The Best Cup of Coffee in Sagada...

... Only costs 20 pesos.

The best things in life aren't free, but they also don't have to be very expensive.

It has been a very fruitful 2012. My head will explode in excitement and anticipation for things that are lined up for 2013. Happy New Year everyone!

Wealth Management for Filipinos Abroad

Wealth management through a Philippine bank offers a good way for Filipinos based abroad to have access to and manage investments in the Philippines. Wealth management services allow investors to:

1) Open investment accounts remotely;
2) Move funds to and from investment vehicles; and
3) Receive information about upcoming financial products

The service was introduced to me by a former student who works at RCBC. Through the service, I was able to invest in RCBC's peso equity and bond funds without having to go to a local RCBC branch. While the steps that I describe in this post pertain to RCBC's wealth management service, I'm pretty sure that other banks would be able and willing to accommodate a similar procedure.

Opening an account

Our conservative banking laws require signatures on numerous forms for opening a deposit or investment account and make it difficult for overseas Filipinos to avail of local bank services remotely. The most straightforward workaround for this requirement is to have the documents sent by mail to your overseas address, and for you to send the documents back to the bank once they are filled up and signed. In my case, the documents were sent to the bank's branch in Hong Kong so that I did not have to pay for postage in sending them back. Once the documents were received by the Philippine office, a savings account to which I could to remit my funds was opened on my behalf.

Remitting and allocating funds

You can send funds to the savings account that is associated with your wealth management account by any means. I used RCBC Hong Kong's remittance service to transfer my funds to the Philippines.

Investors may choose from available Philippine UITFs and mutual funds, time deposits, and upcoming and outstanding bonds to invest in. Once you have figured out how you want to allocate your funds to different investments, you can simply email your instructions (i.e., which investments and how much per investment) to the bank's account officer or representative.

Monitoring and managing investments

You can also email subsequent buying and selling instructions to your bank contact. My account officer frequently furnishes me with reports regarding upcoming investment products and even regulatory information that may affect my current and future investments (he was the one who informed me of the BIR's clarifications for five-year investment tax exemptions).

You can monitor the performance of your investments through the usual channels (e.g., Bloomberg, the bank's website/e-banking platform).

The costs of availing wealth management services

There is no separate, explicit fee for the service, which means that you just pay fees for that your chosen investments charge; the bank will not charge you for investing on your behalf. You'll have to maintain a certain cash balance in your savings account (10,000 pesos in my case), however, so that involves some opportunity cost.

You also incur some costs whenever you send money to your Philippine account (e.g., remittance fee, exchange rate spread), but these aren't really a direct result of availing the service.

It's not a cost, per se, but wealth management services usually require an initial investment of 1 million pesos, which some of us may find prohibitive. If you're really interested in the service but don't have that much capital available for investment, try requesting for a lower initial investment amount.

To end, if you're a Filipino who's based abroad and you're looking for a way to invest in the Philippines, as far as I know opening a wealth management account is the only way to do it remotely--and efficiently and cost effectively, at the same time. I've done it, hassle is minimal, and it works.

If you have questions that were not covered in this post, please feel free to ask in the comments section below.

BIR Clarifies Tax Exemption for Five-Year Investments

On December 11, the Bureau of Internal Revenue released Revenue Memorandum Circular (RMC) No. 81-2012, which includes supplementary clarifications regarding the tax exemption of long term investments as stated in the National Internal Revenue Code (NIRC) of 1997.

The memorandum cites a section from Revenue Regulation No. 14-2012, which lists conditions/characteristics required for the tax exemption of long-term investments:

1. The depositor or investor is an individual citizen (resident or non-resident) or resident alien or non-resident alien engaged in trade in the Philippines;

2. The long-term deposits or investment certificates should be under the name of the individual and not under the name of the corporation or the bank or the trust department/unit of the bank.

3. The long-term deposits or investments must be in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP);

4. The long-term deposits or investments must be issued by banks only and not by other financial institutions;

5. The long-term deposits or investments must have a maturity period of not less than five (5) years;

6. The long-term deposits or investments must be in denominations of Ten Thousand Pesos and other denominations as may be prescribed by the BSP;

7. The long-term deposits or investments should not be terminated by the original investor before the fifth year, otherwise they shall be subjected to the graduated rates of 5%, 12% or 20% on interest income earnings; and

8. Except those specifically exempted by law or regulations, any other income such as gains from trading, foreign exchange gain shall not be covered by income tax exemption.

RMC No. 81-2012 adds that for interest income derived by individuals investing in common or individual trust funds or investment management accounts to be exempt from income tax, the following characteristics/conditions must ALL be present:

1. The investment of the individual investor in the common or individual trust fund or investment management account must be held/managed by the bank for at least five (5) years;

2. The underlying investments of the common or individual trust account or investment management accounts must comply with the requirements of relevant portions of NIRC of 1997, as well as the requirements mentioned above;

3. The common or individual trust account or investment management account must hold on to such underlying investment for at least five (5) years.

So what does this mean for investors? What's clear is that investments in corporate and treasury bonds, even if held for 5 years or more, are not tax exempt. But according to my bank contact, it's not clear to them which particular securities "long term deposits or investments issued by banks" include. Additionally, the lower effective coupons (from taxes) may offset bond price gains from lower interest (due to the recent credit rating upgrade for the Philippines) enough to result in lower bond yields.

Philequity and BPI's Stock Index Funds: An Objective Comparison

Thanks to the person who made this comment for inspiring this post (unfortunately, it has already been removed by the poster):

There is a passive fund in the Philippines -- its called PHILEQUITY PSE INDEX FUND (Bloomberg Ticker PHILPSE:PM). Unlike the actively managed fund, the starting investment is P 50,000. This fund is not actively traded.

First let me clarify that currently no fund in the Philippines is traded--actively or not. Mutual funds and UITFs are not traded, and investment shares or units may only be sold/redeemed through the fund provider. But that's a story for another day.

Before seeing this comment in my inbox, the only stock index (i.e., PSEi) fund in the Philippines that I was aware of was BPI's Philippine Stock Index Fund. But even if I'm biased for passive investing, as some of you may know, I avoided talking about that fund too much because I thought the minimum investment requirement was too high and the management fee too steep. So maybe you can imagine my *excitement* upon finding out that another index fund was available in the country.

After only a few minutes of cursory online digging, I've uncovered some VERY interesting information about which I can only say... WOW (non-judgmentally, but maybe a wee-bit sarcastically).

As a result, I've come up with a 100% (best effort) objective comparison between Philequity's PSE Index Fund (Bloomberg Ticker PHILPSE:PM) and BPI's Philippine Stock Index Fund (Bloomberg Ticker BPIPHID:PM).

All the information below can be found on Bloomberg; try clicking on the above links or refer to this guide that I posted a while ago.

Minimum and Additional Investment Requirement

	Minimum Investment	Minimum Subsequent Investment
BPI	50,000	10,000
Philequity	200,000	50,000

Fees

BPI

Philequity

Current management fee is the percentage of the investment value deducted annually for management and administrative expenses.

Front load is the percentage of the investment amount deducted at the beginning of the investment period. If you invest 100,000 pesos in a fund with a front load of 5%, you will only receive 95,000 pesos worth of units/shares.

Back load is the percentage of the investment value deducted at redemption.

Both the front load and back load fees are supposed to go to the fund agents, brokers, and salespersons.

Redemption fee is the percentage of the investment value deducted when units/shares are redeemed before a predetermined minimum holding period.

Performance vs. the PSEi (PCOMP:IND)

In the past (1) year, BPI has slightly outperformed the PSEi.
In the same period, Philequity has underperformed the PSEi.

In the past 3 years, both BPI and Philequity have closely tracked the PSEi
without any discernible difference in performance.

In the past 5 years, Philequity has significantly outperformed both BPI and the PSEi

Given the following information, which of the two funds above is more attractive to you?

***

I'm sorry, I know I promised to be objective in this post, but I hope you would allow me this one insinuation.

Looking at the Philequity webpage for its index fund, we see the following comparison against the PSEi.

For the life of me, no matter how I look at the data, I just can't reconcile this implied discrepancy in performance between the Philequity index fund and the PSEi, and the Bloomberg comparisons that we saw earlier. Something's amiss, most definitely. And whatever it is, at worst it is irresponsible, unethical, and unconscionable.

Computing for the "Fundamental" P/E Ratio

PERSONAL FINANCE 101

In a previous post, we discussed the reasoning behind the leading P/E ratio, how it actually reflects future cash flows, and why it is referred to as "justified" or "fundamental." In this post, I will give an example of how to compute for this multiple using commonly available data.

(This example is adapted from a question from CFA Institute's free CFA Level 1 Mock Exam.)

An investor gathers the following data for a stock. (In "real life," the following can be derived from financial statements found on the PSE website.)

Year	Earnings per share, EPS (PhP)	Dividends per share, DPS(PhP)	Return on equity, ROE
2011	3.20	1.92	12%
2010	3.60	1.80	17%
2009	2.44	1.71	13%
2008	2.50	1.60	15%

Given that the investor uses a required rate of return of 11.5% (for now, let's just take this as given), estimate the stock's fundamental P/E.

I have already shown that the fundamental P/E is given by

fundamental P/E = P0 / E1 = (D1/E1) / (k - g)

Where D1/E1 is the dividend payout ratio one year from now, k is the required rate of return, and g is the (constant) annual growth rate.

Let's start with the most straightforward input to estimate, D1/E1. Computing for the dividend payout ratio = DPS/EPS in the past four years, we get:

2011	60%
2010	50%
2009	70%
2008	64%
Average	61%

Seeing that the stock's dividend payout ratio does not seem to vary substantially (admittedly, a matter of subjective judgement) from year to year, the most intuitive estimate for next year's dividend payout is the (arithmetic) average, or 6.1%.

Next, we compute for the stock's growth rate. Technically, this growth rate should be the annual growth rate of dividends, which we can estimate using the annual compounded growth rate of dividends from 2008 to 2011 (i.e., geometric mean)

annual compounded growth rate of dividends = (1.92/1.60)^(1/3) = 6.27%

Another way of estimating growth is by using the sustainable growth rate formula

sustainable growth rate = (1 - dividend payout ratio)*ROE

To simplify things, let's just use the average dividend payout ratio and the average ROE, 14.25%, to estimate g

Sustainable growth rate = (1 - 0.61)*14% = 5.55%

Using the formula for P0/E1 above and our input estimates, we get the following values for the fundamental P/E ratio of the stock.

g	P0/E1
5.55%	10.26
6.27%	11.66

We can now use these estimates to judge whether the stock is overvalued or undervalued, or to value other stocks in the same industry or with the same risk.

A word of caution, though. We must be aware that estimates resulting from the procedure I illustrated here suffer from significant limitations. First, the estimates are as only as good as the inputs, so make sure that any assumption you make is realistic and reasonable. Second, all out inputs are based on historical data, so any patterns or trends that are derived from the data may not repeat in future periods. Finally, make sure that you are aware of and understand the assumptions used in the model (i.e., the fundamental P/E formula), and that these are reasonably applicable to the stock or asset of interest.

More about the "required rate of return" in a future post.

Inflation Concerns at Retirement

DEAR INVESTOR JUAN

Dear Investor Juan,

Retired 75 years old without any employment and business seeks help to make money from life saving and SSS pension.

I am really concerned about inflation, and I started reading about how to make money by investments, but I am really lost specially since there is a recurring warning all the time that I must be ready to lose all my life saving and accumulated SSS pension payments.

It seems that the only way to make money safely is to open savings accounts in banks, but the interest earned is so meager that it is not going to outpace inflation in any significant manner.

Are people like myself condemned to be eaten up by inflation so that they will if they live long enough end up penniless owing to inflation and of course from using up their life saving and SSS pension to continue meeting everyday life expenses as they continue in life?

Marius


Dear Marius,

I'll start by briefly discussing inflation in general. Then we'll go through alternatives that people in your situation can turn to to lessen its effects.

Inflation is the tendency of prices of goods and services to increase over time. It is a cause for concern because rising prices reduces how much of something we can buy with a given amount of money. And the less we have of something, the less of it we consume--and typically--the less happy or satisfied we are. And that can't be good.

That's not to say inflation is "bad," per se. Price increases are a part of life, and sometimes even favored and targeted in economic planning. If inflation is caused by increased demand, such as during an economic expansion, then it's good for everyone, on average, since it would be accompanied by low unemployment and proportionately higher wages which counteract the negative effects on spending and consumption.

However, retired individuals like you and others without regular income would be more affected by rising prices. Ideally inflation should be accounted for in financial or retirement planning to make sure that there would be enough money for needs and wants after accounting for inflation. The primary objective of any financial planning exercise is to have enough to cover expenses while one is still alive, and some subjective terminal amount at the end of the planning horizon.

When is enough enough? Technically, "enough" means that the present value of all cash inflows (e.g., retirement pension) and cash and disposable assets at hand should at least be equal to the present value of all future spending and some terminal value/amount. In equation form, it should look like:

cash + disposable assets + PV(pension) >= PV(spending) + PV(terminal amount)

(For a more detailed form of this, please refer to the spreadsheet in this post.)

At retirement, our objective is for the left side of this equation to be greater than or equal to the right side. Inflation increases PV(spending) and the right side of the equation, so it's a cause for concern. Fortunately, this simple model also shows us alternatives that can help us achieve our objective.

1) Invest appropriately. At this stage, your investment should be to earn returns while preserving capital and liquidity. While high expected returns would significantly decrease the right side of the equation (more than it will decrease the left side), it would also entail unnecessary risks that might erode capital and/or limit liquidity. This means inflation being greater than investment returns is pretty much a given at this stage of our lives, but it should not matter as long as our primary objective is met.

2) Control spending/expenses/comsumption. If last year you can buy five apples with your 100 pesos, and now you can only buy four, then maybe you should try to be satisfied with four.

3) Earn extra income. I know it must suck if we have to do this just to make ends meet at this stage of our lives, but we can just think of it as penance for making bad decisions in our youth.

4) Minimize terminal amount. In my opinion this should be zero. Only reason why it should be anything else is if you want to leave your children and grandchildren with some inheritance. But if you're worried that you don't even have enough to cover your needs for the remainder of your life, saving for your descendants' inheritance is a luxury that you can't afford.

I guess what I'm really trying to say is that instead of being overly worked up by "ending up penniless" or by inflation outpacing investment returns or by "using up" life savings (what else are savings for but to use up?), we should be more concerned with making sure that we have the means for a good-quality of life while we're still alive to enjoy it.

Stock Options

DEAR INVESTOR JUAN
PERSONAL FINANCE 101

I got this from the PSE website: http://www.pse.com.ph/resource/memos/2012/LA__2012-0535.pdf

What does this mean?

Thanks a bunch for the help.  You've been really great. :)

George

Dear George,

First, let's talk about stock options. Stock option holders have a right (but not the obligation) to buy a particular stock (the "underlying" stock) at a fixed, predetermined priced called the strike or exercise price. If the market price of the underlying is greater than the strike price, then the option holder benefits from exercising the option since he or she is able to buy the stock at a lower price; if the market price is less than the strike price, then the option is worthless. Stock options are thus widely used as additional compensation for management since it provides motivation to make decisions that may increase the stock price.

Now this is how I understand the disclosure.

In 2003, Jollibee filed for around 100 million additional shares to cover stock options that it provides senior management. Shares won't be considered issued and outstanding until the options are exercised. It seems that recently some of these options were exercised, resulting in 21,633 additional shares outstanding. JFC investors would be affected since the additional shares will dilute their ownership, albeit only marginally since 21,633 is a drop in the bucket compared to JFC's 1 billion shares currently outstanding.

"Behest"

IN THE NEWS from Interaksyon

I remember first encountering the word in college when I was doing research for my paper about the Marcos dictatorship, and even then it was used in the same phrase/context: "behest loans." Around three decades after the word was first used in that sense (presumably), a return to democracy, two (three?) "revolutions," and five presidents later, we hear it again.

What is a behest loan anyway?

Do a Google (web, not news) search, and you'll see that all the relevant results come from the Philippines (I stopped clicking next at Page 5). To me, this is evidence enough that the term, if not the concept, is genuinely and exclusively Filipino.

I'm not familiar with the history and official etymology of the phrase, so all I can offer is a layman's understanding based purely on context:

A loan granted to an undeserving borrower, upon the endorsement (i.e., behest = order or command) of a person (or persons) in power and/or of high authority.

Technically, a loan is considered a behest loan if it satisfies any two of the following criteria:

• loan is undercollateralized
• borrower is undercapitalized
• direct/indirect endorsement by high government officials
• cronies own or control the borrowers
• loan was used to other purposes
• use of corporate layering
• funded project is not feasible
• extraordinary speed in loan release

According to Ombudsman Conchita Carpio Morales, the 660 million peso loan that the Development Bank of the Philippines (DBP) has extended to former Marcos Trade Minister Roberto Ongpin in 2009 has met "some" of these criteria, and is thus behest. As a consequence, the Ombudsman imposed harsh civil-administrative penalties on several high ranking executives of the bank. Good job, Ms. Ombudsman, keep it up.

The next step, of course, should be to pursue criminal cases against those who have broken the law.

And behest loan? The more important question is: at the behest of whom?

Short Answers to Unanswered Questions: Catching Up with Emails

DEAR INVESTOR JUAN

Dear Investor Juan,

Hello there!

I happen to read some of your entries while self-educating on investing. I am a 19-yr old fresh grad who is very interested to know more about investing. As of now, I am reading stuffs about stocks and mutual funds. I know they are risky and that's why I read a lot. If you are kind enough to send me some ebooks about investing for beginners, I'd really appreciate it.

All the best,
Donna


Dear Donna,

You might want to start with Burton Malkiel's A Random Walk Down Wall Street.


***


Dear Investor Juan,

I have been subscribed to your posts ever since and I appreciate your sharing of your knowledge in finance.

Bloomberg.com used to publish company betas (including PSE listed stocks). These betas could no longer be seen since they have replaced their "portfolio" feature to just a "watchlist".

I have checked Thomson Reuters (Reuters.com) and their betas are wrong since they are based on S&P500.

Do you know of other sites that compute and publish these betas?  I don't have much historical data so it is also hard to compute by myself (plus a bit time-consuming hehe)

Best Regards,
ScIoN


Dear ScIoN,


Sorry for the late reply.

As far as I know there are no locally-published betas for Philippine stocks. There was one study made by Dr. Joel Yu of the UP College of Business Administration on CAPM for Philippine stocks; I think this paper includes estimates for beta, so you might want to check it out. Not sure if the paper is available online, if not you can contact Dr. Yu for a copy, I'm quite confident that he will grant your request (he was my MBA prof, and he's quite a nice guy).

If you're going to do serious analysis, I suggest that you buy data from the PSE and just compute for beta on your own. Easy enough to do with Excel if you have data.


Dear Investor Juan,

Do you know what happens to your stocks if your brokerage firm goes bankrupt?

Thanks,
Eugene


***

Dear Eugene,

If your broker goes bankrupt, you would still own your shares and both you and the broker would have records of your share holdings. And since your broker would not have physical "possession" of your money or shares, it would not be able to use these to satisfy its financial obligations as it goes through bankruptcy. I'm not sure exactly how it would work, but as far as I know you should be able to trade your shares through another broker.

I hope this helps.


***

Dear Investor Juan,

I have saved up a few thousand dollars from working for an international company, recent news says that exchange rate could go as Php 32 to USD 1.

It is tucked away on a regular dollar account, do you think I should convert it to pesos? Or it is far better on dollar denominated UITFs? Or just keep it on my savings account? 

Thank you in advance.

Anthony


Dear Anthony,

Yeah I'm in the same boat with my HKD. 32 to 1? It's possible, but I'm not so sure.

Just based on historical exchange rates, right now the Philippine Peso is very expensive compared to the USD. So regardless of whether the peso will continue to strengthen or revert to its level a couple of years ago, I suggest that you keep your earnings and savings in USD or USD denominated securities, and just convert to peso as needed. The choice between a USD savings account and a USD UITF is an investment decision, though, and would have a different set of considerations.


***

Dear Investor Juan,

Just would like to ask kung maganda bang investment vehicle for an OFW ang UITF? let's say po for 5 year term. gagamitin ko sana as my appliance fund sakaling makabili me ng bahay. Ano po ang maipapayo nyo sa akin, para magamit ko po ito to maximize my investment potential. I already have an emergency fund, meron din po akong Insurance (vul), may EIP po ako, tsaka may nakalagak po akong pera sa SUNLIFE flexilink na nasa equity fund. Thank you po for reading my letter and more power to you.

Regards.
Bob


Dear Bob,

Yes, UITFs in general are good investment vehicles for anyone, not just OFWs, as long as you know and accept the risks involved. Actually, you are already invested in UITF-like instruments with your VUL, EIP, and Sunlife fund. What I suggest is that if you want to invest more in UITFs and mutual funds, just add to your current holdings instead of investing in a new one. Adding more funds to keep track of would just result in additional hassle (and possibly, costs) without any significant additional benefits.

I hope I was able to answer your questions, Bob. Good luck.