IMPORTANT INFORMATION. PLEASE READ CAREFULLY.

The Bangko Sentral ng Pilipinas recently issued Circular No. 447, introducing a new pooled fund concept called the “Unit Investment Trust Fund” (UITF). The launching of the UITF aims to revitalize the Trust Business and will lead to the eventual phase out of the “Common Trust Fund” by September 2006.

Investors should refer to this primer for a general overview on UITFs. This primer answers the basic questions, and educates the investors on the advantages and disadvantages of investing in UITFs. While this document should give the reader a reasonable working knowledge on UITFs, investors need to look up other references to thoroughly understand the UITF concept. Please note that this primer is for information purposes only, and is not intended to constitute an investment advice. No recommendations regarding investments are made nor implied herein.

What is a Unit Investment Trust Fund (UITF)?

The UITF was created by virtue of BSP Circular No. 447 dated September 3, 2004. Like its predecessor, the Common Trust Fund (CTF), it is an open-ended trust fund denominated in peso, or any acceptable currency, which pools together the funds of various investors, for investment in various instruments such as government securities, bonds, commercial papers, deposit products and other similar instruments.

What is the meaning of an “open-ended trust fund”?

It is a fund wherein investors can freely buy and sell units of participation at any point in time subject to the fund’s minimum holding period. Units are bought and sold at their current net asset value, which is expected to fluctuate daily, depending upon the performance of the securities held by the fund.

Is the UITF better than the CTF?

The UITF is deemed better than the CTF in terms of safeguarding the interest of the investing public for five reasons:

1.  It assures investors of information and guidance using a more realistic valuation method known as marked-to-market (MTM). This system allows clients to fully understand the status of their investments.
2.  It requires an accredited third party custodian to take charge of all securities or proofs of ownership of investments to ensure market integrity and iron clad protection for the investor.
3. Investments are limited to tradeable investments, or those that can be sold or bought in an organized exchange to ensure fund liquidity at all times.
4. Peso-denominated UITF is exempt from reserve requirement so the entire assets are fully invested to maximize returns.
5. The bank is required to fully disclose investment risks to investors.

What is Marked-to-Market?

Marked-to-Market (MTM) is a valuation method which assigns a value to a position held in a tradeable financial instrument based on the current market price for the instrument.

What makes the marked-to-market method of valuation a better yardstick for investors?

Marked-to-market (MTM) is considered a more accurate and transparent method of valuation as it is able to give investors the actual value of their investments at any given date. The consolidated value of the instruments held by a UITF is easily determined by using the prices of the said instruments in the secondary market at the close of each banking day. With this information readily available for investors, they can easily get in and out of the fund at a market value that is acceptable to them.

It also allows the fund manager to take advantage of trading/market opportunities that may arise, thus enhancing potential returns for its investors.

What is the impact of Marked-to-Market on the value of an investment?

Under marked-to-market method, the value of the investment is constantly adjusted based on market rates. During times of increasing interest rates, the present value of the investment is lower. On the other hand, during times of decreasing interest rates, the present value of the investment is higher. However, if you keep the investment up to maturity date, you will end up with the yield-to-maturity on acquisition date of the instrument. As a result of these, the NAVPU under the marked-to-market valuation will fluctuate depending on prevailing market conditions. On the other hand, under the traditional accrual method, NAVPU is constantly increasing.

Who can invest in the UITF?

UITF’s are available to both corporate and retail investors, who, for a small investment amount, can take advantage of investment privileges normally accessible to investors with sizeable funds.

What are the different types of UITF funds currently available in the market?

The introduction of the UITF gives customers more investment options to choose from. Clients are given more choices with a wide range of fund types that include purely fixed income, equity and balanced funds (discussed in detail below). These funds are suited to meet every customer’s financial standing, investment goal, risk appetite and investment horizon. They are also differentiated by their investment objectives and risk appetite.

•  Fixed Income Fund - This fund aims to achieve steady income at low risk to the invested principal. To achieve this, the fund is invested in fixed-income instruments such as T-Bills, FXTN’s and premium savings deposits.
•  Equity Fund – Funds are invested mainly in stock issues to achieve a higher long-term appreciation or growth of capital. It is usually more risky than fixed income or balanced funds.
• Balanced Fund - A balanced fund seeks a mix of the two classes, fixed income and equity, to achieve a higher return compared to a purely-fixed income fund.

What are allowable investment outlets for UITF’s?

Pursuant to the rules and regulations set forth by the BSP and the PNB Board of Directors, UITF’s may be invested and reinvested in the following:

• Bank deposits/deposit substitutes
• Securities issued by or guaranteed by the Philippine government, or the Bangko Sentral ng Pilipinas
• Tradeable securities issued by the government of a foreign country, any political subdivision of a foreign country or any supranational entity
• Exchange-listed securities
• Marketable instruments that are traded in an organized exchange
• Loans traded in an organized market
• Such other tradeable investments outlets/categories as the BSP may allow.

How do I participate in a UITF? Subsequently, how do I redeem my investments?

To be an investor, you must acquire units of participation in the UITF at the prevailing price for the day, called the Net Asset Value per unit (NAVPU).

On the other hand, should you decide to redeem your participation in the UITF, you may compute for your proceeds by multiplying the number of units to be redeemed by the prevailing NAVPU for the day. The product gives you the proceeds of the investment.

Sample computation is as follows:

Amount invested = Php100,000
Date of contribution: February 1, 2006
NAVPU on the date of investment: 1.00000
No. of units of participation = Principal/NAVPU
= Php100,000/1.00000
= 100,000 units

On May 31, 2006, the client decides to redeem his investments in full
NAVPU at the time of redemption: 1.01850
Proceeds of investment: 1.01850 x 100,000 = Php101,850.00

What is the evidence of investment in the Fund?

Every investment will be issued a corresponding Confirmation of Participation (COP). A Participation Trust Agreement (PTA) will be also given to document an investor’s initial investment/participation in the UITF.

How is the NAVPU calculated?

The NAVPU is the current net market value of each unit of participation in the fund. It is calculated by taking the market value of the fund’s investments deducting expenses, and dividing the remainder by the number of outstanding units of participation as illustrated below:

Market Value of Investments: Php 111,111,111

Less

Total Expenses (Assuming that expenses is 10% of the market value of investments; total expenses consist of fees, taxes and qualified expenses): Php 11,111,111

Equal

NAV: 100,000,000

Assume 100,000,000 units
NAVPU = 1.00

The NAVPU shall be calculated everyday including holidays and will be declared on each business day in accordance with BSP rules and regulations. The NAVPU, as well as the Return On Investment (ROI) of the fund on a YTD and YOY basis will also be published in Business World every Monday and will be made available on the PNB website at www.pnb.com.ph on a daily basis.

Is the yield on UITF guaranteed?

No. Any income or loss of the UITF will be for the account of the investors. There is no principal protection. Past performance does not guarantee similar future results. However, even if the yield cannot be guaranteed, you are assured that your hard-earned money is prudently being managed by expert fund managers.

Will there be an indicative yield quoted to the client at the time of investment?

Since the fund uses the marked-to-market method of valuation, no indicative yield will be quoted to the investor. However, the actual yield of the investment can be determined using the formula below:

Actual Yield   =       Net Income (Loss)             360 X 100
                            ----------------------     X     --------------
                                  Principal                     No. of days

Where: Net Income (Loss) = Market Value – Principal
Market Value = # of units x NAVPU

Sample computations are as follows:

a. Amount invested: Php100,000
Date of contribution: February 1, 2005
NAVPU on the date of investment: 1.00000
No. of units of participation = 100,000 units
Date of redemption: May 1, 2005
NAVPU at the time of redemption: 1.01850
Coupon Rate of Investment: 6%
Interest Rate Scenario: Decreasing

Market Value = 101,850 (100,000 x 1.01850)
Net Income = 1,850 (101,850 – 100,000)
No of Days = 89

Actual Yield   =             1,850                    360 X 100
                            -----------------     X     --------------
                                 100,000                       89


= 7.48% p.a.

b. Amount invested: Php100,000
Date of contribution: February 1, 2005
NAVPU on the date of investment: 1.00000
No. of units of participation = 100,000 units
Date of redemption: May 1, 2005
NAVPU at the time of redemption: 0.99850
Coupon Rate of Investment: 6%
Interest Rate Scenario: Increasing

Market Value = 99,850 (100,000 x 0.99850)
Net Loss = -150 (99,850 – 100,000)
No of Days = 89

Actual Yield   =            -150                      360 X 100
                           -----------------     X     --------------
                                100,000                       89

= -0.61% p.a.

Is the UITF covered by the Philippine Deposit Insurance Corporation (PDIC)?

No. The PDIC only covers deposit accounts. However, a UITF is just as safe as a deposit account especially if invested through a reputable trust institution, like PNB Trust, which has instituted elaborate safeguards in compliance with BSP rules and industry best practice to ensure that investments are managed in the best interest of the investor.