INVESTMENT SPOTLIGHT
In Part 1, we discussed how the investment decision of foreign-currency earners in the Philippines is greatly influenced by exchange rate expectations. In the case of US dollar earners, for example, if the peso is expected to strengthen further against the dollar, the best decision would be to convert USD income to peso and invest in peso-denominated funds; if, on the other hand, there is a prevailing belief that the peso will eventually devalue and make the dollar more expensive, then the best course of action would be to participate in US dollar-denominated investments and just liquidate when the exchange rate is at a favorable-enough level.
This post discusses the alternatives available to the investor who expects the peso to weaken against the dollar in the foreseeable future and appropriately chooses to invest in USD-denominated investments.
US dollar investments in the Philippines
Unlike in more developed markets, Philippine investors don't have direct access to individual stocks listed in major foreign exchanges such as the ones in New York, London, and Hong Kong. The availability of foreign-denominated equity is thus just limited to investment funds like UITFs and mutual funds. Foreign currency-denominated fixed-income securities are more readily available to Philippine investors, with US dollar and Euro Republic of the Philippines (ROP) bonds and corporate bonds, although these usually require steep initial investments, somewhere close to 50,000 USD or EUR.
The best alternatives for foreign currency, particularly US dollar, investors in the Philippines are the dollar-denominated UITFs offered by most major banks. Dollar UITFs are more within the reach of retail investors, with a minimum initial investment of as low as 500 USD and feature all of the advantages of UITFs we have already discussed in previous posts. Below, we see a comparison of dollar UITFs offered by BDO and BPI in terms of various criteria. (Click on the fund names in the table to open the latest monthly report for these funds.)
Money market USD UITFs. These are made up mostly of short-term deposits, and Philippine and non-Philippine government securities. These are the safest (and lowest yielding) dollar UITFs in the market with almost-certain principal protection. (BPI does not offer this kind of dollar UITF)
Minimum Investment | 2,000 USD |
Minimum Additional | 2,000 USD |
Management/Trust Fee | 0.50% per year |
Early Redemption Fee | 0.50% of original investment |
Minimum Holding Period | 45 days |
Annualized Return* | 3.26% per year |
Bond USD UITFs. These are composed mostly of ROPs, corporate bonds, and international bonds. Since bond prices fluctuate with changes in interest rates, these investments are more volatile than money market dollar UITFs and thus pose a more significant risk of principal loss.
Minimum Investment | 2,000 USD | 2,000 USD |
Minimum Additional | 2,000 USD | 2,000 USD |
Management/Trust Fee | 0.75% per year | 1.00% per year |
Early Redemption Fee | 0.50% of original investment | 1.00% of original investment |
Minimum Holding Period | 45 days | 45 days |
Annualized Return* | 4.55% | 5.80% |
Minimum Investment | 500 USD | 500 USD | 500 USD |
Minimum Additional | 200 USD | 200 USD | 200 USD |
Management/Trust Fee | 0.25% per year | 1.00% per year | 0.75% per year |
Early Redemption Fee | 0.25% of original investment | 0.25% of original investment | 0.25% of original investment |
Minimum Holding Period | 90 days | 30 days | 30 days |
Annualized Return* | n/a | 5.34% | 4.39% |
Equity USD UITFs. These funds are diversified across US, European, and other international stocks and equity funds. They are more volatile than bond dollar UITFs so the possibility of principal loss is greater, but they also provide a better chance of earning higher returns on any given period. (BDO does not offer this kind of dollar UITF)
Minimum Investment | 500 USD |
Minimum Additional | 200 USD |
Management/Trust Fee | 1.50% per year |
Early Redemption Fee | 1.00% of original investment |
Minimum Holding Period | 90 days |
Annualized Return* | 0.37% per year |
*"Annualized Return" = compounded annual growth rate of NAVPU in past 5 years
One thing that is obvious from the above comparisons is that this time, the choice is not as obvious as when we compared peso UITFs in a previous post. The most glaring difference between the dollar UITFs of BDO and BPI is that at a minimum investment of 500 USD and a minimum additional investment of 200 USD, BPI's UITFs are more affordable than BDO's. Nevertheless, I'll leave it up to you to scrutinize the details of the offerings and choose one or two that best fits your investment needs.