The US has seen renewed optimism over the past year or two, as much-anticipated fiscal recovery finally set into the world’s largest economy, allowing the US Federal Reserve to raise interest rates once more in March 2017. As rates continue to increase, with another two hikes expected this year alone, the US dollar is projected to strengthen further against other currencies.
While global power shifts and surprise political events such as those of the past year may cause some investors to lose faith and sell their stock investments, they can occur to the immense benefit of far-removed markets such as the Philippines. In comparison to potential market volatility in the US, the Philippines’ improved demographics offer a safe respite for stakeholders looking for a new investment opportunities.
Given that no elections are due in the Philippines this year, the country’s own economy is projected to grow more slowly at 6.3 percent, compared with the previous year’s 6.8 percent. Nonetheless, there could be a pleasant surprise in store for the economy if Rodrigo Duterte’s government proceeds with the immediate implementation of a sound tax reform programme or rolls out several major planned infrastructure projects. With a higher interest rate in the US, the US to Philippine exchange rate is expected to rise further to PHP 51.50 ($1) by the year’s end.
With so many variables across global economies over the next six months, World Finance spoke to Ador A Abrogena, Executive Vice President and Trust Officer at BDO Unibank, to discuss the group’s position within the Philippine market, how the company can help both new and current investors improve the economy even further, and how it plans to stabilise its retirement programme.
What are BDO Trust’s flagship products?
In 2005, Unit Investment Trust Funds (UITFs) were introduced in the Philippines, offering much greater investment options. Similar to mutual funds, UITFs are investment vehicles that allow funds to be pooled from different investors with similar investment objectives. These funds are managed by professional fund managers, and are invested in various financial instruments, including money market securities, bonds and equities. BDO is the leading provider of UITFs, comprising nearly 40 percent of industry assets under management, as well as a number of investment accounts.
There are various UITFs available, depending on an individual’s investment goals and risk preference. These are generally classified into four types: money market, bond, balanced and equity funds. Money market funds are meant for investors whose main concern is liquidity and preservation of their principal investment. These can also be used for parking funds in while waiting to use them for other investments. For those who want higher yields and can invest for longer, the bond funds are more suitable.
Most Filipinos are risk averse, and they prefer short-term, fixed income placements
In between bond and equity funds are the balanced funds, which provide a middle ground between the high risk of equity funds and the relative stability of bond funds by investing in a proportion of bonds and equities.
What is the current state of the Philippines’ investment market?
Investors are optimistic that the Philippines can sustain its GDP growth momentum of six to 6.5 percent. This is because the country’s growth instigators, which are predominantly associated with consumer demand, domestic investments and government spending, remain intact. There is also ample liquidity and a stable currency.
The last 12 months have been positive for fund investors in the Philippine market, but that has not always been the case. Since UITFs were introduced in 2005, they have gone through both positive and negative periods. There was volatility, but as a company we pursued this industry, as we believed in its potential to help the financial needs of many Filipinos.
Early on in BDO’s history, we focused on making sure funds were sold correctly and that clients understood what they were getting. BDO has conducted many seminars, prepared materials and sponsored events to inform the public on products they may require. As of now, those that invested are benefiting, as BDO’s UITFs have grown from a low of PHP 85bn ($1.7bn) in December 2008 to PHP 333bn ($6.6bn) as of last year.
With regards to the country’s rate of savings, the Philippines has one of the lowest rates across Asia for retirement preparation. At BDO, we want to provide products that make it worthwhile for our clients to save and invest. We also want clients to invest over a longer period of time to maximise their returns.
What kind of asset classes and products are you focused on?
We offer products that are in line with market needs. Most Filipinos are risk averse, and they prefer short-term, fixed income placements. Our best seller is the money market fund, as the low volatility and higher-than-deposit yield is a good place to start. However, we also emphasise increasing risk, as this creates better yields and improves the country’s economy. This is why BDO has seminars – to help explain the benefits of risk, and how to manage it.
Where should potential Philippine investors place their money?
Navigating through the changes from last year’s global and domestic developments was challenging. However, BDO deals with professionally managed money markets, bonds, balances and UITFs – available in both Philippine pesos and US dollars. When navigating through difficult financial situations, the company advises clients to invest in the BDO Dollar Money Market Fund. For the more experienced, the BDO US Equity Feeder Fund provides diversification via exposure to US companies that are expected to benefit from Trump’s pro-growth policies. As market conditions have evolved, BDO aims to give informed, prudent and effective investment options.
When is the best time to invest?
There is no better time to invest in UITFs than now, as the Philippine economy looks good, and will improve. The Philippines is now in a better place than it was in the 1970s to 1990s. Today, we have become a net lender because of the economy’s development.
What are BDO’s initiatives in socially responsible investing?
BDO has launched the BDO ESG Equity Fund, a UITF that invests in local companies showing good environmental, social and governance (ESG) practices. The fund is the first ESG-themed UITF in the Philippines. ESG has become known as the socially responsible approach to investing. Responsible investing supports companies adhering to ESG practices that ensure environmental protection and community development which, in turn, sustain both the company’s and its investors’ profitability.
Investors are optimistic that the Philippines can sustain its GDP growth momentum of six to 6.5 percent
The fund is available to retail and institutional clients with an aggressive risk appetite, who want exposure to companies with responsible business practices. The fund can be accessed via BDO branches nationwide as well as via Invest Online, BDO’s UITF online investing facility.
Would BDO consider investing outside the Philippines?
We are diversifying our investments right now, moving from predominantly Philippine-based assets into a mix of local and offshore bonds and equities. We have collaborated with external fund managers for the feeder funds we offer. These include the major global fund managers BlackRock, Legg Mason and SLI Investments.
What about the institutional business of BDO Trust?
At BDO we manage segregated portfolios for institutional accounts – retirement plans, educational institutions, religious organisations and foundations. We are one of the more aggressive managers and have recommended a larger share of equities against fixed income equities over the past five years. Many institutional clients are conservative, so we provide good recommendations and suggest they diversify and buy riskier assets, if they can take the volatility.
Rules on corporate retirement funds have been in place for several decades now, but many companies have not set up pension plans – that’s where we help. Some are hesitant as they have to separately ringfence the funds and cannot use them for current operations. Still, some companies are looking at this now as an employee incentive. It is a slow process, but it is happening. BDO has been advocating the implementation of defined plans that would allow employee contributions, allowing employees to save on their own and make their investment earnings tax exempt at the same time.
How is BDO helping Filipinos with their post-employment security?
After hurdling the stringent qualification requirements of Bangko Sentral ng Pilipinas (BSP) and the Bureau of Internal Revenue (BIR), the Trust and Investments Group of BDO became the first institution in the Philippines to be accredited as a Personal Equity and Retirement Accounts (PERA) Administrator.
The PERA implementing rules and regulations were issued on October 21, 2009 by various regulatory bodies. These were detailed in regulatory issuances by the BSP and the BIR, the latest of which was dated December 2016.
PERA is the Philippine version of similar laws covering retirement savings vehicles prevalent and long standing in more developed countries, such as IRA and 401(k). It establishes the legal and regulatory framework for voluntary personal retirement plans as a means to promote savings, capital market development and long-term fiscal sustainability. It also provides Filipinos with a means to supplement their future pension benefits from the Social Security System/Government Service Insurance System.
At BDO, we believe that being the first PERA administrator is a distinct privilege. This will allow us to promote our advocacy for financial inclusion. Implementing PERA is complex as it involves efficient coordination with the various PERA participants, like the cash/securities custodian, investment product providers and investments managers, as well as providing the required regulatory reports. More importantly, it involves educating and inculcating financial literacy across PERA contributors.
The challenges notwithstanding and with the continuous support of BSP as the government agency working for the implementation of PERA, BDO looks forward to fulfilling its responsibilities as the country’s first PERA administrator.