INVESTMENT MANAGEMENT

A fund, also known as an investment fund, is a collection of stocks, bonds or other securities owned by a group of investors and managed by a professional investment company.

Similar to a Common Trust Fund (CTF), a Unit Investment Trust Fund (UITF) is a trust product that pools the money of various investors into a single portfolio managed by a professional investments team of a trust department of a bank or an institution with a trust license. The Fund allows the investor to own participation in stocks or bonds at a fraction of the costs and minimum investment amounts usually associated with these investments. Moreover, the investor need not track his investment daily, nor worry about what stocks or bonds to buy or sell. This is because skilled fund managers with years of asset management experience handle the portfolio day-in, day-out. But unlike the CTF, a UITF must be valued using the marked-to-market method and is not required to keep any reserves with the Bangko Sentral ng Pilipinas.

The risk and return of the Fund is determined in large part by the asset type or types that comprise it. To illustrate, the graph to the right plots the quantified risk and return characteristics of the various types of Funds over a span of five years. Portfolios invested purely in cash or time deposits would generally have the least exposure to risk, as well as the least return. On the other end of the spectrum, portfolios with holdings composed entirely of equities is high-risk, yet high return. A curve called the risk-return frontier may be used to approximate the trade-off between risk and return.

The risk and return of the Fund is determined in large part by the asset type or types that comprise it. To illustrate, the graph to the right plots the quantified risk and return characteristics of the various types of Funds over a span of five years. Portfolios invested purely in cash or time deposits would generally have the least exposure to risk, as well as the least return. On the other end of the spectrum, portfolios with holdings composed entirely of equities is high-risk, yet high return. A curve called the risk-return frontier may be used to approximate the trade-off between risk and return.

Funds are also further differentiated by the types of securities that they are made up of.

Open-end funds sell as many units as investors are willing to buy. This makes the fund grow bigger as every new investor buys a unit of the fund.
Closed-end funds sell only a fixed number of shares. After that, the shares are traded on an exchange.

Different types of funds have different objectives. So an investor should choose the fund which satisfies his own needs or preferences.

Example:
An investor wishes to build a vacation house for his retirement in ten years. He can afford to keep the money allotted for this locked up for the entire period, and he can tolerate up to moderate risk if his money can appreciate considerably. Given these characteristics, he may want a fund that delivers capital growth.

Towards this objective, he may prefer an equity fund. Equities provide generally higher growth over debt instruments, in exchange for a higher risk exposure. However, even as they are more volatile than other instruments, returns on equities tend to average out in the long-term. An investor willing to wait out a ten to fifteen year time frame will have the advantage of a greater probability of high returns at low level of risk.

In order to invest in a fund, a person must buy shares or units of participation in the fund. The value of one unit can be calculated by dividing the current market value of the entire fund by the number of outstanding units. The market value of the entire fund is equal to the market value of all the securities in the fund. This is known as Net Asset Value or NAV. By dividing the NAV by the number of outstanding units, we get the NAV per unit of participation or NAVPU. The NAVPU is the price the investor must pay for one share or unit of participation.

There are two ways to value fixed income funds, the accrual method and the marked-to-market method.
In the accrual method the value of each asset in the Fund is recorded at its purchase price and coupon payments are accrued or accumulated on a daily basis(less tax expenses). Take note that this does not reflect the actual market prices at which assets in the Fund can be traded.
On the other hand, the marked-to-market method values each security in the portfolio at its end-of-day market price plus the accrued interest (less taxes and fund expenses).

MTM accounts for all gains and losses of the assets of the Fund on a daily basis. Thus, it reflects the actual net worth of the Fund

Recall that when purchasing units of participation, the price of each unit is determined by the current day's NAVPU. When redeeming units, the amount that the investor shall receive is also based to the current day's NAVPU. So an investor can earn on a UITF when the redemption price is greater than the subscription price.

On September 3, 2004, the Bangko Sentral ng Pilipinas (BSP) officially released Circular No. 447, paving the way for the creation of Unit Investment Trust Funds (UITF). Previously, only CTFs and mutual funds existed. Circular No. 447 was the BSP's response to the need to reform the Fund industry and bring it up to global best practices, wherein mark-to-market valuation is used. MTM accounts for all gains and losses of the assets of the Fund on a daily basis. Thus, it reflects the actual net worth of the Fund. An investor transacting units of a Fund that is valued using MTM is assured he is buying or selling the Fund at its true value. The circular took effect last October 1, 2004 and promotes a shift from CTFs into UITFs thereby conforming more closely to global standards.

BSP Circular No. 452 (dated September 22, 2004), together with a number of other official directives, outline the transition guidelines for existing CTFs. These directives mandate that all banks are to cease accepting new participants into their CTFs by December 31, 2004, refrain from accepting additional placements from existing CTF investors effective April 1, 2005, and to submit to the BSP a plan for phasing out by October 1, 2006 all outstanding CTFs. These directives were made to encourage banks to shift their CTFs to UITFs soon.
In addition, existing CTF assets need to be delivered to a third party custodian by the end of October, and would likewise become subject to the reserve requirement for deposit substitutes by April 1, 2005. Be informed that reserves kept with the BSP are in cash and low-yielding reserve securities, and can weigh down the performance of the CTF. On the other hand, UITFs are free of such a reserve requirement and may fully invest its assets in the financial markets - earning potentially higher returns.

The fund's daily Net Asset Values per unit are compared against a benchmark. A benchmark is normally an index or collection of different securities. In choosing the right benchmark for a fund, it is important that the benchmark and the fund are composed of similar securities. In other words, you must compare "apples to apples." Upon inception of the fund, an index placing the fund in proportion to the benchmark is constructed and the selected benchmark is set to have a NAVPU equal to the fund's initial NAVPU. Whenever the fund's value is greater than that of the benchmark, the fund is said to be outperforming the benchmark. If the fund's value is below that of the benchmark, then the fund is underperforming.
Usually, the fund's Return objective is to outperform the benchmark, gross of any fees and expenses incurred in its management.

ING issues daily fund fact sheets that contain the relevant information such as NAV, NAVPU, the top ten holdings of the fund and even a short report from the manager. For further information, see the appendix "How to read an ING Fund Fact Sheet."
Investors can also monitor the fund performance through regular publication of the NAVPu by the Trust Officer Association of the Philippines (TOAP) on a weekly basis in a newspaper of national circulation.

You need to build on the concept of an "expected time horizon" for funds, long term investing/holding capacity with flexibility to pay-out.

One can never time the market; investing should involve a disciplined process.
Market Timing is an investment strategy that seeks to place the purchase of investment instruments on the time that prices are low so that when prices go up, the instruments bought can be sold for higher prices and thus the investor can earn from the sale. The ultimate goal then for timing the market is to gain the maximum return by buying at the absolute bottom of the instrument's price and sell at the very peak.

That is why the biggest fear of investors is to enter the market is when prices are high and expected returns are lower.

Consider three investors John, Jack, and Joe, who invest in a fund invested in US Dollar denominated fixed income bonds issued by the Philippine government. Suppose now that each of the investor buys $5,000 to invest at the start of each year for 10 years; the only difference is the time that each investor enters the market. John times the market perfectly and enters the market at its bottom, i.e. when prices are low. Jack meanwhile, is a periodic investor who places his investment on the first business day of the year. Lastly, Joe times the market in the worst possible way and invests at the peak of the market, i.e. the prices are high.

The following table shows the investment transactions and the returns for each year of each investor.

From their investments, John gets the highest rate of return while Jack, who trails only by 0.73% behind John, receives the second highest return. Joe's investment on the other hand, gives him 15.85% return, which is the lowest among the three. In connection to this, at the end of ten years John gets the highest end value which is $178,418 while Jack gets $171,982 ,and Joe $128,482.

From the illustration presented it is clear that the one who enters the market at the bottom, which is John, gains the most returns from the investment while the one who enters at the peak gains the least (Joe).

Market timing is difficult to do. The probability of bad timing is equally present as a good one.

In addition, a good market timing gives only a limited additional return over the long term. In this case, John's return is only 0.73% higher than Jack's, who doesn't time the market and does periodic investment instead.

In addition, a good market timing gives only a limited additional return over the long term. In this case, John's return is only 0.73% higher than Jack's, who doesn't time the market and does periodic investment instead.

The Investor subscribes, or purchases, Units of Participation in the UITF through an instruction given to his Broker/Trustee, who then relays the instruction to ING Bank N.V. Trust Department. The purchase is made at the Net Asset Value per Unit (NAVPU) of the UITF, which is calculated by the end of the day.

The Investor redeems, Units of Participation in the UITF through an instruction given to his Broker/Trustee, who then relays the instruction to ING Bank N.V. Trust Department. The redemption is made at the Net Asset Value per Unit (NAVPU) of the UITF, which is calculated by the end of the day.

The value of the fund, otherwise known as Net Asset Value (NAV) is the market value of all the assets that comprise the fund, less management fees and other expenses. ING UITFs are Marked-to-market daily. Marked-to-Market (MTM) method is method for the valuation of fixed income funds which calculates Net Asset Value (NAV) using the assets' current market price plus coupon payments accrued daily.

The fund's Net Asset Value per Unit (NAVPU) is calculated at the end of the day. This means that if an investor is able to buy into the fund before the cut-off time for the day, he will only find out his NAVPU the following day.