2: yuaytief Flashcards by sinuka sinuko

is a relationship or an arrangement whereby a person called a TRUSTEE is appointed by a person called a trustor to administer, hold and manage funds and/or property of the trust for the benefit of a BENEFICIARY.

Trust

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Trust Principles

→ TRUSTOR
→ TRUSTEE / TRUST ENTITY
→ TRUST PROPERTY
→ BENEFICIARY
→ TRUST INSTRUMENT

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The person who intentionally causes the trust to come into existence; gains and losses of the trust are for the account of the trustor

TRUSTOR

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The person who holds title for the benefit of another; does not have beneficial interest in the trust property/fund

TRUSTEE / TRUST ENTITY

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The property interest which the trustee holds subject to the right of another

TRUST PROPERTY

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The person for whose benefit the trust property is to be held or used by the trustee

BENEFICIARY

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Document by which property interests are vested in the trustee and beneficiaries and the rights and duties of the parties are set forth

TRUST INSTRUMENT

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Unit Investment Trust Funds (UITFs)

→ An _________________________ in any acceptable __________, operated by a _____________, and made available by participation.
→ Established, administered and maintained in accordance with a _____________________ drawn by the ________, i.e., the Declaration of Trust (DOT). The DOT provides the guidelines in the management of a ______, and ________.
→ No _______________. This allows investors to invest or redeem their investments at any time subject to the trust entity’s guidelines.
→ UITFs are __________, not implied.
→ Established, administered and maintained by a trust entity subject to ______________* or notification. Trust entity may establish more than one UITF.

→ open-ended pooled trust funds; currency; trust entity;
→ written agreement/plans; trustee; UITF; plan rules
→ maturity date.
→ express trust
→ BSP approval

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How does a Fund work?

 Group of investors ______ their money/ funds together
 Entrust the pooled funds to a _____________
 Fund Manager invest the investors’ funds to either _________, _______ or _____ (securities) based on the ___________________ of the UITF
 Fund Manager, through time,will actively/ passively ____________________ and aims to ____________________.

→ pools
→ Fund Manager
→ equities, bonds, both; investment objective
→ manage the UITF; generate returns for the investors

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How does a Fund work?

(INVESTORS) Pool their money ➡️ (FUND MANAGER) Invests in ➡️ (SECURITIES) Generates ➡️ (RETURN) Provides Income

(back to investors)

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How does a UITF work?

Investors ➡️ UITF (Managed by team of Fund Managers) ➡️ Cash / Gov’t. Bonds / Corp. Bonds / Listed Shares

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Benefits vs. Risks of investing in funds

→ Potentially higher returns
→ Affordability
→ Professional management
→ Diversification
→ Liquidity
→ Investor Information
→ Transparency

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Benefits vs. Risks of investing in funds

→ Returns are not guaranteed
→ Not insured by PDIC

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Key differences between UITFs & Mutual Funds

UITFs
Regulator: Bangko Sentral ng Pilipinas
Structure: Contractual
Instrument: Units of participation
Governance: Bank/Non-Bank FI’s Trust Committee / Trust Corp
Management: Bank/Non-Bank FI’s Trust Department / Trust Corp
Sales License: Certified UITF Sales Person
Annual Stockholders Meeting: No / Yes (Trust Corp)
Liquidity requirement: None

Mutual Funds
Regulator: Securities and Exchange Commission
Structure: Corporate
Instrument: Common shares/ Units
Governance: Board of Directors
Management: Independent Investment Company Adviser/Fund Manager
Sales License: Sales agents need SEC license to sell funds
Annual Stockholders Meeting: Yes
Liquidity requirement: Yes. 5% of NAV subject to submission of liquidity plan to SEC, otherwise 10% of NAV

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Fund Classifications

→ Money Market Fund
→ Fixed Income Fund
→ Multi-Asset Fund
→ Equity Fund

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Money Market Fund invests in bank deposits and fixed income securities with remaining terms to maturity of ______________________ and has a weighted average portfolio life of _______________.

not more than three (3) years; one (1) year or less

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Fixed Income Fund invests in fixed income instruments and has a weighted average portfolio life of ______________________. Cannot have investment in equities ________________.

more than one (1) year; more than 5%

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Multi-Asset Fund invests in a ________________ of ______________ securities, ________, and other allowable investments for UITFs.

diversified portfolio; fixed income, equities

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Equity Fund has at least ____of its net asset value (NAV) in equities.

80%

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Types of Fixed Income Funds: What’s the Maximum Modified Duration?

Classification
→ Intermediate-Term Bond Fund:
→ Medium-Term Bond Fund:
→ Long-Term Bond Fund:

→ Intermediate-Term Bond Fund: 3
→ Medium-Term Bond Fund: 5
→ Long-Term Bond Fund: >5

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Types of Multi-Asset Funds:
What’s the Equity Allocation Range

Risk Profile
→ At least Moderate
→ At least Moderate
→ Moderate to Aggressive
→ Aggressive

→ At least Moderate: 5% to 20% in equities
→ At least Moderate: 21% to 40% in equities
→ Moderate to Aggressive: 41% to 60% in equities
→ Aggressive: 61% to 80% in equities

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Examples of Equity Funds

 EquityFund
 BlueChipEquityFund
 DividendPayingEquityFund
 Themed Equity Fund (e.g.ESGEquityFund)
 IndexTrackerFund

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New UITF Structures

 Regular
 Feeder Fund
 Fund-of-Funds
 Multi-Class Fund
 Distributing Fund

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New UITF Structures

→ Any trust entity authorized to perform trust functions may establish, administer and maintain ____________________ subject to applicable provisions under this section.

→ A UIT Fund may be allowed to operate as a 1) __________, 2) _______________ 3) ________________ and/or ________________; provided, that the plan rules and related documents shall state that the UIT Fund is a feeder fund, fund-of-funds, or multi-class fund, and provide an explanation or illustration of such structures.”

→ Foreign currency denominated funds may invest in any currency including ____________ if the same is expressly allowed in the fund’s ______________ and disclosed to participants.

→ one (1) or more UIT Funds
→ 1) feeder fund, 2) fund-of-funds 3) multi-class UIT Fund; Distributing Fund
→ Philippine Peso; Declaration of trust

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A UIT Fund structure that mandates the fund to invest at least 90% of its assets in a **single** collective investment scheme—the target fund

Feeder Funds

→ Feeder Fund’s investment in the target fund must __________ of the target fund’s market value → Feeder Funds can have _________

→ not exceed 10% → multi-classes

A UIT Fund structure that mandates the fund to invest at least 90% of its assets in **more than 1** collective investment scheme—the target fund

Fund-of-Funds

Fund-of-Funds can have ________________

multi-classes

**Feeder Fund and Fund-of-Funds** UITFs may invest in other pooled funds referred to as _______________________, i.e., target funds, are subject to the following: • _______________ of the target fund are aligned with that of the __________. • Target fund has no investment in other ______________________ • Target fund shall include ________________ and other _____ • Target funds may be of _______ or ________

collective investment schemes (CIS) • Investment objectives; investor fund • collective investment schemes • Exchange Traded Funds (ETFs); CIS • local; foreign origin

Target fund is supervised by a

regulatory authority

Feeder Fund and Fund-of-Funds: regulatory authority LOCAL TARGET FUND: TARGET FUND CONSTITUTED IN ANOTHER JURISDICTION:

**LOCAL TARGET FUND:** → Bangko Sentral ng Pilipinas **or** → Registered with Securities & Exchange Commission **TARGET FUND CONSTITUTED IN ANOTHER JURISDICTION:** → Registered/authorized/approved in its home jurisdiction by a regulatory authority that is a member of the international organization of securities commissions (IOSCO)

Structure of Feeder Fund and Fund-of-Funds

see page 79

Multi-Class Fund shall refer to a UITF structure which has

 more than one(1) class of units in the fund  invested in the same pool of securities  Invested and the same portfolio, investment objectives and policies

can generally promote efficiencies by eliminating the need to create additional UITFs.

Multi-class fund

can generally promote efficiencies by eliminating the need to create additional UITFs.

Multi-class fund

A UITF that has an income distribution feature whereby the income of the fund is distributed in the form of units called unit income.

Distributing Fund

_____________________ shall be determined by the trustee in accordance with the UITF’s plan rules and is not guaranteed. **Income for distribution shall automatically be considered as _________ from the fund**

Income for distribution redeemed

**The Plan rules of a Distributing Fund shall:**  Set an _______ and a _________.  _______________________, how the computation is made for the UNIT payouts.

 ex-date; date payable  Provide, in plain and simple language

the cut-off date for the unit-dividend entitlement

Ex-date

the day when the unit dividends are actually paid out to the investors.

Date payable

**Distributing Fund: Distribution of Income** *The Trustee may distribute the income of the Fund subject to the minimum conditions below:* 1) Only from cash received from _______________ and ___________; and 2) After the trustee has taken into consideration the following: 3) Converted into ___________, referred to as _________, based on ______ as at the first business day when units in the fund are quoted _____________. 4) Participants shall be entitled to their ____________ in the unit income based on their outstanding units of participation on distribution date 5) State the distribution policy, including the following: 6) For monitoring purposes, Trustee shall ______________ for the Fund’s income due for _________ 7) Notice to each participant on the unit income which shall contain:  ___________ – the number of un for every unit held by the participant entitled for distribution

1) interest income earned; cash dividends 2)  income for the period;  taxes and expenses;  sustainability of distribution of income; and  investment objective and distribution policy of the Fund 3) equivalent units; unit income; NAVPu; ex-distribution 4) pro-rate share 5)  sources of income for distribution  intended frequency of distribution  manner of distribution of unit income 6) separately account; distribution 7)  Total amount of income for distribution  NAVPu ex-distribution as its basis  Total number of units for distribution  Unit Income – the number of un for every unit held by the participant entitled for distribution

Creation of UITFs that require **BSP APPROVAL**

a) Fixed income fund b) Multi-asset fund c) Equity fund d) Fund-of-funds e) Feeder fund; f) Multi-class fund g) Distributing fund

Creation of UITFs that require **NOTIFICATION to BSP**

a) Money Market Fund b) Fund that falls under the same category of an existing UITF

is a summation of the market value of each investment less fees, taxes, and other qualified expenses.

Net Asset Value (NAV)

What is Net Asset Value (NAV)?  All UITFs are to be ____________________.  Mark to Market (MTM) is the act of assigning a value to a position held in a ______________________ based on the ______________ for that instrument.  Under the MTM method of valuation, the value of the investment is constantly __________ based on __________.  Asset classes are based on its ________________.

 marked-to-market on a daily basis  tradable financial instrument; current market price  adjusted, market rates.  weighted average return

PORTFOLIO IS COMPRISED OF:

Asset 1 (MTM Valuation) + Asset 2 (MTM Valuation) + Asset 3 (MTM Valuation) - Trust Fees, Taxes, Other Expenses and liabilities (Expenses & Liabilities) = Net Asset Value

What is Net Asset Value (NAV)?

Cash / Deposits + Market Value of Investments + Accrued interest on deposits and fixed income securities + All other assets and receivables **= GROSS ASSET VALUE** Gross Asset Value - Accrued Taxes Payables - Accrued Trust Fee Payables - Other Accrued Expenses - Accounts Payable - All other liabilities **= NET ASSET VALUE**

**NAVPU Valuation Methodology Net Asset Value per Unit (NAVPU)**  Computed by dividing the fund’s __________ by the __________________.  Determines the _________________ of each participation unit

 total NAV; total outstanding units  beneficial interest NAVPU = Net Asset Value/Total Outstanding Units of Participation

ROI Computation

ROI = (Current NAVPU/NAVPU at the start of the period) - 1 x 100

Other ROI Computation

**Year-to-Date ROI:** YTD ROI = (Current NAVPU/Previous year - end NAVPU) - 1 x 100 **Year-on-Year ROI:** YOY ROI = (Current NAVPU / NAVPU of same calendar date the previous year) - 1 x 100 **Past 1-month, 3-month, 6 month ROI:** N month ROI = (Current NAVPU/ NAVPU n months from current date) - 1 x 100 *Do not annualize ROI numbers for periods less than 1 year*

Simple Return computation

Simple Return = (Current NAVPU/beginning-of-period NAVPU) - 1 x 100

Compute for the ROI: Fund NAVPU 03/19/23: 115 02/19/23: 112 01/19/23: 113 12/29/22: 110 03/19/22: 105 12/31/17: 102

Past 1 Mo: (115/112) -1 x 100= 2.68% YTD: (115/110) -1 x 100 = 4.55% YoY: (115/105) -1 x 100 = 9.52% Since 12/31/2017: (115/102) -1 x 100 = 12.75% *Note: All of the ROIs are paper gain/loss until the investor actually redeems units from the UITF*

Compute for the ROI: Date of Investment: Aug. 3, 2021 NAVPU: 10.9854 Initial Investment: 1,098.54 Units Owned: 100 Date of Redemption: Aug. 3, 2022 NAVPU: 12.1304 Redemption Proceeds: 1,213.04 Units Owned: 100

Earnings: Php 114.50 ROI: 10.42%

**Investors are generally _____________** • Investors prefer _________ to more for the ___________ of expected return

**risk averse** • less risk; same level

How do you select funds?

Simplest approach is to look at the performance, i.e. returns

Is it sufficient to track only returns?

Also need to account for the risk taken by the Fund Manager

Common measures to evaluate “Risk-adjusted investment performance”: 1. 2. *Both measures how well the Fund Manager is able to balance between ____________ and ______________*

1. Sharpe Ratio 2. Information Ratio *”High Returns”; “Acceptable Risks”* Allows you to see which fund is able to give higher returns with optimal risk-taking

Measure of how well a Fund Manager performs by looking at the excess portfolio return generated for every unit of risk that the Fund Manager is taking

Sharpe Ratio

How to Calculate Sharpe Ratio

Sharpe Ratio = (Rp - Rf)/σp → (Rp - Rf): Excess Returns generated by the Fund by taking risk → σp: Amount of risk taken by the Fund *_Where:_* **Rp** = Return of the Portfolio **Rf** = Risk−free rate (usually use the Short term government instruments such as the 91-Day Tbill) **σp** = Standard Deviation of the Portfolio

**General Rule:**  _________ Sharpe Ratio, the better the fund.

Higher *Shows Fund Manager was able to generate higher returns on risk-adjusted basis.*

Sharpe Ratio: EXAMPLE #1 **Fund A** Annual Portfolio Return (Rp): 25.80% 91-day Tbill (Rf): 0.50% Annual Standard Deviation (σp): 18.54% **Fund B** Annual Portfolio Return (Rp): 25.80% 91-day Tbill (Rf): 0.50% Annual Standard Deviation (σp): 13.12%

Fund A Sharpe Ratio: 1.36 Fund B Sharpe Ratio: 1.93 → If Fund A and Fund B have similar strategy and both offer similar returns, but Fund A has higher risk, Fund A will have lower Sharpe Ratio than Fund B → Although both Funds generated same level of returns, Fund Manager B has higher Sharpe Ratio hence was able to generate higher risk-adjusted returns (i.e. took lesser risks to attain same returns)

Sharpe Ratio: EXAMPLE #2 **Fund A** Annual Portfolio Return (Rp): 32.50% 91-day Tbill (Rf): 0.50% Annual Standard Deviation (σp): 22.12% **Fund B** Annual Portfolio Return (Rp): 28.80% 91-day Tbill (Rf): 0.50% Annual Standard Deviation (σp): 15.20%

Fund A Sharpe Ratio: 1.45 Fund B Sharpe Ratio: 1.86 → Higher returns does not mean the fund is performing better, also need to account for risk taken by the Fund Manager → Although Fund Manager B generated lower absolute returns, it was able to generate higher returns for every additional unit of risk taken compared to Manager A.

tells an investor how much excess return is generated from the amount of excess risk taken relative to the benchmark. The higher the number the better.

Information Ratio

How to Calculate Information Ratio:

Information Ratio = (Rp – Rb)/TE → (Rp - Rb): Active return (or outperformance) = Excess returns generated by the Fund over benchmark → TE: Tracking Error = Standard deviation of active returns (Rp – Rb) *Where:* **Rp** = Return of the Portfolio **Rb** = Return of benchmark of the Portfolio **TE** = Tracking Error = Standard Deviation of the difference between Portfolio and Benchmark returns

General Rule:  __________ IR number, the ______.  _______________ means Fund Manager failed to add value to the Fund

 Higher; better *Shows that Fund Manager is skillful to deliver higher returns over benchmark, given the risk taken.*  Negative IR

Information Ratio EXAMPLE: **Fund A** Annual Portfolio Return (Rp): 30.60% Annual Benchmark Return (Rb): 17.60% Standard Deviation of Rp - Rb (Tracking Error): 15.40% **Fund B** Annual Portfolio Return (Rp): 24.80% Annual Benchmark Return (Rb): 17.60% Standard Deviation of Rp - Rb (Tracking Error): 6.80%

Information Ratio of Fund A: 0.84 Information Ratio of Fund B: 1.06 → Fund Manager B generated lower portfolio returns but better IR. This shows that Manager B was able to generate outperformance over benchmark more efficiently by taking on lower active risk, compared to Manager A.

is a standard against which the performance of the fund will be measured. In choosing the benchmark for a fund, it is important that the benchmark and the fund are _composed of similar securities._

benchmark

is an aggregate value produced by combining several stocks or other investment vehicles together and expressing their total values against a base value from a specific date. Market indexes are _intended to represent an entire market_ and thus track the market's changes over time.

Market Index

The **Plan Rules** shall include the following:  ______________ and ____________________ of the benchmark  its use relative to the fund’s ___________ or _________________  references from which __________________ on the benchmark can be obtained.

 description; key characteristics  objectives; investment strategies  detailed information