Taxikick

Near the end of last year, this happened to my girlfriend:

I should've taken it as a sign (blah blah blah) that Christmas is in the air. Watch out for the Airport Metered Taxi (Yellow Taxi) with plate number - TYT 449.

On November 05, I arrived at NAIA at around 10 PM and took the Airport Metered Taxi (Yellow Taxi) home. When I got on, the driver told me they had to charge a fixed rate of 640, to the area where I lived. When I asked why, he said because it was after 10 PM. Hmmm. OK. This was the driver of TYT 449.

On December 03, I arrived from another trip, also at 10 PM. Before I got into a Yellow Taxi, I verified with the guy who issues receipts whether I will be paying a fixed rate, or will be going by the meter. He confirmed I will be charged by the meter.

"Even at this time (10 PM)?".

"Yes, ma'am."

And there you go. True enough, the driver of the cab I took on December 03 didn't even mention a fixed rate, and I paid according to the meter.

Whereas before, we just treated such events as an unavoidable part of life and "experience earned," with Taxikick, we get an opportunity to fight back. Taxikick is an online tool that provides users with an easy way to report abusive taxi drivers in the Philippines. It also displays helpful information such as the plate numbers of frequently-reported cabs and actual reports of victim-passengers.

User complaints or "kicks" are forwarded to the LTFRB at the end of each day.

The platform is great, and I laud the founders for spending time and resources in creating and managing the website. I hope that they have plans for a mobile app that allows picture uploads (imagine being able to see actual photos of notorious drivers). Come to think of it, even a way to upload pics from a desktop would do.

And I wish the LTFRB actually does something about the reports and complaints.

Always stay safe, everyone.

Manuel Amalilio, Aman Futures Group Updates

IN THE NEWS from Interaksyon

Photo of Manuel Amalilio taken at Kota Kinabalu airport on January 25, 2013,
taken while he was in the custody of Philippine officials. From Interaksyon

Ten weeks ago, we were greeted by bad news that some of our kababayans down south fell victim to an investment scam allegedly perpetrated by a Mr. Manuel Amalilio and his Aman Futures Group investment company. In this follow-up post, we'll take a look at recent developments about the case.

According to the latest reports, Amalilio is now confined in a hospital in Malaysia where he also faces criminal charges. This comes after news that NBI agents were able to arrest Amalilio in Malaysia and were about to bring him to the Philippines, only to be prevented from boarding a plane at the last minute by Malaysian police. One very interesting detail is that evidently, a group of Amalilio's investor-victims were able to track and confront him in Kota Kinabalu, which led to his arrest by NBI agents.

Overall, I find these updates to be highly encouraging that the victims of the scam will at least get justice, if not part of their investment. Let's all remain vigilant and hope that authorities will not screw this up.

Leisure and Resorts World Corporation (LR) Set to Issue 8.5% Coupon Preferred Shares

INVESTMENT SPOTLIGHT

Leisure and Resorts World Corporation, a listed games operator in the Philippines, announced its plan to raise 1.75 billion pesos through a preferred share issuance. Proceeds of the issue will be used to finance the following projects:

1. Belle Grande Integrated Resort and Casino
2. Midas Hotel and Casino
3. Techzone project
4. Acquisition and roll-out of additional bingo sites

The perpetual preferred shares will have a par value of 1 peso per share, a coupon rate of 8.5% per annum, paid semi-annually, and are cumulative, non-voting and non-participating.

Here are what these features mean:

1. Perpetual - the issuer (in this case, LR) has no obligation to buy back the shares from investors. Instead, shareholders can buy and sell shares in the stock exchange after the issue.
2. Coupon rate - the percentage of the par value (or the amount investors pay when they buy shares at issue) that is paid out to investors every year. With this issue, dividend payments will be made every six months, at 8.5%/2 = 4.25% of par per payment.
3. Cumulative - the firm cannot issue common dividends until all accumulated unpaid preferred dividends. Yes, firms can choose not to pay preferred stock dividends in any given year.
4. Non-voting - preferred stockholders do not have voting rights
5. Non-participating - if the company goes bankrupt, preferred stockholders are entitled to, at most, their initial investment plus any unpaid dividends

The issue also comes with 1 warrants for every 20 preferred shares. The warrants have an exercise price of 15 pesos and exercise date of 5 years from issue. A warrant gives the holder the right to buy the issuer's common stock at the exercise price any time after the exercise date.

You can download the actual press release here.

Some helpful info about LR from Bloomberg here.

A Sigh of Relief

Geographical Diversification, Part 2: Answering Ayon's Questions

DEAR INVESTOR JUAN

In this post we go straight to answering Ayon's questions from Part 1.

1. Is the 50% US stock allocation due only to the location of the magazine? If so would it make sense to just switch Phil. Stocks with U.S. (i.e. 50% Phil, 15% US, 15% Foreign Developed)? Or is it truly better to follow the recommendation and put 50% in the US?

From the previous post, we have established that geographical diversification--that is, investing in different markets around the world--can be used to hedge against country- or region-specific risk. If you have already decided to diversify into foreign markets, the next steps are to identify which markets you want to invest in and how much you are going to invest in each market. Ideally, asset allocation/portfolio construction should be based on an analysis similar to the one described in this post, and I'm not sure if the percentages that you mentioned are a result of this procedure or rules of thumb. What I'm (fairly) certain of is that you allocate the biggest portion of your investment in the currency that you earn and consume/spend. Why? Because earning in one currency (say, peso), then investing in another currency (say, USD), and then converting back to the original currency to spend the money entails a significant exchange rate-related cost. Banks (and money exchange companies) earn from currency conversion by buying at a lower rate and selling at a higher rate, as this table from BPI shows:

If you convert from peso to US dollar and back, for example, you effectively "pay" (40.97/40.18 - 1) = around 2% (assuming the exchange rate remains stable), which means your US-based (or US dollar) investment should earn 2% more than a comparable peso investment for the move to make sense. Actually, it's not so bad for the US dollar since it's widely used in the Philippines, so the spread (difference between the buying and selling rates) is not that high. If you take a look at other currencies such as the British pound (7.45%) and the Hong Kong dollar (16.73% !!!), this exchange rate related cost can be very significant. And this is on top of other extra fees that you will incur if you invest in securities from other countries, which I'll discuss in question 3.

Just to clarify, I'm not saying investing in foreign markets/currencies is wrong; I'm just saying that if you earn and spend in one currency, it would be best to invest most of your holdings in that currency to lower your exposure to exchange rate related costs.

2. If ETFs are locally unavailable, and I want to begin passive investing, what's the best alternative I can get?

We don't have ETFs yet. Laws for ETFs, REITs, and even "PERA" provident funds have already been passed, but I think persons-in-charge are still dickering over the details of implementing rules and regulations.

We do have stock index funds, which are "passive" by definition. I discussed a couple that I know of here.

3. What would be the best way to invest in foreign ETFs? A friend mentioned he opened an account with etrade in Singapore, but I'm not sure if that's the best way.

I'm not really sure if one can open an eTrade account from the Philippines; I'm sure I explored it before, and I remember not being able to find a convenient way of doing it. In any case, even if you are able to use eTrade, I'm not sure that it's the best way to invest in foreign ETFs because it charges a commission of 5% for every transaction, as far as I recall. Costs and fees like this, on top of the currency-related cost that I mentioned above, make investing in foreign markets very expensive.

A more efficient and less costly way to diversify geographically is to invest in a locally offered fund that invests in foreign securities. One example is BPI's Odyssey Asia Pacific High Dividend Equity Fund, which if you take a look at its latest report, is heavily invested in countries like Australia, China, Hong Kong, and Singapore. While this method of diversifying geographically also entails additional costs (US dollar denomination, 1.75% per year management fee), it's still better than if you do it on your own--if you can do it on your own.

4. I believe I've got the Fixed Income investments covered in my Balanced fund, but I'm curious to what those Alternatives really connote. 

"Alternative investments" generally pertains to non-stock, non-debt investments such as real estate, commodities, and private equity.

I hope I was able to address at least some of your concerns. Good luck!

Geographical Diversification, Part 1: A Second Look at Diversification

DEAR INVESTOR JUAN

Dear Investor Juan,

Thank you for the very enlightening resource you've provided. I'm sure countless Filipinos will continue to benefit from your practical and approachable guides to investment.

On to my question. I've started EIP investments in the BDO Equity and Balanced Fund, but I'm worried that it might not be the best move considering the very high market at present. After reading about diversification, it seems that a genuinely diverse portfolio implies investing in not just one market, but in several.  In particular, the recommended portfolio from a US magazine for someone my age (25) was this:

80% Stocks
- 50% U.S.
- 15% Foreign developed
- 15% Emerging markets

14% Fixed Income
- 5% Investment-grade bonds
- 7% High Yield
- 2% Foreign Bonds

6% Alternatives
- 3% Commodities
- 3% Real estate

This brings me to a series of questions (apologies if some are a bit unrelated):
- Is the 50% US stock allocation due only to the location of the magazine? If so would it make sense to just switch Phil. Stocks with U.S. (i.e. 50% Phil, 15% US, 15% Foreign Developed)? Or is it truly better to follow the recommendation and put 50% in the US?
- If ETFs are locally unavailable, and I want to begin passive investing, what's the best alternative I can get? 
- What would be the best way to invest in foreign ETFs? A friend mentioned he opened an account with etrade in Singapore, but I'm not sure if that's the best way.
- I believe I've got the Fixed Income investments covered in my Balanced fund, but I'm curious to what those Alternatives really connote. 

Thank you so much and more power! :)

Ayon


Dear Ayon,

Before I answer your questions, let's first take another look at diversification, which I discussed in detail in this post.

The objective of diversification is to manage risk, not minimize it. This means that in diversifying our investments, we should take the trade off between risk and return into consideration and allocate our resources in such a way that we meet our risk and return targets simultaneously. Done right, diversification should be able to provide lower risk given a particular level of return (or higher returns at a given level of risk) compared to specific types of investment, in isolation. This is achieved by investing in several kinds of investments or assets, whose returns are not perfectly correlated.

There are different ways of achieving diversification. Perhaps the most basic example is to invest in a portfolio of stocks, such as index or even actively-managed equity funds. Since component stocks of an equity fund presumably come from different industries, they are subject to different kinds of risks and their returns should therefore not be perfectly correlated. For example, some factors that negatively affect the business of Ayala Land would affect a company like Jollibee differently, perhaps even positively. There are some risks, however, that affect all stocks regardless of industry, and a 100% investment in stocks would be subject to such risks.

To hedge against these risks, we may add non-stock assets such as bonds to our portfolio since stock and bond returns have historically had low correlation. In fact, if you take a look at the composition of some "equity" funds, you'll see that 20 to 30% of these are actually invested in corporate bonds and Treasury securities--precisely to achieve this kind of diversification at some level. Of course, the most explicit diversified investments of this nature are so-called "balanced funds," as you have mentioned. And we may even expand our portfolio to include other assets such as real estate, private equity, and commodities.

Going up one more level, we can perhaps imagine events and circumstances that would affect only specific countries or even regions of the world. Country risk is specific to a particular country, and is a function of the country's political stability and institutional development, among other factors. In 1997, the Asian financial crisis affected most of the economies of East and Southeast Asia, while leaving the rest of the world relatively unaffected. Perhaps the most straightforward way hedge against this kind of risk is to invest in assets outside the Philippines, which is the main concern of your email.

I'm afraid that your questions will have to wait for Part 2, though, which I promise to post in a couple of days.

Monitoring Investment Performance

DEAR INVESTOR JUAN
PERSONAL FINANCE 101

Dear Investor Juan,

Just want to say that your blog is the answer to my prayers hehe investment terms na madaling maintindihan. I'm planning to invest in UITF equity for my daughter's college education. I have a question lang regarding the ROI. Meron ba syang closing balance for the day or talagang based sa NAVPU kung kelan ka naginvest? For ex, 5 years ung 10k mo sa equity, say at 100 napvu. After 5 years 120 napvu on the date of selling ko. Does that mean in 5 years kumita lang ng 2000 ung 10k? Please enlighten me. Thank you.

Here's another question: initial investment ko is 10k then add ako ng add ng 10k every month (making my total investment 120k for one year, how do you compute that? base sa basic accounting ko

month 1: 10,000 at 100 Buying NAVpU, 110 Selling NAVpU = 11,000

month 2: 11,000(from month 1)+10,000 (addl inv) = 21,000 at 110 buying NAVpU, 120 selling = 22909.09

month 3: 22909.09(from month 2)+10,000 (addl inv) = 32,909.09 at 120 buying NAVpU, 130 selling = 35651.52

I'm checking kasi paano computation para pag nakipag-usap ako alam ko yung sinasabi nya at alam ko yun sasabihin ko.

Thank you so much!

Marissa


Dear Marissa,

You're right, if you invest in a UITF, your returns will solely be determined by the NAVPUs at the time you buy and at the moment you sell.

Your computations are correct, but allow me to try to restate them in a (hopefully) simpler way. Let's just assume that you won't sell at the end of every month and just compute for the value of your investment on paper. We can also compute for the percentage return at the end of every month using the formula

Month 0 (beginning of Month 1), NAVPU = 100

Invest 10,000 pesos or 100 units

Total "Money Out" = 10,000
Total Investment Value = 10,000

Month 1 (end of month), NAVPU = 110

Total "Money Out" = 10,000
Total Investment Value = 100 units * 110 = 11,000

Percentage return after one month = (11,000 - 10,000)/10,000 = 10%

Invest additional 10,000 pesos or 10,000/110 = 90.91 units
Total units after additional investment = 100 + 90.91 = 190.91 units

Month 2 (end of month), NAVPU = 120

Total "Money Out" = 20,000
Total Investment Value = 190.91 units * 120 = 22,909.20

Percentage return after two months = (22,909.20 - 20,000)/20,000 = 14.55%

Invest additional 10,000 pesos or 10,000/120 = 83.33 units
Total units after additional investment = 190.91 units + 83.33 = 274.24 units

Month 3 (end of month), NAVPU = 130

Total "Money Out" = 30,000
Total Investment Value = 274.24 units * 130 = 35,651.20

Percentage return after three months = (35,651.20 - 30,000)/30,000 = 18.84%

The computations for percentage return shown here is simple and straightforward, but does not take the time value of money into account. In a follow up post, I will discuss alternative ways of computing for investment returns that takes this into consideration.

I hope I was able to answer your questions. Good luck!

Free Financial Planning Course at Coursera

PERSONAL FINANCE 101

University of California at Irvine will launch its "Fundamentals of Personal Financial Planning" online course on January 14.

The course will run for 6 weeks and would only involve a workload of 3 to 6 hours a week. Which means one less hour spent on Facebook a day or <whatever else people are busy with these days> would more than suffice. :)

Here's the course description from the website:

"Explore the basic personal financial planning concepts. Learn how to define and reach your financial goals. Apply the framework of personal financial planning to monitor your own finances, with special emphasis on lifecycle-specific topics, such as saving for education, student loans, or wealth management and estate planning."

The course will be facilitated by Avi Pai, a licensed financial consultant who has also taught a Financial Planning course at UC Irvine.

Don't forget to register; I already have. See you all in class next week!

Thanks to Nolan for the heads up.

Short Answers to Unanswered Questions: PDIC Coverage and Non-stock Investments

DEAR INVESTOR JUAN

Dear Investor Juan,

I read your October 2012 article (http://www.investorjuan.com/2012/10/armed-forces-and-police-savings-and.html) stating that AFPSLAI deposits are covered by PDIC (up to 500,000 pesos).
I don't see this information from AFPSLAI's website. Where do I get an official statement?

Is PNSLAI also covered by PDIC? How about AMWSLAI?

Thanks!

Rose


Dear Rose,

Since both PNSLAI and AMWSLAI are both savings and loans associations, they are covered by PDIC. For these and other entities that are "authorized to perform banking functions in the Philippines," membership is mandatory.

***


Dear Investor Juan, 

First I would like to thank you for your creating your blog and sharing informative posts. 

I have been reading most of your posts which spark my interest. With your expertise in the field of investment, I am wondering if you can help me out. 

Just to give you a glimpse. I have started investing in mutual funds and stocks. Also, I have small amount of investment in SSS flexifund and in PAG-IBIG II. It is not really big investments but I am planning to be more aggressive this year. As you know, time is the essence for this kind of investments. 

I am still working on my emergency fund. I still have not reached my desired amount. Also, we already have insurance. 

Anyway, I am looking to have a diversified portfolio. So far, my major investment is in stocks. I read your articles about UITFs too but it seems this investment is also linked in stocks. 

Can you recommend some other investment vehicles which do not relate to stocks and MF? My concern is if the stock market is in turmoil then all of my investments will be in trouble too. 

Also, I am planning to have investments with different lock-in periods. Perhaps for 3 years, another is 5 years and the rest will be for more than 10 years.

Lastly, I have always this nagging thought that what happen to our investment if we die. I started my investment when I was still single and last year I got married. Insurance is fine because it has beneficiaries. How can we secure our investment in case we die? I actually ask my mutual fund and stock broker about changing my account to joint account but it is not possible. Unless you will open a really new account. 

Anyway, sorry for the long email. If you have already featured some of the answers, please be kind enough to send the link. I hope I am making sense with my questions.

To our financial freedom,

Miles


Dear Miles,

You're off to a great start, congratulations!

If you're looking for non-stock or non-equity investments, you might want to consider the following:

• Bond funds
• Money market funds
• T-bills and Treasury bonds
• Corporate bonds
• Time deposits
• Real estate

I've talked about these topics and actual products that fall under these categories in past posts. Try using the search function of the blog or clicking related tags; both of these features are found on the right side of the web page.