Measures pushed to promote UITFs

BY IRIS CECILIA C. GONZALES, BusinessWorld Senior Reporter Banks’ trust departments are looking into putting in place policy changes and safeguards for the so-called unit investment trust funds (UITFs) to make investors more aware of the benefits and risks of the product. UITFs are open-ended peso- or dollar-denominated trust funds. Under the scheme, the money of small investors are pooled into a larger fund and are invested in high-yielding outlets such as bank deposits and securities that are tradable. The Bangko Sentral ng Pilipinas (BSP) is also looking into smoothing out the volatility in the securities market as the recent movement in interest rates has been affecting UITF investments. This is amid mounting concerns about UITFs with banking sources warning that investors could lose as much as 10% to 15% of their principal investments. The Trust Officers Association of the Philippines (TOAP) assured the public the product is safe and that it yields higher returns compared to ordinary deposits. "UITFs are safe. It has risks but investors can find products suited for their risk tolerance," TOAP President Ma. Lourdes T. de Vera told BusinessWorld on Friday. Some UITF investors wanted to pull out their funds during the past several days amid concerns they are losing their principal investments. Ms. de Vera, however, said investors need only to stay long enough and not pull out their product until the volatility in the market disappears. According to industry estimates, 80% of the P230 billion in UITF funds in the market are invested in government securities, making the product safe. UITF returns are marked to market and that the net asset value per share changes daily. When market prices rise, the UITF investor enjoys higher returns because re-valuations result in capital gains on top of the accrued income. When market prices fall, the UITF participant is exposed to capital losses which may be avoided by deferring redemption until market conditions become favorable. AVOID UNCERTAINTIES To avoid uncertainties and to attract more investors into the product, TOAP is studying possible policy changes it may implement. TOAP is looking at requiring all member banks to present absolute yields for their UITFs and not annualized yields to give investors a more accurate picture of how much the fund earned for a particular time and not on an annual basis. "One of the changes we are looking at is that all member banks should not present annualized yields but only absolute yields or what the fund earned for a particular time. This is because the rate for this month will not hold for the entire year," Ms. de Vera said. Another change is for banks to impose a minimum placement period so that investments in UITFs will be able to ride out the volatility. "What we plan to do is to require at least three months," Ms. de Vera said. Another policy change is for banks to present all the information about the product, particularly the different kinds of UITF funds. "More and more education is needed. The product is new so people need to understand more," Ms. de Vera said. Monetary authorities for their part assured the public there is no need to panic as they attributed the recent decline in UITF returns to the volatility in the market. They also hinted that the BSP may intervene to smoothen the volatility in the market through its open-market operations. "The market will eventually correct itself but if it doesn’t, it is well within the BSP’s mandate to smoothen excessive volatility," BSP Deputy Governor Nestor A. Espenilla, Jr. told reporters on Friday. -Report from BusinessWorld