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.

Why the Leading P/E Ratio Makes Sense

PERSONAL FINANCE 101

Wrong PE?

In a post at the beginning of the year, we discussed the price-earnings or P/E ratio in detail, particularly how we can use it to distinguish between undervalued stocks (which we would want to buy) and overvalued stocks (which we would want to sell or not buy). In that post, we also took a brief look at the leading P/E ratio, which is based on the forecast earnings for the following year.

leading P/E ratio = P0 / E1

Where P0 is today's stock price, and E1 is the earnings per share next period.

While using E1 seems to make sense since it accounts for future earnings, using just one earnings forecast may not be able to completely capture the future profitability of the firm/stock.

But as it turns out, it can.

There are different ways of estimating the intrinsic value or "true worth" of a share of stock. I'll get into the basics of stock valuation in a future post, but for now just remember this:

The intrinsic value of a share of stock (or any asset) is the present value of all cash flows it can generate in the future.

Based on this idea, we get one of the simplest models of stock valuation: the Gordon or Dividend Growth Model. This model, which was named after Highly-Regarded Economist and Distinguished Senator, Dick Gordon (Kidding! Just checking if you are still paying attention ;)), makes the following assumptions:

1. Dividends grow at a constant rate, g
2. The investor's required rate of return, k, is greater than g and is also constant (per stock)
3. The investor holds the stock forever

By the magic of math, and given the above assumptions, we can compute for the stock price with

P0 = D1 / (k - g)

If we divide both sides of the equation by E1, we get

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

D1/E1 is the portion of the firm's earnings next year that it will pay out as dividends, or the firm's dividend payout ratio for next year.

Now here's the interesting part. As it turns out, firms typically have constant dividend payout ratios, making D1/E1 easy to estimate (by using the latest payout ratio, for example). So given D1/E1, and estimates for k and g, we can compute for the leading P/E ratio. Since the leading P/E ratio is based these "fundamental" inputs, it is also referred to as the fundamental or justified P/E.

The leading P/E computed using the above approach gives us what the P/E of a stock should be, and we can compare it to other P/E estimates (using the current stock price and forecast earnings, for example). If the forecast P/E is greater than the one using the fundamental approach, then the stock may be too expensive, and cheap if it's the other way around.

But how can we estimate the inputs required by the model? This I will discuss next week. Have a great weekend everyone!

Short Answers to Unanswered Questions: Stock Delisting, Pulling Out of a VUL, and Non-Monetary Returns

DEAR INVESTOR JUAN

Dear Investor Juan,

I am an avid reader of your posts and have just started investing 3 months ago. I currently have invested mostly on fixed income peso denominated notes as they I am not yet confident in my skill with stocks. From my readings on your post however I have not come across delisting of stock (maybe I have not read enough) from the PSE:

a. What happens to the stock?
b. Encashment after delisting?
c. Will the price still have a chance to go up?
d. Other concerns an investor should think before purchasing a stock which is going or planning to be delisted?

Sincerely,
Mike


Dear Mike,

Thanks for the question, it's a very good one. There are both negative and positive reasons for "delisting" from the stock exchange--making a stock unavailable for public trading. The "top-of-mind" reason, most probably, is if the company gets into trouble financially, such as if it is forced to go declare bankruptcy. In this case, investors should be able to get early warning from sharp and sustained declines in stock price, public disclosures, and even news reports, although losses may be unavoidable.

In some instances, though, a firm may have very good reasons to delist and revert to being "private," In this case, the firm buys back shares traded in the stock exchange, and public investors would receive a tender offer for their holdings.

In summary, and to address some of your issues regarding the possibility that a stock you own would delist, if it's because of the first reason then you should actually be concerned about whether the firm is capable of sustainable profitability rather than the possibility of delisting. And if the firm chooses to delist because of the second reason, then there's really no reason to worry because you should get at least the market value of your investment (more if the firm has reason to pay a premium for publicly-held shares) if it happens.


***

Dear Investor Juan,

I have started investing some of my savings in SunLife VUL (Equity Bond) since Nov 2007.
And i have started investing in BPI's UITF products, some in ODYSSEY PESO BOND FUND and a little in ODYSSEY PESO CASH MGT FUND, about a year now. I read one of your article or comments about ODYSSEY and about VULs, and it seems its not a good one, should I redeem my investment and invest it somewhere else?

In your own opinion, don't worry I will not blame you in case anything goes wrong, where should I put these investments? Should I just hold it there, and just make new investment. I want to make sure that I am investing correctly.

Thanks,
Aubrey


Dear Aubrey,

According to the "search" function of this blog (a feature everyone would do well to learn to use), I've only talked about Odyssey funds only once, and even then I did not talk about either the Odyssey Peso Bond Fund or Peso Cash Management Fund. After consulting Bloomberg, I see that these funds charge management fees of 1% and 0.75%, respectively, which are comparable to similar products in the market (at least there's no front or back sales load). Just based on this, I have no reason to recommend that you pull out of these funds.

Regarding your VUL... As far as I know another important "cost" of VULs (apart from higher fees) is the cost of getting out of the agreement early. So I suggest that you first contact your agent and ask if you can terminate the coverage and recover the portion of your premium payments that was allocated to the mutual fund, then get back to me with your agent's answer.


***


Dear Investor Juan,

Greetings from Dubai!

Are you having an income directly by posting articles in your blog?

Regards,

Marlo
Accountant



Dear Marlo,

No, I don't. As a matter of fact, I even spend a small amount periodically for extra cloud storage (which is shared among all my Google accounts and websites, actually) and domain name registration. But that does not mean I don't get anything out of what I do.

This blog is very rewarding to me, albeit in a non-monetary sense. First, writing something regularly (~9 times a month!) serves as good practice for writing my dissertation and other "official" writing assignments. Second, this blog gives me an opportunity to not only share what little I know about finance but also learn from the collective experiences of all you readers. And it forces me to learn about things that I don't know, or know very little about, and that's a very good thing. Finally, managing the blog, organizing and processing ideas about personal finance, helps me better manage my own finances to. Haha, so yeah, maybe the blog does offer monetary rewards, if only indirectly.

Arithmetic Mean: The Return of the Comback

PERSONAL FINANCE 101

Some of you may remember how, in a previous post, I have relegated the arithmetic mean--more popularly known as "average"--to irrelevance. In the example that I used, we saw how the geometric mean is the more appropriate measure of investment performance since it accounts for compounding every period.

I have recently realized, however, that the arithmetic mean is not as inutile as I first thought. How exactly? Please refer to this series of returns earned by a mutual fund in the past 5 years.

Year 1 = 10%
Year 2 = 4%
Year 3 = -7%
Year 4 = 15%
Year 5 = 11%

The arithmetic mean of these returns is 6.60%, while the geometric mean is 6.31% (do you still remember how to compute for these?). Nothing has changed: the geometric mean is still the appropriate measure of investment performance, meaning that if you invested in the fund at the beginning of Year 1 (and reinvested all income/earnings), your investment will have grown by 6.31% per year and not by 6.6%.

So what is the arithmetic mean for? If we want to predict or forecast how much the mutual fund in our example will earn the following year (Year 6) and assuming that the returns in the past five years are equally likely (meaning the probability that the fund will earn 10% or 4% or -7% or 15% or 11% is the same), then we should use the arithmetic mean. In this case, the simple average gives us the expected return for the following year. In the example, we can therefore say that on any given year, using past performance as basis, the fund will earn 6.6% on average.

So remember, if your want to measure the performance of a multi-period investment on an annual, compounded basis, use geometric mean. But if you want to forecast the return for one period using historical data, the arithmetic mean is more appropriate.


***

PS. I apologize to those of you who have sent me emails/questions for not being able to respond immediately. I've had a really busy quarter, but December will definitely be better, so I promise to answer all your questions soon, FIFO. :)

Pinoy (Pride) Pity

A GUEST POST by Anonymous

My boyfriend and I booked a biking tour when we visited Bangkok 2 weeks ago. Our first rest stop was at a park, leading to the “slums” – shanties put up under the bridge. Our tour guide Cha (pronounced Djaaa~, if you please), was quick to say, “The people who live here are not poor. There are no people in Thailand.”

I’m not sure what the Dutch and Danes in our party thought, but I was waiting for a punch line.

Here’s what followed instead: “The people who live here [in the slums] are not poor. They choose to live here so they won’t have to pay for rent, which means, they can send more money back home to their families. When you are poor, it means you have no food, no work. But anyone can get a job in Thailand. They can work as taxi drivers, truck drivers – anything. You will not see Thai people begging on the street. The beggars you see around are probably from Cambodia.”

That’s just all sorts of wrong, isn’t it? I certainly don’t believe there are no poor people in Thailand (You may open a new tab to Google the numbers). Those people who live in the shanties probably wouldn’t if they didn’t “have to”. But the stigma of begging – that was something to think about.

I personally think begging is obscene. This has nothing to do with those who beg, but having to resort to begging, is something I would never wish upon anyone. There is no shame in being poor, but there is shame in having to beg, and shame that you live in a world where your fellow has to beg from you.

I pity those who have to resort to begging. Pity, but nothing else. I sympathize with people for whom life is a burden. I respect people who ask for help. I admire people who are determined to help themselves. But I only feel pity for people who beg.

A beggarly attitude, though, is downright offensive. If you’re looking forward to Christmas as a time to receive dole outs from your wealthier relatives, it means you probably can’t afford Christmas. But if you intend to make the rounds bringing home made dinuguan, you have something to say for yourself (please stop by our house too – I beg of you!).

Here’s Emile Gaboriau, describing, Pascal Ferailleur, a young man in his crime novel, The Count’s Millions. Pascal’s widowed mother was cheated out of the millions earned by his late father, leaving them destitute:

“With a tact unusual for his age [a 12-year-old Pascal], or indeed at any other, he bore his misfortunes simply and proudly without any of the servile humility or sullen envy which so often accompanies poverty.”

-- The Count’s Millions

Lack of pride in oneself leads one to beg—for money, food, a savior, a miracle…Pride, not arrogance, is good. Pride is not false bravado nor is it stubbornness. Pride is not incompatible with humility. Pride means you believe you have something of value, even though you live in a shanty under a bridge. Pride means living in a shanty under a bridge, rather than begging. Pride can be found in being a truck driver, taxi driver—anything—but not in being a beggar. A laborer can look his employer in the eye and demand his pay. A beggar must accept what he can get.

If Cha is speaking for Thailand, it looks to me they’re aiming for the right thing—70,000,000 people who have confidence in themselves, and not 70,000,000 people who need to be saved.

The Philippines’ and Thailand’s numbers aren’t so disparate, yet I get the impression that we are perversely proud of being “poor” and welcome pity. We are quick to paint ourselves as long-suffering victims and are ready with a list of people to blame. But we lose interest in ideas for a solution – especially if it means we have to wait in line like everybody else, or if the solution isn’t as dramatic and sweeping as a lottery win.

If I’ve got it wrong, and this attitude reflects the refusal to put in work (and not about despair / confidence at all), then I guess we’re getting what we want. And we are very good at pitying ourselves.

Manuel Amalilio, Aman Futures Group, and the Great Pyramiding Heist of 2012

IN THE NEWS

If it seems too good to be true, then it must be.

This lesson was painfully and expensively realized by 15,000 Filipinos who unwittingly participated in a "pyramiding" investment scheme scam perpetrated by this guy:

Take a long, hard look at the face of Mr. Manuel Amalilio, Filipino Malaysian and CEO of Aman Futures Group Phils. Inc. According to reports, Amalilio is now out of the country, presumably with the 12 billion pesos that he allegedly bilked from his investors.

Online and traditional media are now rife with stories of how Aman's victims are now coping with the loss of a not-inconsiderable sum of money, in many instances from life savings, in some from high-interest loans from middling financial institutions. Reading these accounts and seeing the reports can be more than a little depressing. Situations like this are always very unfortunate, but much more so when many of the victims are the not-so-well-off.

While it's clear that blame and the plea for justice should be laid on the feet of Mr. Amalilio and his still unknown (or maybe just still unproven?) cohorts, we should all remember that we are not completely powerless to avoid falling into such a trap. Awareness, knowledge, and understanding of matters of money and finance--causes that are central to this blog--are key in weeding out scams like this from decisions and alternatives that truly provide additional value to people's lives.

And I think it's best if we make the most out of this atrocious situation and learn from the misfortune of others, however callous that may seem.

Short Answers to Unanswered Questions: Emergency Fund for Emergencies and Investing From Abroad

DEAR INVESTOR JUAN

Dear Investor Juan,

I'm Alexander, 23 y.o. I'm currently trying to create a sound financial plan for my accumulated savings. So far, i have roughly 150,000 in savings and i'll be setting aside 72,000 as an emergency/buffer fund (i pegged it at 6 months at Php 12,000 per month). The rest (at around 78k) i'm planning to put aside in high-yield investment instruments or maybe add it to the 7,000 i have in an equity fund which i opened last May. :)

Any advise where it's best to keep an emergency fund without exposing it to substantial risk but still guaranteeing sound returns? I checked BPI's Short term money market fund but it has this "Special Expense" quoted (Please see attached) which costs Php 2,000 p.a. I haven't checked with BPI yet but any idea if they charge it to you directly? (Php 2,000 is quite big of an expense!).

I currently have a maxi-saver account in BPI where i keep my emergency fund; it yields 2.250% gross interest p.a. (around 1.8% net after withholding tax) provided that no withdrawals are made within a month. the interest is also credited monthly so it's easy for me too keep track. but of course the 1.8% net yield is still quite low when you consider the annual inflation rate of around 3%. haha :)

With that i need your expert opinion on what is the best plan of action. i shall definitely consider it as an option in allocating my finances. Dealing with all the computations and options by myself is sometimes too taxing. :)

Thanks IJ.

Regards,
Alexander


Dear Alexander,

There's a saying, "You can't have you cake and eat it too." In finance, there's a similar saying, "There's no such thing as a free lunch."

Emergency funds are for emergencies, so they must be always readily available and liquid, and liquidity comes at a cost--lower returns. So I suggest to keep it simple and just park your emergency funds in a savings account. The extra return that you lose (~3% from a money market fund or time deposit minus ~1% from a savings account = 2% x 72,000 = 1,440 pesos per year) should be worth the extra liquidity and convenience that you gain.

If you want to invest in a money market fund, then by all means do so, but treat it for what it is--an investment in a low-risk, low-yield asset, and not an emergency fund.


***


Dear Investor Juan,

I just came your blog recently when was searching about UITF.

I just want to know your opinion on an idea that I'm contemplating. I'm in Australia and currently have a mortgage on a 3 bedroom unit I just acquire a year ago. I have about AUD 150K (PHP 6M) equity and with low interest rate at the moment (5%), I'm think of investing some of my equity in the Philippines in UITF/MF. I'm also looking at opening a Investment Manage Account in BDO or BPI. Do you think my idea is feasible? Will I likely earn more than 5% in the Philippines?

Kind regards,
Pinoy in OZ


Dear Pinoy in OZ,

What kind of investment gives you 5% a year in Australia? If that comes from fixed income securities or funds, you'll get the same of even a lower yield for the same kind of investment in the Philippines (the price we pay for a "better" investment climate). If that comes from equities, the local stock market has been able to provide more returns than that in the past couple of years (but understand that this does not guarantee that these high returns will persist in the foreseeable future). The point is, we can only compare returns of investments with the same risk, that is, fixed income to fixed income, equity to equity.

If you are keen on investing in Philippine securities, yes, you might want to consider getting investment/wealth management services. It's really a convenient way for Filipinos abroad to manage funds in the Philippines. I have just opened such an account, and will write about it this month. So stay tuned. :)

BPI Trade Set to Up Its Game

From the personal correspondence of reader Daniel with BPI Trade:


Dear BPI Securities Corporation Client,

Greetings from BPI Trade!

We are currently in the process of upgrading BPI Trade in order to provide a state-of-the-art integrated trading platform with the following capabilities:

- Robust system for executing and confirming customers' orders to ensure efficient order execution and accuracy.
- Complete process flow from order taking to settlement, so that you can conveniently pay for stock purchases and accept proceeds of sale as BPI Trade is linked to BPI ExpressOnline which allows direct access to your BPI Account.
- More tools in making well informed investment decisions such as historical charts and fundamental company and economic research.
- Modern portfolio management system to help you monitor and have better control over your equity investments.

BPI Securities Corporation


Market reports, finally!--this is something some readers were complaining about a while back.

But what's really exciting about this is the linkage with BPI ExpressOnline. It will make things significantly more convenient, particularly for us BPI account holders.

And I have to agree with Anonymous, this platform upgrade is well timed for the upcoming introduction of ETFs.

Would this be enough reason for you to stay with the platform, BPI Trade users? COL and other online broker clients, would this make you want to shift platforms?

For me, it's definitely a step in the right direction. Let's just wait and see--and cross our fingers--that they do it right.

Thanks for sharing this Daniel!

Short Answers to Unanswered Questions: Reinvesting Earnings, Money Market Funds, and Bond Bubbles

DEAR INVESTOR JUAN

Once again, it's time to catch up with some of your questions...


Dear Investor Juan,

Do you think it is a good strategy to sell units equivalent to the earnings of your original investment after a certain period of time lets say every 4 months? And re-invest on let say stocks?

Anthony


Dear Anthony,

The best way to reinvest earnings is to not redeem any of your units. "Cashing in" a portion of your investment and reinvesting the proceeds in stocks, as you suggested, would make better sense if you're originally invested in a non-equity fund such as a bond/fixed income or money market UITF and you want to diversify your portfolio. Reinvesting redemption proceeds into (more or less) the same kind of security may not make much difference in terms or risk and return to justify the additional transaction costs that you would incur, so maybe it would be better if you just keep your original investment intact.

***


Dear Investor Juan,

Good day!

Let me start by telling you how informative your blog is. I have a number of questions i want to ask you. I have recently invested a good amount of money in BDO's equity, Bond, Fixed-income and money market. The percentage of investments are as follows: 30%, 20% and 50 %. However i still have some money in the savings account. Should i put the remaining amount in a money market which would produce a better return than a Saving account?

I also invested money in foreign denominated funds. These being Dollar money market, Dollar bond fund, dollar medium term bond all at BDO. Moreoever, I have invested in the ALFM euro bond fund of BPI. My concern with this is the recent interest cuts by the Feds and ECB on interest rates have seen interest rates reach new lows. While this would mean that bond prices rise, at what point can the US and Europe sustain these borrowings until the burden becomes to heavy and a government defaults? Wouldnt this produce a bond bubble?

I also would like to ask how these Foreign denominated bond funds would fare in the long run considering that interest rates are set until 2014 in the US and in the foreseeable future for europe? lastly given that these Bond funds are mainly invested in ROP bonds would they be affected by the changing bond prices of the US and euro?

Hoping for your positive response.

Respectfully yours,

student


Dear student,

Wow, that's a lot of questions. Unfortunately, I don't have answers for some of them.

The returns that you get from money market funds is essentially the price of liquidity, of having ready access to cash that you get from a savings account. So sure, invest whatever amount you think you can afford to not be readily available in a money market fund, but remember that we all need to have some amount of cash at hand for various reasons.

If you were already investment in those fixed income funds that your mentioned before the rate cuts, then you should be happy because your portfolio value will already have risen, right?

Decreases in interest rates are a result of the injection of funds into the system by an economy's central bank (such as the Fed), and the central bank does this by buying securities such as bonds, not by selling them or borrowing money. So why would interest rate cuts result in a heavier debt burden for governments? Unless I'm missing something here...

Bubbles are created by unrealizeable/unjustifiable expectations, and bond price bubbles occur when investors bid up the price of bonds to a point where it can't be justified by interest rate cuts. Whether the current rise in bond prices represent a bubble or not is a matter of opinion, though. By the way, the cuts already happened, and prices have already risen, so you should be more concerned if what we have now is a bubble rather than if a bubble will be created.

Finally, I'm afraid I can't answer your last set of questions because I have no idea how foreign exchange rates will move in the future.

I hope that my responses are positive enough, as you hoped.

Broke

Would you rather have their problems?

What If Money Were No Object?

Despite once saying that true "self-help" is never philosophical, I beg you to permit me to be philosophical this one time.

What would you do if money were no object?

Few of us have a ready answer to this question because it's a question that's rarely asked. Maybe it's because for many of us, money being no object is an unthinkable, an unattainable state of being. I think for this fortunate (?) majority, it's less a function of how much wealth one has, but more the constant drive for the "better" and the "more." My Atenean friends, that's magis, right?

Anyway, for argument's sake--please indulge me--let's say that it's possible for money to be no object, for it to not matter. Lets hypothesize: If money were no object, how would you live your life?

I'll start. Studying, learning, teaching, doing research. Spending lots of time with my girlfriend, my family, my friends. Collecting toys, building model kits, building furniture, cooking. Running, biking, hiking, snorkeling, traveling, exploring. Reading, reading, and reading some more. Spending time writing posts for Investor Juan and facilitating financial literacy classes for Project Be.

So I guess I can call myself lucky because if money were no object, I'd more or less be living the same way I do now.

How about you? What would you do if money were no object?

A Closer Look at VULs: Philam Life's Family Secure (Part 2)

DEAR INVESTOR JUAN

Dear Azeotrope,

First, let me clarify. The point of these past two posts is neither to encourage nor dissuade readers from buying the product. My main objective is to help you and other readers/potential buyers make an informed decision whether to buy the product or not.

Okay, now we end the dilly-dallying and go straight to the heart of the matter.

What is Family Secure? As Philam Life clearly illustrates in its brochure, Family Secure is a combination of a term life insurance policy and a mutual fund. It follows, therefore, that getting these two products separately from any provider should produce the same, or at least comparable, results.

One way to choose between Family Secure and a "do-it-yourself VUL" is to have an idea how much each alternative costs and make a comparison. Fortunately, Philam Life provides us with enough information that could serve as basis for such an analysis.

From the example in the brochure, we see how an annual premium of 30,000 pesos could be allocated between the insurance component and the investment component; according to the graphic, if you make the proposed allocation, you will have accumulated 2,507,062 pesos over 35 years, at an assumed annual return of 8%. One way to estimate the cost/value of the term life policy is to subtract the aforementioned value from the future value of the premiums if the entire amount is to be allocated to the investment component. Using the "FV" function of Excel (or Google Spreadsheets), and entering the following arguments: rate = 8%, NPER = 35 (number of payments from age 30 to 65), PMT = 30000 (payment at the end of every year), we get 5,169,504 (ignore the negative sign). This number tells us that as per Philam Life's proposed allocation, 5,169,504 - 2,507,062 = 2,662,442 pesos or more than half of the value of your premiums will go to insurance coverag. But remember that this is the value of your premiums after 35 years; to make better sense of it, we have to can convert it to present terms. This time using the "PV" function of Excel, enter rate = 8%, NPER = 35, PMT = 0, and FV = 2,662,442, and you'll get 180,073 pesos--the cost, in today's peso, of getting the same insurance coverage as the one indicated by the gray areas in the brochure example.

So how can we use these results in making a decision? Go to a term life insurance agent (even one from Philam Life such as your aunt) and ask for a quotation for the coverage in the example. If the present value of quoted premiums is greater than 180,073 pesos, then Family Secure is a good deal; if it's less, then maybe you'd want to consider the cheaper option.

Of course, Family Secure does have qualitative advantages that you may also want to consider. Well, to me one advantage: convenience. So even if this product is more expensive, but you don't want the headache of reading posts like this or using Excel or shopping around for the cheapest deal, then it may well be worth it.

There is one important disadvantage to getting Family Secure, of course: you lose flexibility since the plan is essentially a long-term commitment. While you are free to allocate your premiums from time to time, you do have to make regular premium payments for a predefined number of years, which implies penalties if you fail to make payment (I'm not sure about this, so you might want to ask your aunt). You're also limited to choosing a Philam Life mutual fund, and I don't think you can change the kind of fund after your initial choice.

So these are the things that you have to consider in deciding whether to get Family Secure or other Variable Life Insurance products. Whatever alternative you're leaning towards, don't hesitate to ask your agent questions, such as the points raised in the past two posts. Good luck, and I hope you find these posts helpful. :)