Lessons From The BDO Financial Wellness Seminar

The entire seminar was basically a differentiation between mutual funds, UITFs, and VULs. When it comes to costs of operation, mutual funds are at a disadvantage. Since mutual funds are corporations, they pay a lot of fees relating to their entity; this is probably why they have front or back end fees. Both mutual funds and UITFs, however, have management fees. These fees, however, are already incorporated into the NAVPS or the NAVPU, so investors don’t feel them anymore. Have you ever wondered how the NAVPS or the NAVPU are being computed? These two figures are computed using this formula: total money (assets) of the mutual fund/ UITF – total expenses (such as management fees) divided by number of shares/units. When it comes to disclosures, mutual funds are required to be more open whereas UITFs are not. You can even demand information such as the CEO’s age from the mutual fund you invest in.

One thing that I learned from Ffren Cruz is that earnings from UITFs are strictly speaking not exempt from capital gains tax. Mutual funds are exempt from capital gains tax and because UITFs pretty much work like mutual funds; banks are of the opinion that UITFs too should be exempt from paying capital gains tax (and in practice, banks do exempt their clients from paying capital gains tax whenever they redeem UITFs). However, as Efren Cruz said, there is no enabling law saying that UITFs are exempt from capital gains tax.

Another question answered by Efren Cruz at the seminar was the question of what happens to a UITF when the bank that offers it closes. He said that the assets of the trust department of the bank (this is the department which handles UITFs) exist separately (from the bank) and as such will simply be transferred to another bank that chooses to buy it out. I’m not really sure how this would work though or if this is something that is easier said than done.

In one of my posts, I said that investing in balanced UITFs doesn’t make sense as you can just create your own balanced fund. Efren Cruz said the same thing in his seminar. Balanced funds will ALWAYS have a FIXED allocation set for bonds and stocks (e.g. 50% stocks and 50% bonds, 70% stocks and 30% bonds, 60% stocks and 40% bonds, etc.). A lot of people think that balanced funds are very flexible wherein the fund manager can invest 90% in stocks and 10% in bonds at one time and invest 10% in bonds and 90% in stocks at another. Unfortunately, this kind of a pooled fund just does not exist.

During the seminar, we were presented with some interesting facts and figures about mutual funds and UITFs. I was surprised to find out that BPI's mutual funds have the biggest market share in mutual funds and BDO UITFs in UITFs. I don't know why but for some reason I’ve always thought that Phil equity had the largest market share in mutual funds and BPI UITFs in UITFs. I was not surprised however to find out that while the pooled funds industry in the Philippines is an almost 1 trillion peso industry, only a small percentage is made up of pooled funds investing in stocks or equities. Yes, you guessed it; most people are still investing in virtually risk-free money market UITFs and mutual funds.

While VULs were also discussed in the seminar, I did not pay much attention to it since I don’t have any VULs. From what I understand, though, a lot of the VUL’s attractiveness comes from the fact that it is exempt from estate taxes. Efren Cruz cautioned though that with the current BIR commissioner, this exemption might not last for long.

Robert Kiyosaki, the author of Rich Dad, Poor Dad, seems to have a dislike of the mentality of turning money over to a managed pooled fund (such as a mutual fund and a UITF). He says that mutual funds will give you a less than 10% average yearly return, this is in the US. In the Philippines however, mutual funds and UITFs historically gave an average of well over 10% return per annum. Efren Cruz explains that this is because the stock market in the US is very efficient; this means that everyone has access to the same information at the same time. In the Philippines, certain fund managers will get wind of certain information before the rest of us do. But the yearly returns is not the point here, what Robert Kiyosaki is saying is that we shouldn't be entrusting strangers with our hard earned money.

One of the things that I don’t like about pooled funds invested in stocks is that they can only keep a very little amount of their assets liquid. If the market is falling and the fund manager believes that it will continue to fall, he can’t go liquid because the rules say so. Also, pooled funds invested in stocks are always measured against the PSEi. This means that if the PSEi went down 50% and a UITF or a mutual fund goes down only 40%, they can still say that they did well because they beat the index.

I can say that the time I spent at that seminar was time very well spent. Aside from the fact that such seminars would have cost a few thousand pesos were it not sponsored by BDO, I learned a lot of new things. I initially thought that the seminar was going to be biased since BDO was sponsoring it. Instead, it turned out to be anything but. Efren Cruz touched on the different mutual funds, UITFs, and VULs and discussed them very thoroughly without sugar coating anything.

I realized though that the seminar was not very suitable for people with zero investing experience. You probably have to be at least investing in time deposits to have appreciated the content of the seminar. Most of the people who attended the seminar, however, were people who were already investing in instruments other than time deposits like stocks and bonds. In fact, some of the questions from the audience were questions like how the ASEAN integration will affect the stock market and whether one should still buy into this market which is currently trading at 20x PE already (meaning that Philippine stocks are already expensive).

After the great seminar sponsored by BDO, we were given a Krispy Kreme donut to boot, a sweet way to end a very productive day.

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