| Frequently Asked Questions ( FAQ ) | ||
INTRODUCTION TO THE UNIT INVESTMENT TRUST FUND PRIMERThe
Trust Officers Association of the Philippines ( A BIT OF HISTORYThe
year 2005 saw the proliferation of new trust products in the market known as
Unit Investment Trust Funds or UITFs, a product which
trust licensed institutions can establish, launch and operate in accordance
with Bangko Sentral ng Pilipinas (BSP) Circular 447 issued on To
the investing public, many questions come to mind: Is the UITF a better product than the CTF? If so, in what way? How do investors benefit from this
product? What are the risks? Through
this UITF Primer, FREQUENTLY ASKED QUESTIONS ON UNIT
INVESTMENT TRUST FUNDS
1. What is a Unit Investment Trust Fund? A
Unit Investment Trust Fund (UITF) is an open-ended pooled trust fund
denominated in pesos or any acceptable currency, which is operated and
administered by a trust entity and made available by participation. Each UITF
product is governed by a Declaration of Trust (or Plan Rules) which contains
the investment objectives of the UITF as well as the mechanics for
investing, operating and administering the fund. Most
UITFs are considered medium to long term
investments. Clients considering to invest in UITFs must have the
financial resources to stay invested in them for a reasonable period of time in
order to maximize earnings potentials.
If the funds to be invested will be needed by the client in the
immediate future, the UITFs may not be a suitable
investment vehicle for such client. 2.
What does “open-ended pooled trust
fund” mean? An
open-ended trust fund allows clients to invest or redeem their investments at
any time subject to guidelines set forth in the UITF Declaration of Trust.
Funds from various clients with similar investment objectives are pooled
together into one fund, which the trustee invests in various types of
securities with the aim of maximizing returns within reasonable risk levels. 3. What does “made available by participation”
mean? A
client invests in a UITF by purchasing units of participation in the fund. The
units of participation represent the investor’s proportionate beneficial share
in the total value of the fund. As an investor in the fund, the client does not
own any specific asset of the fund, only a proportionate share in all of the
fund’s assets. 4. At what price may these units of
participation be purchased? Units
of participation are made available to investors based on the Net Asset Value Per Unit (NAVPU) of the fund for the day. The NAVPU is
derived by dividing the fund’s Net Asset Value (NAV) by the number of
outstanding units in the fund. NAV, on the other hand, is the sum of the market
value of the investments of the fund less expenses such as taxes, fees and
other qualified charges. To determine how many units of participation a certain
amount of investment is equivalent to, simply divide the amount to be invested
by the prevailing NAVPU for the day. 5.
How different is a UITF from a
CTF? The
main difference between a UITF and a CTF is the manner in which the NAV is
calculated. CTFs are valued using the accrual method
(i.e. NAV of the fund takes into account principal and interest accruing from
various investments of the fund). This method generally results in a steadily
increasing NAVPU. UITFs, on the other hand, follow
the marked-to-market valuation method, which calculates the NAV based on the
estimated fair market value of the assets of the fund based on prices supplied
by independent sources. The marked-to-market value takes into account the
accrued interest (and dividends where the fund is invested in equities) plus
unrealized gains or losses of the investments given their prevailing market
prices. As such, UITF NAVPU may fluctuate depending on the volatility of the
prices of various assets held by the fund. 6. Why was there a need to
change the valuation methodology? The
marked-to-market valuation provides the investor with a more accurate and fair
value of his investments at any given time. It ensures that no participant in
the fund is put at a disadvantage as a consequence of new investors coming in
or of existing investors getting out of the fund. The marked-to-market
methodology is in accordance with international best practices. 7. What documents should a client have as
evidence of his investment in a UITF? The
UITF investor and the trust entity shall execute a Participating Trust
Agreement to confirm the investor’s desire to participate in the fund and the
trust entity’s acceptance thereof, subject to the terms and conditions set
forth in the Declaration of Trust. The
trust entity shall likewise provide the investor with a Confirmation of
Participation which documents the amount of funds received by the trust entity,
the NAVPU on the date of purchase and the corresponding number of units of
participation. These original documents
are surrendered to the trust entity upon redemption. 8. Are all UITF products offered
in the market the same? No.
UITF products differ in terms of the fund’s investment objectives, types of
assets invested, portfolio mix, minimum investment amount, minimum holding
period, possible benefits and risks, settlement period and charges. These key
features should be explained by the trustee in detail to its investors to
determine customer suitability. The
level of risk to which an investor is exposed to may vary from one UITF to
another. Generally, UITFs
that aim to deliver higher potential returns are likely exposed to greater
risks and need a longer investment time horizon to achieve their potential
returns. Conversely, UITFs
that aim to deliver lower returns are likely exposed to lower risks and require
a shorter investment time horizon to achieve their investment goals. Each
UITF product is governed by a specific Declaration of Trust, which contains the
product’s investment objectives and mechanics. This Declaration of Trust shall
be made available by the trust entity to investors, upon request. Based on these
information, the client should choose a UITF product suitable to his investment
objectives and risk tolerance 9. What are the types of UITFs available in the market? UITFs are established and managed based on a
set of investment objectives and strategies, and these have varying levels of
risks and returns. UITFs
may be denominated in Philippine Pesos, US Dollars and acceptable third currencies. Following are the four general major
classifications of UITFs listed according to
ascending levels of risk, return and investment time horizon: a. Money Market Funds - These funds are
invested principally in short term, fixed income deposits and securities with a
portfolio duration of one year or less. b. Bond Funds – The mandate of these funds
is to invest in a portfolio of bonds and other similar fixed income securities
with portfolio duration which may exceed one year. These may further be classified into
Intermediate Funds (where the fund mandate limits the duration up to 3 years),
Medium Term Funds (where the fund mandate allows a duration
of up to 5 years) and Long Term Funds (where the fund mandate allows a duration
of greater than 5 years). c. Balanced Funds – The mandate of these
funds is to invest in a diversified portfolio of bonds and stocks where
investments in stocks shall be up to a maximum of 40% to 60% of the fund, with
the balance invested in fixed income securities. d. Equity Funds – The mandate of these
funds is to invest substantially in equities.
Cash may be kept for liquidity and portfolio re-balancing purposes. 10. Can a client invest in more
than one type of UITF? Yes.
Clients may diversify their investments across various UITFs
as long as the objectives and mechanics of the funds are suitable to their
requirements. 11. Which type of UITF is
suitable to an investor? When
choosing a UITF, investors should identify their needs and goals and match them
against the investment parameters of the product. To determine the clients’
suitability to a fund, the following factors have to be considered: ·
Investment
capacity - the amount available for
investment ·
Investment
horizon -how long a client can stay in the fund ·
Risk profile
-how much risk the client is willing to take ·
Investment
objective -what the investors seeks to achieve by making the investment, e.g.
whether client wants income or capital growth The
investor should likewise be comfortable with the trustee of the UITF in terms
of their expertise and skills in fund management. 12. Who can invest in a UITF? Any person,
association, corporation, entity or firm who/which has the legal capacity to
contract or establish a trust may invest in a UITF product. 13. Is there an indicative or
guaranteed rate of return for UITF products? Since
UITFs are subject to the marked-to-market valuation
method, the NAVPU may fluctuate depending on the volatility of the market. As
such, indicative rates cannot be quoted by the trustee. Yields are variable and
cannot be guaranteed. Historical performance of the fund may provide an
indication of how well the trustee is managing the fund but this is not a
guarantee of future performance. 14. How do investors keep track of the value
of the UITF investment? The
NAVPU of the fund is generally made available on a daily basis (or as
prescribed in the Declaration of Trust) at the office of the trustee, its
branches or through the 15. How much will an investor
get when the UITF investment is redeemed? The
investor can calculate the proceeds of his UITF investment by simply
multiplying the number of units being redeemed by the applicable NAVPU for the
day. Generally, the NAVPU is already net of the trust fees, taxes and qualified
charges. However, there may be additional charges to the client such as early
withdrawal charges in cases where the client redeems his UITF investment prior
to the completion of the minimum holding period required by the trustee. 16. How does a participant
determine how much he earned from the UITF? The
difference between the value of the units of participation at the time of
purchase and the value at the time the units are redeemed determines how much
an investor earned (or the loss incurred) from the UITF investment. As the fund
value increases, each participant earns more.
Ideally, the longer a client stays invested in the fund, the better his
chances of earning more since the underlying investment outlets become less
prone to market volatility over time. 17. How does an investor
determine the return on the UITF investment? The client’s return
on investment can be determined using the following formula: Return on
Investment = Proceeds
of investment – Initial investment * 100 Where: Proceeds of
investment = Applicable NAVPU x number of units of participation (less early
withdrawal charges, if any)
18. How can an investor compare
the performance of various trust entities? All
trust entities offering UITF products are required to publish the fund’s
prevailing NAVPU as well as the year-on-year and year-to-date return on
investment (ROI) in major dailies at least once a week. Year
to Date (YTD) ROI = NAVPU (current) – NAVPU
(last year’s end figure) * 100
NAVPU (last year’s end figure) Year
on Year (YOY) ROI =
NAVPU (current) – NAVPU (same date of previous year) * 100 NAVPU (same date of
previous year) The
YTD ROI presents the absolute returns of the fund from the end of the previous
year. The YTD ROI cannot be compared to
rates offered by deposits, government securities or other money market products
which are usually expressed on an annualized or per annum basis, unless the
returns for a full year (i.e. January 1 to December 31) are being derived. The YOY ROI, on the other hand, compares the
NAVPU as of current date against the NAVPU as of the same date in the previous
year. This may be considered an
annualized return as the period covered is always one full year. It should be noted however that historical
returns of a fund are purely for reference purposes and do not guarantee
similar future results. 19. When does the investor get the proceeds of the UITF investment? Payment
to the investor will depend on the settlement period prescribed by the trustee.
This may vary depending on the nature and settlement convention of the
investments of the UITF product. 20. In what instruments can a trustee invest the
fund? The
character and kind of investments which may be made by the trustee depend on
the investment parameters set forth in the UITF Declaration of Trust or Plan
Rules. BSP regulations, however, prescribe that UITF fund investments shall be
limited to: (a) Bank deposits (b) Securities issued by or guaranteed by the
Philippine government or the BSP (c) Tradable securities issued by the
government of a foreign country, any political subdivision of a foreign country
or any supranational entity (d) Exchange listed securities (e) Marketable
instruments that are traded in an organized exchange (f) Loans traded in an
organized market and (g) Such other tradable investments as the BSP may allow. 21. How will the investor know where the fund is
invested? A
list of prospective and outstanding investment outlets of the fund shall be
made available to the clients as part of the disclosure requirements for UITFs. The list of
investment outlets shall be updated quarterly. 22. How much do trustees charge
UITF investors? The
trustee shall charge the fund for management fees, taxes and qualified
expenses. The management fee shall differ for each type of fund and will cover
the costs of investment research, management, marketing and routine
administrative expenses of the trustee. 23. Can the UITF Declaration of
Trust be changed and how will that affect existing investors of
the fund? The Declaration of Trust of a UITF may be amended by a resolution
of the Board of Directors of the trust entity provided that participants in the
fund shall be immediately notified of such amendments. Clients who are not in conformity with the
amendments shall be allowed to withdraw their participations within a
reasonable time but in no case less that thirty calendar days after the
amendments are approved. The
trustee shall submit the amendments to the BSP for approval, within ten
business days from approval of its Board of Directors. Said amendments are deemed approved by the
BSP after thirty (30) business days from date of completion of requirements.
24. What are the risks of
investing in a UITF? A
client investing in a UITF product should be prepared to absorb the following
potential risks: (a) interest rate risk
– the potential for an investor to experience losses due to changes in interest
rates; (b) market/price risk – the potential for an investor to experience
losses due to changes in the market prices of securities (e.g. bonds and
equities); (c) liquidity risk – the inability to sell or convert assets into
cash quickly or where conversion to cash is possible but at a loss; and (d)
credit risk – the risk of loss due to a borrower or issuer’s failure to repay
principal and/or interest on securities issued. Because
the assets of the UITF are valued based on the prevailing market prices, yields
and potential yields cannot be guaranteed.
There is a possibility of incurring losses in the UITF if the client
withdraws in a scenario of generally declining market prices, even if the fund
is invested in government securities. It should be noted that investments in
government securities, although considered credit risk free in the domestic
market are also subject to interest rate risk, market risk and under extreme
volatile conditions, to liquidity risk.
Should this situation arise, clients may, however, opt to defer their
withdrawals until market conditions become more favorable. Being
a trust product, there is no guaranty on the principal and income of the
investments and losses, if any, shall be for the risk of the UITF investors. UITFs are governed by BSP regulations but are not deposit
products, hence are not covered by the Philippine Deposit Insurance Corporation
(PDIC). Historical performance of a fund may be used for reference purposes
only and do not guarantee similar future results. 25. What are the benefits of
investing in a UITF? Investors
in UITFs can avail of the following benefits: ·
Diversification. By participating in a UITF, risks are
spread out across the various investments held by the pooled trust fund.
Diversification comes in the form of various types of investments, issuers and
tenors. UITFs are required to observe its exposure in
a single entity and its related parties to 15% of the market value of the fund,
except in the case of government securities. ·
Liquidity. While it is advisable to stay invested
in the UITF for a longer period of time, clients can redeem units of
participation at any time. The fund will not have difficulty redeeming such
units of participation because UITF investments are limited to marketable or
tradable securities. ·
Affordability. UITFs
generally have low minimum investment requirements. Additional investments may
be made in tranches as funds become available to the
client. ·
Better earnings potential. Greater earnings potential is achieved
without having to invest large sums of money. There are opportunities for
potentially higher returns due to possible marked-to-market gains on top of
accrued income from investments. UITFs provide access
to financial instruments not readily available to retail investors. ·
Exempt from reserve requirements. UITFs are
not subject to reserve requirements imposed on bank deposits and CTFs. ·
Professional fund management. Participating in a UITF allows clients
to gain access to the expertise and services of seasoned fund managers who are
able to actively monitor the markets for possible investment opportunities. ·
Transparency. Trust entities are required to publish
the UITF NAVPUs at least weekly, allowing investors
to compare investment performance of various fund managers. Each UITF is
subject to a separate annual audit by an independent auditor acceptable to the
BSP, the results of which may be made available to investors. In addition, each
UITF is required to have a BSP accredited third party custodian, who is tasked
with safekeeping the securities of the UITF and performing independent
marking-to-market of such securities. ·
Regulated product.
The management and administration of UITFs are
governed by the BSP.
UITF FAQ 3112007 | ||