Fund managers lobby for new benchmark

REPORT FROM BUSINESSWORLD Local fund managers are moving towards the adoption of a new benchmark for calculating the performance of local fixed income funds to improve transparency and comply with global investment standards. In a position paper, the Fund Managers Association of the Philippines (FMAP) called for the phasing out of the use of the single security such as the 91-day Treasury bill as a benchmark for reporting investment results to clients. "In line with our mission to foster the development of capital and financial markets through the fund management industry, [we] strongly endorse the adoption of a total return index in lieu of the... 91-day T-bill rate, [as a] benchmark for local fixed income funds," the FMAP paper said. "A good benchmark should include all opportunities that are realistically available to market participants under normal market conditions," it added. Specifically, the group is endorsing the use of the HSBC local bond index, which takes into account the marked-to-market valuation of portfolio securities, FMAP President Paul Joseph M. Garcia said. When assets are marked-to-market, they are valued at current market prices and not at their acquisition costs. "Our advocacy is to raise the standard so that everyone will be on the same boat, that is, marked-to-market. Fund managers now will have to reckon with marked-to-market risks so we can be closer to global best practices in terms of fixed income benchmarking," said Mr. Garcia, who is also chief investment officer of global financial giant ING. "This is also part of our initiative to support the central bank’s move to increase liquidity and transparency in the bond market," he added. Central bank Governor Amando M. Tetangco, Jr., who spoke at Monday’s meeting of the FMAP, made his own recommendations to improve the financial market. "[The central bank] hopes that the industry will likewise consider adopting fund performance calculation and presentation standards and other initiatives that promote market transparency," he said. Standards for fund performance measurement and presentation help make performance results more readily comparable among fund managers, and facilitate dialogue between fund managers and prospective clients, Mr. Tetangco said. "I believe that benchmarking portfolio performance is one step towards aligning local investment management practices with global standards," he said. "We hope that the Bangko Sentral ng Pilipinas and the fund management industry can build a strong and successful partnership in the implementation of reforms geared towards capital market development and investor protection," he added. The HSBC local bond index, launched in 2002, tracks the total return performance of local currency-denominated liquid bonds in China, Hong Kong, India, Indonesia, Korea, Malaysia, Singapore, Taiwan, Thailand and the Philippines. Zhi Ming Zhang, HSBC fixed income market analyst, noted that the Philippines, with its developing capital market due to the improved liquidity, should join other players in the region that have been using the performance measure. "That would discipline the fund managers," Mr. Zhang said in a separate interview. HSBC has specifically crafted the HSBC Philippine local bond sub-index (HLBI), which tracks the daily performance of peso-denominated government securities on a total return basis. It takes into account bid-side price changes, accrued and reinvested coupon payments and the 20% final withholding tax. HSBC forecasts returns on Philippine local currency-denominated bonds to hit 16% to 17% this year from 2006’s 21.56%, due to the prevailing low-yield environment. "Philippine peso bonds are unlikely to meet last year’s performance, but there will be continued strength," Mr. Zhang said. "It will be decent capital gains because investment sentiment is strong. People still want to buy peso-denominated assets," he added. — Maria Eloisa I. Calderon and Paolo Joseph L. Lising/BusinessWorld