of end-September, up from P107.2 billion as of the end of 2009.

Popular funds

There are four major types of UITFs based on levels of risk, return and duration: Money market funds, which are invested mainly in short-term fixed income deposits and securities with maturity of one year or less; bond funds, which are invested in a portfolio of bonds and other similar fixed-income securities with average duration of more than one year; balanced funds, which are parked in a diversified portfolio where investments in stocks account for 40-60 percent and the balance invested in fixed income securities, and equity funds, which are placed mainly in equities.

Based on the collective net asset value of the various funds in the country, peso bond funds are the most popular. “It’s the first stop after graduating from time deposits and special deposit accounts (SDAs),” said BPI’s Javier.

Corporate bonds tend to be snapped up very fast, said Ador Abrogena, executive vice president for trust and investment group at BDO Unibank, which has about P569 billion in trust portfolio.

Abrogena said the returns on UITFs could go anywhere from 3 to 4 percent for money market funds and 50 to more than 100 percent for equities funds, higher than rates on regular peso savings accounts of 0.5-1 percent.

“There are still a larger portion of our clients which are invested in fixed income, which are the bond funds right now,” said Allan Yu, head of investment for Metrobank’s trust banking group, which manages P270 billion in trust assets.

Fund managers say equity funds are the next most popular and usually suit well with people who want to invest in stocks but don’t know what stocks to choose. Balanced funds come third, catering to investors who want to balance out risk and return from equities and bonds.

UITFs are typically meant to be held for long periods of time. BDO recommends that investors hold for three years their investments in bond funds and more than three years those in equity and balance funds. In all, different investors have different holding periods, depending on their investment horizon and liquidity requirements.

Asian crisis

Managed properly, UITFs can be a powerful way to mobilize funds for capital market development.

The setback suffered by the UITF industry in May 2006 underscored why investors should be mindful to choose funds suitable for their investment horizon.

That UITF episode coincided with the growing risk aversion among global investors, which was reflected in the fall in Asian currencies, stocks and metals. As interest rates rose, the net asset value per unit (NAVPU) of UITFs diminished as mark-to-market losses were booked. Jittery investors withdrew from UITFs, forcing fund managers to sell bond assets to fund the withdrawals. It spiraled and turned into a vicious cycle.
Since then, the industry has bounced back in a more friendly market environment and a more robust economy. Economic Planning Secretary Cayetano Paderanga projects the country’s gross domestic product to grow 7-8 percent this year, supported by improved employment situation, rising incomes and continued strong remittances.

UITF sellers are looking at tapping the money sent home by Filipinos working abroad. The prospect looks promising, considering that overseas Filipinos’ remittances coursed through banks exceed $1 billion monthly. But for now, more work needs to be done.

“We’re starting on a program to get into that market (OFWs),” said BDO’s Abrogena.

Selling the security directly to Filipinos abroad is not allowed due to licensing laws in other countries. This means UITF sellers will have to market the products through their beneficiaries.

A number of overseas Filipino workers look keen on investing in UITFs, said Ma. Lourdes de Vera, SVP for trust and investment group at BDO Unibank, citing inquiries that the bank has been getting.

“They know they need to invest but they don’t know how,” De Vera said.
Indeed, more education is necessary if OFWs were to turn into investors.
“The OFWs generally lack financial sophistication to make investment decisions, to cross over from savers into investors,” said Paul Joseph Garcia, head of ING Investment Management in Manila. ING Philippines, which has P78 billion in assets, will be merged with BPI Asset Management to create one of the biggest trust operations in the country.

In general, Filipinos are conservative investors but there are certain groups who are willing and able to take more investment risks. This is where client education on financial planning will come in.

In investing in UITFs, a client must undergo a client suitability assessment to determine which UITF matches his investment objectives, risk tolerance, preferences and experience.

New regulations

The long-term outlook for growth of Philippine trust funds remains strong, thanks to new regulations that aim to strengthen the governance of the trust and investment management business. These rules will ensure that industry players practice risk disclosure and client suitability processes.

Among them is a BSP-issued circular that requires trust corporations to perform the same functions as those undertaken by trust departments of banks. The rule also allows market participants other than banks to provide trust services with governance standards and subject to capitalization requirements.

The industry is now facing a big challenge as the funds that have supported domestic capital markets are now flowing back into developed markets. As such, the trust industry may see its growth moderate after a very strong performance in 2010.

Still, the macroeconomic environment remains conducive for the local trust business.

“We expect the growth momentum of the trust industry to continue to stay strong given the liquidity in the market and the resilient domestic economy,” said BPI’s Javier.