Time for smart investing: Capturing the Filipino spending power
As Filipinos become more financially aware, more and more individuals are welcoming investment opportunities that can further grow their hard- earned money. Several products have been developed and offered by investment companies to encourage Filipinos to build personal wealth. For those who want to start small and and are looking for long-term gains, index investing is the way forward.
First Metro Asset Management, Inc. ( FAMI) is an investment company adviser licensed by the Securities and Exchange Commission to manage and distribute mutual funds. The company, together with renowned index provider, MSCI, Inc. ( MSCI), created a Consumer Index that would measure the performance of consumer-related stocks, noting that Private Consumption Expenditure ( PCE) accounts for around 70% of the country’s gross domestic product ( GDP). FAMI President Augusto M. Cosio, Jr. recently conversed with Business World to discuss more about the new index and provide some insights that would help investors understand how they can take advantage of this index tracker.
BW: What is a stock market index?
AMC: Primarily, the index is a measure. Secondary, it is a guide that tells you how the market is moving, up or down. But more importantly, it is an imaginary portfolio that somewhat reflects the market in general.
BW: What is an index fund?
AMC: An index fund is a vehicle where people can invest so that they can replicate the movement of the main index or the way the market is measured. Here in the Philippines, we have the PSEi ( Philippine Stock Exchange Composite Index) and an index fund that closely tracks the PSEi, the FMETF ( First Metro Philippine Equity Exchange-Traded Fund).
BW: What is index investing?
AMC: Index investing is investing in a fund or in a listed index fund to participate in the movement of the index.
BW: How is it different from the usual investment in stocks?
AMC: If you have to invest in stocks, you normally select one or a few stocks. When investing in an index, you’re buying the entire market with one product. This is so because the nature of the index, which the consumer fund tracks, comprise a set of selected/screened constituent stocks that carry or track the index. In the case of a consumer index, the theme is the spending power of the Filipino consumer being on the growth path onwards. That theme is a robust one because it is anchored in a proven growth locomotive of the Philippines which is household or private consumption.
BW: What are its advantages over other types of investment strategies AMC: Historically, we see that individual stock picking is not as powerful as index investing because individual stock picking has the potential risk of poor stock selection. The market can go up and your stock can go down, but if you invest in the index, if the market goes up, the index goes up. Index investing is less expensive because of its lower costs and better after-tax performance by keeping portfolio turnover low in comparison with actively managed funds. It is convenient. It has the desired characteristics of investor wants in a sense that is thematic and sector- oriented. In this case, the theme is consumer spending of the growing Filipino households and middle class. The sector exposure is the consumer- oriented industries of the Philippines.
BW: How is it different from an exchange-traded fund?
AMC: An exchange-traded fund is actually an index fund. The consumer index tracking fund is not listed unlike the ETF which is a listed index fund.
BW: What prompted First Metro to come up with a consumer index fund?
AMC: We will still be coming up with a consumer index fund. What we crafted right now is merely a consumer index with the help of MSCI. There’s a gap in the measurement of equity performance right now in the Philippines. There is no index that tracks the performance of stocks. Globally, index funds or passively managed funds have emerged and are growing. First Metro’s investment ideas and product offerings have always embraced global trends. Just like when we brought to the Philippine market the very first ETF, it was a step that gave local investors a taste of good return opportunities that have performed better than most actively managed funds.
BW: Why a consumer theme? Why not any other sector?
AMC: If you look at the GDP right now, more than 70% of GDP is private consumption expenditure. That seems to be the fastest growing sector, given the new tax reform that we are anticipating. There is no doubt that the future has placed the Filipino consumer at the gas pedal of the Philippine growth story. Demographics have helped drive the robust profit outcomes and share price gains of a host of Philippine consumer- centric industries such as fastfoods and restaurants, mall development, tourism, financial services, aviation, automotive, food and beverage manufacturing.
BW: Is the time right for this kind of investing?
AMC: We should have done it a long time ago, but we think there could be no other better time than now given the market landscape. The Philippine economy continues to be driven by household spending/private consumption with strong OFW remittances and BPO income. We also expect the CTRP to boost disposable income. We have a growing Filipino middle class and our demographics, millennial dominated, will boost consumption spending. These will help improve the earnings growth of consumer companies.
BW: Who are you targeting as investors for this type of investment: the retail market or the big fund managers/ institutions? AMC: Well, I would say we would really go for the retail market, even those who are new to investing.
BW: Was the FMETF a test case for index investing? How was it received by the Philippine market?
AMC: It was received mostly by retail investors. Institutional investors, they have other considerations. Well, if you look at it from the point of view that it continues to be traded daily — volumes of course, sometimes are small, sometimes are significant — but the fact that it trades daily, it performs better than many other listed stocks.
BW: Effectively, index investing is passive investing, right? As a strategy, how is it advantageous compared to active investing?
AMC: If you think that the market is going in a positive direction, you can be sure that the index will move in that direction. In an individual stock, it is still possible that the market moves in a positive direction but the individual stock does not. And we’ve seen that happened many times. It also reduces some of the risks of active management such as poor security selection and while you may not dramatically outperform the market with index funds, you won’t dramatically underperform either.