"The Retirement Gamble" on PBS

If my recent posts about retirement haven't pushed you to take action yet, hopefully this Frontline documentary will.

Don't gloss over discussions about "401(k)"--think of it as just a modern incarnation of our SSS and GSIS (and the US's version of Hong Kong's MPF). Let's compare notes next week.

Return and Risk (Annotated Class Slides, Part 2)

PERSONAL FINANCE 101

Click here for Part 1

BDO Equity UITF (EPCIBEQ:PM) Now Charges Front and Back Load Fees? It Turns Out That It Does Not

I'm not exactly sure when it happened, but the last time I checked the fund still was not charging sales fees. Now, according to Bloomberg, it is.

When I saw this, it seemed to me that BDO was taking advantage of the growing popularity of UITFs and stocks, and investing in general. But even if it were true, charges like this are not necessarily bad. If the fund is performing better than its peers to a degree that makes it worth paying extra, then there's no reason not to invest in the fund.

What's confusing is that BDO has ANOTHER equity UITF: the BDO Institutional Equity Fund (BDOEQTY:PM). And this one does not have a sales load.

I'm not sure how different these two are in terms of composition--BDOEQTY is not listed on the page where monthly reports for BDO UITFs can be found, and all I can find is this report from last year.

Based on performance, however, these two funds have performed very similarly in the past 5 years, although BDOEQTY has a slight edge over EPCIBEQ:PM.

Remember, sales loads (i.e., the front load and back load) are not reflected by the NAVPU, so the difference between BDOEQTY and EPCIBEQ would be more substantial if we take these additional fees into consideration. If EPCIBEQ does charge sales load fees. But as you'll see in the updates below and the comments section, it really does not.

UPDATE 22 April 2013, 2:14pm

Some readers have pointed out that there has been no mention of the sales load in the BDO Equity UITF monthly reports. Another reader has called BDO, who told her that BDO EQUITY UITF has NO SALES LOAD. So until we get official confirmation, I'll leave the post as is and keep everyone updated.

UPDATE 22 April 2013, 6:52pm

As you see in the comments section below, one of our good friends at BDO Trust, Ms. Ma. Lourdes T. de Vera, went out of her way to clarify the issue. So EPCIBEQ does not charge sales load fees as indicated on Bloomberg. You'll find her full message on the comments section, but for the benefit of other readers, I will post her message in the post body below:

***


Dear  Investor Juan, 

On behalf of BDO Unibank, Inc. - Trust and Investments Group (BDO-Trust), I would like to inform you that all BDO UITFs, including the BDO Equity Fund, do not charge any sales load (i.e. front or back load fees).  In fact, BDO-Trust prides itself in charging one of the lowest fees in the industry. 

Furthermore, in the event that there will be any such changes in the features or fees of the BDO Equity Fund or any of our funds, we are mandated by Bangko Sentral ng Pilipinas' regulations to go through an approval process which includes a 30-day advance notice to all existing participants or investors (to give them  time to withdraw if they are not amenable to the changes). Such notice has to be posted in our branches and in our website. 

We also wish to inform you that we have  requested Bloomberg to correct the wrong information that the BDO Equity Fund is charging front and back load fees. 

To answer the other question on what is the difference between the BDO Equity Fund and the BDO Institutional Equity Fund, the former is for retail clients while the latter is for tax-exempt entities whose tax-exemptions are supported by Bureau of Internal Revenue (BIR) tax-exemption certicates. 

For additional clarifications, please do not hesitate to call us at tel nos. 878-4265 and 878-4244 or  email us at investments@bdo.com.ph. 

Thank you.


Very truly yours, 

Ma. Lourdes T. de Vera 
Senior Vice President 
BDO Trust and Investments Group  

How UITFs Work

DEAR INVESTOR JUAN

Dear Investor Juan,

patulong naman, nagugugluhan kasi po ako kung bakit sa mga comments nyo sa UITF's particularly equity funds na bakit na tratrade nila yung units nila?dba passive to?nag iinvest ka lang tapos ang mga profesionals na ang bahala mag laro sa money mo? 

Anonymous


Dear Anonymous,

Thanks for your question. Let me start by briefly explaining how UITFs work.

The trust/asset management arm of a bank creates a fund with a pre-defined objective, which mostly depends on what kind of fund it is: equity, bond, money market, etc. This objective limits the kinds of assets the fund manager can invest in.

At the start, the fund is divided into a certain number of units at an arbitrary initial price: say, 1 million units at 1 peso each. The bank then sells these units to investors like you and I; using our example, by selling all 1 million units of the fund at 1 peso each, the bank collects 1 million pesos. These funds are not owned by the bank or its asset management department, but rather just held by it "in trust"--basically for management and safekeeping on our behalf as investors. The fund manager then invests our money in assets that meet the constraints defined by the fund objective, while trying to make decisions that are good for us at the same time. These decisions include buying and selling assets like stocks and bonds at any given time. For this service, the bank charges a certain percentage of the fund that is called the management or trust fee.

So depending on how well the fund manager's decisions turn out, the total value of the fund may go up or down at any given day. The fund's per unit price--its net asset value per unit or NAVPU-- is just the fund's total value minus all expenses (including the management fee and taxes) divided by the total number of units, so that may also go up or down. Since Philippine UITFs are a form of "open ended" fund, the bank may sell more units to other investors at the current NAVPU: while the total fund value will go up because of this, the number of units would increase in such a way that the NAVPU would remain the same.

So in the world of UITFs, there really are two kinds of investors. The first is the fund manager, who we entrust with our money, who we assume knows what he is doing and will do things with our interest in mind. The second type is us UITF investors. The same way our fund manager make buy and sell decisions depending on how prices go up and down, you and I can also buy and sell UITFs depending on how NAVPUs go up and down.

So yeah, the fund manager gets to play with our money. And we can play with our money, too, if we so choose. Or not, it's all up to you and I. :)

Return and Risk (Annotated Class Slides, Part 1)

PERSONAL FINANCE 101

(I just finished teaching my first university finance class in Hong Kong, and I think I did pretty well. I've been very busy writing my dissertation in the past few weeks, so I thought maybe I can buy some time by sharing my class slides in a couple of posts. Yeah, I know that I'm being lazy again, but I hope you won't mind too much, even with my bad handwriting and inadvertent grammatical errors. Enjoy!)

(Click images to enlarge)

To be continued in Part 2.

Warren Buffet's Secret Millionaires Club

Secret Millionaires Club is a cartoon show that helps kids understand money matters, learn about money management, and develop good habits. It's like Cha-Ching, but without the singing (which, to be honest, can be pretty annoying). But it's much, much, MUCH more than that, if only because it stars Warren Buffet.

While the first season (which consists of seven episodes) is already done and available for purchase on Amazon (and for free on other nefarious sources online), there are a ton of "webisodes" that are freely available on the Secret Millionaires Club website (also available on Youtube, where you'll also see the catchy intro).

I've seen a couple of these, and I honestly found them to be quite entertaining. Have I already mentioned that the show features Warren Buffet? His voice and ideas anyway, but I think that fact alone makes the show worth seeing. Well, that--and "Words from Warren" at the end of every episode.

The best investment you can make is an investment in yourself. The more you learn, the more you'll earn.

Priceless.

Investing Lump-Sum Pension Proceeds

DEAR INVESTOR JUAN

Dear Investor Juan,

I would like to take a chance this to ask you, if you have a post /recommendation regarding on what to do with SSS pension once claimed. 

My mother will receive her SSS pension this, I am not sure of how much would it be.(but I think it will be 100K++) 
I would like to help her , by putting 
-at least 60% in a Mutual Fund (index fund, since it is not that risky compared to equities), so it will earn interest much higher than banks. 
-20% - Putting up a business, see is unemployed for 5 years. 
-10%- on bank for emergency purposes 
-10% - for herself. 

I would to ask for any options that I/ we can take. 
I believe my parents do not have retirement fund, since all their life they have been working for us and helping other relatives as well.. 
I want to help to utilize this money very well. 

Thank you very much. 

PS: Thank you for guiding/helping to be an Investor Juan. Godbless! 



Best Regards,

Maria

Dear Maria,

I don't think you should invest a bulk of your mom's pension in an equity fund. Even if it's an index fund, it's still exposed to risks that affect the entire market, and the chances of losing principal would still be considerable. At this stage, since your mom is not earning anymore, capital preservation should be the primary objective of her portfolio. Also, since she'll (presumably) need to withdraw portions of her portfolio from time to time, her investment horizon might be too short to weather the short-term up and downs of the market.

Generally, at retirement a person's portfolio should mostly be invested in safe instruments like time deposits or money market funds, so I normally would advice against starting a business, which is even riskier than equity funds--unless you can think of one that you're 99% sure will work. Or maybe something simple, something that requires minimal capital outlay, something that won't break the bank if things don't go as planned.

I don't know what your specific circumstances are, but I hope you're not just going to rely on the SSS pension proceeds to support your mom's retirement--it's obviously far from being enough. Even if you can reliably earn 10% per year on a 100,000 peso investment, that's just 10,000 per year in earnings, and that's assuming you won't spend a cent of that principal. 

Anyway, I wish you and your family well and I hope you find my reply helpful.

Retirement Planning with Excel, Part 2: Making Ends Meet

If you're facing this:

Click image to enlarge

What can you do to improve your prospects? What can you do to improve the chances of meeting post-retirement expenses? Using the template that I provided in Part 1, let's see how much of an impact different strategies can make.

1. Save more

Who would have thought that a 32% savings rate (on a 30,000 per month budget) won't be enough for retirement? On the plus side, it turns out that a just bit more belt tightening, specifically saving around 2,000 per month more (or saving a total of 38% of annual income), will do the trick.

Lowering monthly expenses to 20,000 per month from 22,000

2. Earn more

If you feel that living strictly on 20,000 pesos per month (in today's peso) is unrealistic, then you would have to find a way to earn more. Fortunately, it won't take much to bridge the gap as increasing the annual salary growth from 4% to 5% will be more than enough. If a sustained, annual increase is not possible, then aim for one-time significant wage bump, like 20% at age 40, for example.

A one time wage increase to 51,000 per month at age 40

3. Don't be "too conservative" with investments

Changing the "Annual investment return" value in the template will show how sensitive retirement cash flows are to this variable. Keeping all your savings in a savings account which earns an annual return of 1% (nowadays, that's being generous), for example, will accelerate bankruptcy to age 70, and result in an end-of-horizon deficit of 26 million. Investing in still-safe but higher-yielding instruments like time deposits and T-bills will probably earn 2 to 3% per year; at 3%, bankruptcy is at age 73 and the shortfall is 24 million.

The "magic number" for annual investment return turns out to be 6% (keeping all other variables constant). Unfortunately, 6% per year after tax is not achievable with corporate bonds and bond funds alone, especially given today's interest rate environment. It's therefore important that you invest in "riskier" but higher-yielding assets like equity funds, especially while you're still young (and can afford to take on the additional risk).

Household scenario

But what if, like most people, you decide to settle down soon and raise a family. How would that affect your retirement planning? Using some assumptions from this past post about financial planning:

• Get married in three years (and spend 600,000 pesos on the wedding)
• Have and raise two kids, send them to good schools, and support them til they turn 25
• Buy a new car every 10 years
• Rent a house for 15,000 per month (at today's prices)

And assuming that your would-be wife is earning as much as you, your household cash flows and wealth will look like this:

Cash flows and wealth on a 60,000 peso monthly household income

As is, you'd be bankrupt at age 41 and would face a deficit of 100+ million at the end of the planning horizon. So please think very hard before you decide to get married on a 30,000 per month salary.

For the kind of lifestyle and decisions defined by the assumptions above, you would have to have a minimum monthly household income of around 100,000 pesos.

Cash flows and wealth on a 100,000 peso monthly household income

If you're not there yet, then you should make do with a more prosaic lifestyle. Or get a second job. Or stay single. Or something.

Hopefully, with this post you now have an idea how you can make ends meet.

"Effects of PH Investment Grade to Trickle Down to Poor"

IN THE NEWS from ABS-CBN News Channel

Perfect timing. The punchline is in the title.

You'll find a shorter version of the video here.