UNIT INVESTMENT TRUST FUND

(UITF)

Deputy Governor Nestor A. Espenilla, Jr.

Bangko Sentral ng Pilipinas

Outline
Legal Basis for Creation of UITF
Definition
Rationale for Shift to UITF
Salient Features
Investor Protection Measures
May 2006 UITF Experience
Further Enhancements
2

Legal Basis for the Creation

of UITF
Section 83.6 of the General Banking Law
A trust entity, in addition to the general powers
incident to corporations, shall have the power to
Establish and manage common trust
funds, subject to such rules and regulations
as may be prescribed by the Monetary
Board.

Common Trust Fund

Different Kinds of common trust funds:

Common Trust Fund (CTF) for

phase out by 30 Sept. 2006

UITF

Rationale for Shift to UITF

Align the operation of pooled funds
under management by trust entities
with international best practices
Ensure differentiation from bank
deposits and other direct liabilities of
the financial institution
5

Rationale for Shift to UITF

Sound operations of pooled funds will

enhance the credibility with retail
investors and enable them to evolve as
major institutional players that can
support the deepening of domestic
capital market.
A client has free choice on what suits his
financial objectives, particularly as to
risks and returns and his perceived
expertise of the fund manager.

Governing Regulation
Cir. No. 447 dated 03 September 2004
Regulations governing the creation,
administration and investment/s of
UITFs

UITF - Definition
Open-ended pooled trust funds denominated
in pesos or any acceptable currency, which
are operated and administered by a trust
entity and made available by participation
Participation or redemption is allowed as
often as stated in its plan rules
Specie of common trust funds
8

UITF Documentation
Plan Rules / Declaration of Trust - Written
trust agreement
- approved by the Board of Directors
- submitted to the BSP for prior approval
- approved copy of Plan available at the
principal office of Trustee for inspection by
any person having an interest in the fund or
by his authorized representative.
9

UITF Documentation
Minimum elements:

10

Title (product/brand name)

Investment objectives and policies
Investment powers of trustee
Unitized NAVPU valuation methodology
Terms and conditions governing the
admission or redemption of units of
participation

UITF Documentation
Minimum elements:
External audit requirement
Basis to terminate Plan
Liability clause of trustee
Fees/commission and other charges
deductible from fund
Other matters to define clearly the rights of
participants
11

UITF Documentation

12

A copy of the plan rules shall be

available at the principal office of the
trustee during regular office hours for
inspection by any person having an
interest in the fund or his authorized
representative.
Upon request of the client, a copy of
the plan rules shall be furnished to the
interested person.

Salient Features of UITFs

I. Pooled UIT funds can only be

invested in liquid investments and
tradable financial instruments.

13

UITFs Allowable Investments

14

Bank deposits (for liquidity purposes)

Financial instruments
Government securities
Tradable securities issued by the
government of a foreign country, any
political subdivision of a foreign
country or any supranational entity
Exchange-listed securities

UITFs Allowable Investments

Marketable instruments that are traded in an
organized exchange
Loans traded in an organized market
Other tradable investment outlets/
categories as the BSP may allow

15

Subject to exposure limit to a single person/

entity (equivalent to 15% of market value of
the UIT Fund)

Tradable Financial Instrument

Loans traded in an organized market
Two-way prices are quoted readily and
regularly available from an exchange,
dealer, broker, industry group, pricing
service or regulatory agency
Prices represent actual and regularly
occurring market transactions on an
arms length basis.
16

Salient Features of UITFs

II. UITFs may use financial derivatives to

hedge market exposure.

17

Financial derivatives instruments

Solely for the purpose of hedging risk
exposures of the existing investments of the
Fund

18

In accordance with existing BSP hedging

guidelines, Trust Entitys risk management
and hedging policies
Disclosed in the Plan and quarterly list of
investment outlets

Salient Features of UITFs

III. Full transparency on the pricing of

investments (valued at market daily)

19

Mark to Market (MTM)

The market price determines the valuation of
the securities underlying the UITF.
Unlike the CTF, valuation is not on an accrual
basis.
If the investment deteriorates, the trustee shall
provision to reflect fair value in accordance
with generally accepted accounting principles
(GAAP) or BSP regulations
If security has no fair market value, then it
shall be assumed to be of no value.
20

Salient Features of UITFs

IV. Beneficial interest of each
participation unit is determined under
a unitized net asset value per unit
(NAVPU).

21

NAVPU
Total Net Assets divided by total outstanding
units
Total Net Assets : summation of the market
value of each investment less fees, taxes,
and other qualified expenses
Made available to existing and prospective
participants
22

NAVPU
Daily computation of NAVPU
Weekly publication
Name of the UITF
General classification (e.g., money market
placement, bond, balanced, equity)
UITFs NAVPU
Return on Investments of the UIT fund
- Actual (not annualized) on a year-to-date (YTD)

23

- Actual year-on-year (YOY)

Salient Features of UITFs

V. Fees and expenses that may be

charged from the UITF are clearly
defined.

24

UITF Expenses
Trust Fees
- inclusive of the routine administrative
expenses
o
o
o
o

25

Salaries and wages; office supplies

Credit investigation/collateral appraisal
BSP supervision fees/internal audit fees
Security/messengerial/janitorial services

UITF Expenses
Special expenses
Requirements
o Preserve/enhance the value of Fund
o Payable to third party
o Covered by a separate contract
o Disclosed to participants
26

Salient Features of UITFs

VI. Trust entitys staff charged with the

marketing of the UITF shall be trained to
properly market the instrument.

27

Marketing Personnel

28

All personnel involved in the sale of

UITFs shall undergo standardized
training program for the purpose of
developing/ improving their ability to Objectively make a judgment on client
suitability
Clearly explain to investors the inherent
risks in investing in UITFs

Marketing Personnel
Conduct of training
In accordance with TOAP minimum
training program guidelines
Undertaken by respective trust entities

Training program regularly validated by

TOAP
29

Salient Features of UITFs

VII. Dealings with counterparties

undertaken in a transparent manner.

30

Dealings with Counterparties

Counterparties are qualified by the Trust
Committee
Counterparties are subject to appropriate
limits in accordance with sound risk
management principles.
Trustee always transparent

31

Maintains an audit trail for all transactions

Salient Features of UITFs

VIII. Dealings with related interest follow
the principle of best execution.

32

Dealings with Related Interests

Trustee observes principle of best
execution
- If purchase/sale of securities effected with
related counterparties, trust entity shall
consider at least two (2) competitive quotes
from other sources.

33

Salient Features of UITFs

VIII. An independent third party custodian

accredited by BSP shall be
appointed for UITF investments.

34

Custody of Securities
BSP accredited third party
custodian
Take custody/safekeep investments
in securities
Perform independent marking-tomarket
35

Salient Features of UITFs

IX. UITF may be denominated in any
acceptable foreign currency and are
not subject to the 30% FCDU
liquidity cover

36

Salient Features of UITFs

X. Exemptions from regulations on
reserves, single borrowers limit and
DOSRI ceilings applicable to trust
funds in general

37

Administration of UITF
Trustee Exclusive management and control of each
UITF under its administration
Sole right at any time to sell, convert,
reinvest, exchange, transfer or change or
dispose of the assets comprising the fund
38

Administration of UITF
Has no other relationship with such fund
other than its capacity as trustee of the
UITF
Backroom operations with adequate
system to support the daily marking-tomarket of UITFs financial instruments

39

Investor Protection Features

Minimum Disclosure Requirements
Client Suitability Test

40

Minimum Disclosure
Requirements
Evidences of participation
Participating Trust Agreement
Confirmation of Participation
o
o
o

41

NAVPU of fund on day of purchase;

Number of units purchased/redeemed
Absolute peso or foreign currency value

Minimum Disclosure
Requirements
Documentations given to Client

Must contain a statement

The contract is a trust agreement not a deposit account.

Not insured by PDIC

No Guaranteed Returns
Losses or income are for the account of the
trustor/investor.
The Trustee is not liable for losses except upon gross
negligence, fraud or bad faith.

42

Such statements should be strategically placed near

the space for the investors signature.

Minimum Disclosure
Requirements
Printed marketing materials
Name of fund
Name of Trustee of UITF
A trust product, not a deposit account
No guaranteed rate of return
No indicative rates of return
Availability of Plan Rules
Customer and Product Suitability Standards
43

Minimum Disclosure
Requirements
Printed marketing materials
May present relevant historical
performance purely for reference and
with clear indication that past results
do not guarantee similar future results

44

Minimum Disclosure
Requirements
Weekly Publication of the NAPVU
Must contain:
Name of the Fund
General Classification
Moving Return on UITF Investments on a year
to date and year-on-year basis

At least one newspaper of national

circulation
45

Minimum Disclosure
Requirements
Quarterly Disclosure Statement

Investment Objective
Investment Policy
Participations: Requirements and Restrictions
List of prospective and outstanding investment
outlets
Admission and Redemption
o Frequency, Date, Time and Other
Requirements
o Pricing/Currency
o Fees/Other Terms Conditions

46

Client Suitability
Investment Objective
Risk Profiling (e.g risk appetite)
Knowledge and Exposure to Financial
Instruments
Previous Investment Experience
47

Investment Options
A CONSUMER has a basic right to
choose where he can place his hard
earned savings.

48

Banks need to compete for this business

against other banks and non-bank
financial institutions by offering deposit
and non-deposit products that meet
customer needs.

Investment Options

49

UITF Growth (in Php billion)

324.3
Equity Funds
Balanced Funds
Bond Funds
Money Market

2.8

350.0
0.5

261.6

300.0

Amounts (in Php Billions)

2.4

3.0
0.7

200.0

278.5

120.5
150.0

100.0

35.8

25.7
50.0

224.5

2.1

60.9

50

206.8

0.4

250.0

2.1
0.1

1.8
0.1

30.5

22.1

1.5
31 Mar 05

3.4
30 Jun 05

0.1

1.9

171.3

0.3

91.6

44.2
14.7
30 Sep 05

26.5

34.3

42.5

31 Dec 05

31 Mar 06

30-Apr-06

31.8

31-May-06

UITF Rapid Growth

Reasons:
UITFs answered the requirements of investors for
high-yielding investment products that are readily
available and convenient to buy.

51

Philippines interest rates for the past year were on a

downtrend (until April 24, 2006). This positively
affected the UITF NAVPUs, which increase when
interest rates decrease.
In addition to interest
accruals on the investments, yields were improved
with mark-to-market gains. Investors were happy
about their returns.

UITF Rapid Growth

Reasons
Trust Industry banded together on a UITF
educational campaign, guided by BSP Circular
447.
Individual trust institutions had their share in
marketing the products through their branch
network, advertisements, newspaper supplements
and investor briefings.

52

Philippine interest rates

Supreme Court decision, 3

November 2005, upholding RVAT

Missed tax collection target

Govt floats the idea of lifting RVAT on oil

53

Philippine Yield Curve

As of 05 June

As of 23 May

As of 02 2May

54

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What happened during the

UITF May 2006 Experience?

55

The UITF experience also coincided at a time of growing risk

aversion among global investors, which manifested in the fall of
Asian currencies, the emerging markets, metal and the stock
markets.
As interest rates moved up, NAVPUs of the UITFs, particularly
that of the Bond Funds, moved down as mark-to-market losses
were reflected. While investors in these funds have experienced
volatility in the past, the degree of volatility had been of smaller
amounts and shorter duration (i.e. Hyatt 10, February 2006
Declaration of State of Emergency)
Jittery investors withdrew from the UITFs and fund managers
were forced to sell their bond assets to fund such withdrawals. It
became a spiral: the more the investors withdrew, the more the
fund managers sold the UITF assets, the more the interest rate
increased, the more NAVPUs fell and this became a vicious
cycle.

Is there a future for the UITFs?

UITFs are sound investment and present real
value to investors in terms of returns and
convenience.
UITFs are meant to be held for long periods of
time.
They are a powerful way to mobilize funds for
capital market development.
They can be the answer to increasing the saving
rate of the country.
56

Proposed Enhancements
Ensure proper marketing of UITFs

Enhanced risk disclosure

More effective client suitability testing
More rigorous standards for training marketing personnel

Promote better investor education through various

programs
Accelerate development of domestic capital market

57

Promote market depth and liquidity

Encourage product diversification and new investment
instruments

Proposed Enhancements
Adoption of
Standards

Global

Investment

Performance

Obtain worldwide acceptance of standards for calculating

and presenting fund performance
Ensure accurate and consistent data

Certification of UITF marketing personnel

58

Course will include understanding of the underlying

investments and workings of the financial market

59