The Trust Officers Association of the Philippines (TOAP) has prepared this primer to help clients understand the features of unit investment trust funds (UITFs). It highlights the benefits and risks of investing in UITFs, what to look for in a Declaration of Trust which sets the investment objectives and embodies the mechanics of the UITF. It also provides answers to frequently asked questions about UITFs, as well as other information that clients should consider before investing in these products.
The 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 BangkoSentralngPilipinas (BSP) Circular 447 issued on September 3, 2004. UITFs are intended to replace a popular product of the past two decades known as Common Trust Funds (CTF) which the BSP had directed to be phased out by October 1, 2006 (and October 1, 2009 for the long term tax-exempt CTFs). As early as January 1, 2005, BSP directed trust entities not to accept funds from new investors under CTF products while additional investments from existing clients were no longer allowed effective April 1, 2005. These BSP regulations were intended to align the operation of pooled funds under management by trust entities with international best practices and to ensure differentiation from bank deposits and other direct liabilities of the financial institution.
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, TOAP provides the answers.
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.
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.
A client invest 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.
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.
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.
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.
The UITF investor and trust entity shall execute a Participating Trust Agreement to confirm the investor's desire to participate in the fund and 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.
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 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.
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:
Yes. Clients may diversify their investments across various UITFs as long as the objectives and mechanics of the funds are suitable to their requirements.
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:
The investor should likewise be comfortable with the trustee of the UITF in terms of their expertise and skills in fund management.
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.
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.
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 TOAP website or the trust entity's website. To determine the value of the UITF investment, simply multiply the NAVPU by the number of units of participation acquired.
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.
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.
The client's return on investment can be determined using the following formula:
|Return on Investment =|| Proceeds of investment – Initial investment * 100
Proceeds of investment = Applicable NAVPU x number of units of participation (less early withdrawal charges, if any)
Initial Investment = Amount invested
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)
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.
Payment to the investor will depend on the settlement period prescribed by the trustee. This way vary depending on the nature and settlement convention of the investment of the UITF product.