Value for money

Suppose you have P500,000 in extra cash that you want to invest. Where will you place it? The choices are many — bank deposits, mutual funds, stocks, government and corporate bonds, etc. — but choosing which among them is tricky. Which will give the best and least returns? Which is the least and most risky? Deciding will not be easy. But you must be guided by a rule of thumb, that your return must be higher than the inflation rate to offset any erosion in the value of your money.

"There is no ’one size fits all’ when it comes to investing. The answer depends on the investor’s objectives and risk tolerance as well as the current environment and investment outlook," said Ador A. Abrogena, Banco de Oro Unibank, Inc. executive vice-president and head of trust banking.

You have to take into account your investment horizon, whether the money will be invested for the short- or long-term, he added.

"Obviously, one can buy a higher-yielding 20-year bond if the fund is for retirement more than 20 years from now. But the money should be placed in an SDA (special deposit account) or [the usual] deposit accounts if it is needed within a year," he said.

Mr. Abrogena categorized investors, based on their risk tolerance, into conservative, moderate and aggressive.

Averse to losses, the conservative investor prefers the safety of deposits and short-term government securities. Since aggressive investors are after maximizing capital appreciation, they are open to the possibility of incurring losses in exchange for higher potential for gains. Moderate investors will be somewhere in between, in varying degrees, he added.

"As investors move their investment horizon to longer term, the range of investments appropriate for them increases. The same thing happens as they are able to tolerate more risk," he said.

"The investors who have the most flexibility in placing their funds are those with an aggressive profile and long-term horizon for investments."

Special deposit account

Deposits are your safest bets. They are insured up to P250,000 — and up to P500,000 if initiatives by Congress to raise the maximum deposit insurance coverage prove successful.

However, they offer the lowest return — currently less than 1% per annum — which make them unsatisfactory if you are looking for something higher. The central bank expects inflation to average 5.5% this year.

Fortunately, the Bangko Sen-tral ng Pilipinas (BSP) opened its SDA to government financial and trust institutions. If you are interested, you may go to a bank that offers the SDA.

The BSP introduced the SDA in 2006 to mop up excess liquidity in the financial system — and counter inflation — without raising its overnight borrowing and lending rates.

You must have at least P100,000, however, before you can place your cash in the SDA. "At present, only the 14-day and 30-day windows are available. This facility is deemed very lucrative because it offers relatively high interest rates and are considered very safe, akin to government securities, because the counter-party is the central bank itself," said Josefino P. Cerin, Land Bank of the Philippines investment and trading department head.

The SDA offers interest pegged on the central bank’s overnight borrowing rate. As of Dec. 23 last year, the 14-day SDA offered 5.265%, and the 30-day SDA, 5.875%. Interest income, however, is subject to a 20% withholding tax.

Mr. Abrogena said the SDA is a secure investment since it is backed by the BSP and offers better rates compared to deposits.

"This is a combination that is hard for investors to resist. However, they are not for everyone because it is basically short-term in nature, so even if the rates are high it cannot provide the higher yields over the long term like the retail Treasury bonds or corporate bonds, which can provide fixed yields for five years or more," he said.

Time deposit

With the introduction of the SDA, however, banks were forced to raise the interest rates of their time deposits and special savings deposits.

"Placements can mature in a number of days, anywhere from one year and under. As a rule of thumb, the longer the tenor of placement, the higher the interest rate for that placement. Rates usually differ from bank to bank, depending on the bank’s borrowing policy," Mr. Cerin said.

Generally, the bigger, more stable and liquid banks offer interest rates lower than those of the smaller, more illiquid banks.

"Smaller banks, which are less liquid, are willing to pay higher interest because of their more immediate need for cash. Bigger banks usually pay lower interest because they can afford not to borrow," Mr. Cerin said.

PERA

If you want to save for retirement, you should consider setting up a Personal Equity Retirement Account (PERA).

PERA, according to Republic Act 9505 or the PERA Act of 2008, "refers to the voluntary retirement account established by and for the exclusive use and benefit of the contributor."

The PERA law, Mr. Abrogena said, is a "very significant piece of legislation that will provide the incentive and the discipline for our countrymen to save for their retirement."

Francis Ed. Lim, Philippine Stock Exchange (PSE) president and chief executive, added that "as adverse global developments beyond our control threaten our economy, a measure like the PERA represents a welcome help not only for our capital market but also for millions of Filipinos who are looking for alternative sources of income."

Roel A. Refran, PSE general counsel, said the PERA law, if implemented properly, will be a "major capital market development tool that can expand the investor base in the Philippines."

Under PERA, you can contribute up to P100,000 per account annually. You may create and maintain up to five accounts at any one time.

If married, you and your spouse may each save up to P100,000 per account annually.

An overseas Filipino worker, on the other hand, may contribute double this amount, or P200,000, to his or her account annually.

Contributors will get a 5% tax credit. Amounts beyond the P100,000 or P200,000 ceiling, however, are excluded from computation for this incentive. The PERA law also provides that income earned from the investments and reinvestments of the maximum contributions are tax-free.

Mr. Abrogena noted how the investments allowed under the PERA program — unit investment trust funds, mutual funds, insurance plans, pre-need plans, equities, corporate and government bonds, etc. — are tailor-fitted to an individual’s risk preferences.

"The law not only provides tax incentives but also the widespread application across all individuals," he said. "This makes the program powerful in inducing people to save, making it easy to have a disciplined approach to savings and making the returns on these savings attractive enough for people to make it worthwhile."

"I believe everyone should take advantage of this opportunity not only because it is profitable, but because it provides financial security. Furthermore, the long-term funds that will be made available to Philippine industries will bring down the cost of capital, make our industries competitive and make us less dependent on foreign borrowings that have made our economy very susceptible to external shocks," he added.

The PERA law’s implementing guidelines, however, are still being hammered out by regulators.

Government securities

If bank deposits offer negligible interest rates, your P500,000, if you prefer to be on the safe side, will have the potential to earn more if placed in government securities.

Fixed-income securities issued by the Bureau of the Treasury, had taken a beating in the past year as inflation soared, hitting a peak of 12.5% in August, but investment managers see a rebound in bond prices now that inflation has eased.

Bond interest rates and prices have an inverse relationship. As rates rise, prices go down and vice versa. Interest rates had risen along with inflation, or the rise in the price of goods and services, last year.

"Fixed-income returns will be better this year given the direction of interest rates," said Paul Joseph M. Garcia, former president of the Fund Managers Association of the Philippines and currently chief investment officer of ING.

If you are a retail investor, you may avail of government debt papers from government securities eligible dealers, usually the large universal and commercial banks. You must be armed with P100,000, but need to cough out only P5,000 if you are buying a retail Treasury bond.

Marcelo E. Ayes, Rizal Commercial Banking Corp. (RCBC) senior vice-president for financial markets, said the local market should see more debt issuances this year as the government faces the twin problem of low tax collection and pump priming the economy to counter an economic crunch.

An abundant supply of government securities should make bond prices more competitive, he said. "The Treasury might change its course [compared to last year when it repeatedly rejected bids]. [The government] needs to spend more to stimulate the economy," he said. "Bond prices will definitely become more competitive."

Managed funds

Managed funds such as mutual funds and unit investment trust funds (UITFs) have become popular options for investors looking for yields higher than those offered by bank deposits. They are called as such since the management of the funds is assigned to portfolio managers who ensure that investments are earning and losses are minimized.

Fernando Jose Sison III, chairman of the Investment Company Association of the Philippines, the umbrella organization of mutual fund companies in the country, said net asset values per share (NAVPS) may have slumped in 2008 but this year should see them rebounding with inflation on a decline.

"NAVPS have gone down but at these levels, it is a good time buy," Mr. Sison said.

Mutual funds are pools of funds placed in high-caliber outlets such as stocks and bonds. They provide small-scale investors access to investment outlets that are normally limited to high net worth investors since minimum investments can be as low as P5,000.

Investors may buy mutual fund shares from licensed mutual fund agents. Mr. Sison said the total amount of funds managed by mutual fund companies slumped to P62 billion as of October 2008, P24.2 billion lower compared to the P86.2 billion recorded in end-2007.

Funds invested in stocks such as stock and balanced funds were the most severely hit after the local bourse fell by almost 50% in 2008. Those that were invested in fixed income outlets such as bond and money market funds were likewise hit after bond prices slipped due to high interest rates last year.

Stock funds are invested in shares of stock while balanced funds are invested in both equities and bonds. Bond and money market funds are essentially invested in bonds, but the latter are invested in securities with tenor of less than a year.

"There’s softening of interest rates. There should be a recovery for NAVPS [this year]," Mr. Sison said. The stock market is also expected to make a rebound this year since benchmarks such as Dow Jones and the PSE index have appeared to have bottomed out, he added. The entry of new mutual funds — Deutsche Bank’s DWS Deutsche Philippine Fixed Income and DWS Deutsche Philippine Equity Fund, Inc. as well as three others in the pipeline — are also signs of better prospects for the mutual funds industry this year, he said. Trust industry players, however, are less bullish.

Marvin V. Fausto, vice-president of the Trust Officers Association of the Philippines, said that while there is a big chance for the bond and stock markets to rally, the volatile market conditions might minimize returns from these investments.

Mr. Fausto is also Banco de Oro senior vice-president and chief investment officer of trust banking. "There will be a rally but conditions will remain volatile. The general sentiment will still be risk aversion," he said.

Like mutual funds, UITFs are also invested in fixed-income securities, money market instruments and stocks, only that these funds are sold in units instead of shares. UITFs, introduced in 2005, replaced common trust funds. UITFs are being offered by banks’ trust departments, and minimum investments start at P5,000.

Mr. Fausto said assets held in trust amounted to around P110 billion as of September, and growth of at least 10% is expected this year, slower compared to growth rates in previous years, as investors are expected to remain risk averse and to save rather than invest. He said growth for the UITF business this year will come from money market funds.

Going back to the question of where you should place your P500,000 in a time of market turbulence, Mr. Abrogena said you should strongly consider the SDA, short-term deposits or short-term government securities if your time horizon is short-term.

"For P500,000, what we can offer is a money market fund that invests in a diversified mix of these instruments: SDAs, bank deposits and short-term government securities.

"It gives the investor the flexibility of placing in smaller amounts [minimum of P100,000], automatic reinvestment [no need to track down maturities], nor pretermination penalties, and professional management to maximize yields and minimize risk exposure," he said.

For those who are at the "extreme, long term horizon, aggressive investor," he said now is an exciting time to invest.

"Amid the turmoil and fear in the current environment, Warren Buffet’s words remind us: ’Be fearful when others are greedy and greedy when others are fearful,’" Mr. Abrogena said.