Room for growth

IMPROVEMENTS in investor behavior and strong economic fundamentals have enabled the local mutual fund sector to grow remarkably in previous years, but its performance over the last several quarters has since slowed.

Based on industry figures, the mutual fund marketplace grew by only 10.1% year- on-year in 2014 after soaring by 41.12% and 41.54% in 2012 and 2013, respectively. The latest available data showed that as of the end of August, the industry grew by 7.87% in terms of net assets under management.

“The reality is there’s not a lot of growth,” ATR Asset Management Managing Director Ben Thomas Panares told BusinessWorld in an interview. “Although in value it’s gotten up, the reality is that the industry’s negative outflows reached P2.3 billion.”

First Metro Asset Management, Inc. President Augusto M. Cosio Jr. echoed the same sentiment and ascribed the market’s modest performance to redemptions.

“I think between the peak of the market and now, there has been some redemptions because the market reached an all-time high. So while mutual funds investors do have a longer term perspective, some cannot avoid taking profits,” Mr. Cosio said in a separate interview. “They could also have shifted to other asset classes.”

He added that the average Filipino today is still not inclined to take long- term investment vehicles, and this is among the challenges the industry continues to address

“I guess it’s more of past experiences, of financial crises, so while the mutual funds industry as an asset class performed a lot better than the other investment products available, many Filipinos still do not appreciate the risk-reward equation. They want reward, but cannot stand the risk,” he said. “But now, there are certain improvements going on because of investor education.”

For his part, Cocolife Asset Management Company, Inc. President and CEO Artemio A. Tanchoco, Jr. affirmed that efforts to raise financial literacy in the country have spurred activity in the mutual fund market, but there is still a lot of room for improvement.

“There has been an increasing propensity to invest because the yield generated by traditional finance products, such as deposit accounts, is often not enough. In fact it’s even negative when you compare it to inflation, because inflation is at 2-3% and the returns from these products are only at 1%. So the people even lose monetary value,” Mr. Tanchoco said in an interview. “But financial literacy remains a challenge because there are still a lot of people who are not aware and who do not understand the value of investing.”

Regulatory issues have also been cited by the industry leaders as one of the hurdles that tend to impede the growth of the sector. For one, Mr. Panares said he believes regulation across collective investments needs to be more equal.

“We are quite unique compared to our neighbors. We have three regulators for three kinds of products which are actually packaged in a similar manner, as all of them are collective investments. We have the Securities and Exchange Commission (SEC) for the mutual fund, Bangko Sentral ng Pilipinas for the unit investment trust fund ( UITF), and the Insurance Commission for the variable universal life insurance. What would be helpful is if the three regulators made the playing field a lot more even in terms of taxation and treatment, among others, because right now hindi pantay ‘ yung laban (the playing field is uneven). For instance, if you set up a mutual fund it’ll cost you P50 million and another P10 million if you create another fund. But if you set up a UITF, it’s not going to cost you that much,” he explained. “There is a bill [on this] that is not yet passed, but it needs to happen soon,” he said.

Meanwhile, Mr. Cosio said that the Philippine Investment Fund Association has been in talks with the SEC as well about the exclusive nature of its licensure examination for certified investment sales.

“We really do not have enough people who are selling mutual funds... because it’s been very difficult to pass the exam and get a license. In the past, the exams have been so difficult that the passing rate of some offices range from something like 15% to 25%. We feel that the licensure exam should be inclusive rather than exclusive,” he explained. “After all, as mutual fund companies, we provide our own training, we monitor our own people, and we

have our own control mechanisms. But if the test to get a license is so difficult, what’s going to happen is the number of sales people will decline.”

He said that the bigger problem that might emerge in this scenario is that there may be people who will falsely represent themselves to the public as investment solicitors.

“But if they are licensed, then we’ll know who they are. We can monitor them. If we have a database of all these licensed people, then we can actually avoid the scams of the past because we know the people who are selling our products. If we didn’t know, we wouldn’t know how to find them,” he said.

Asked about his projections for the industry, Mr. Cosio said that he doesn’t see any drastic changes in terms of growth in the coming years, although his aspiration is to see the growth rate become bigger. -

Efforts to raise financial literacy in the country have spurred activity in the mutual fund market, but there is still a lot of room for improvement.