Ac­tive vs. pas­sive

The Philippine Star - - BUSINESS - WIL­SON SY

At the start of 2019, we launched our new­est fund – the Philequity MSCI Philip­pines In­dex Fund. We have re­ceived ques­tions from in­vestors about our new in­dex fund. In this ar­ti­cle, we ex­plain the dif­fer­ence be­tween ac­tively man­aged funds and pas­sive funds. We also enu­mer­ate the fea­tures of the MSCI in­dex fund as com­pared to Philequity PSE In­dex Fund, Philequity Div­i­dend Yield Fund and Philequity Fund.

What is the dif­fer­ence be­tween ac­tively man­aged funds and pas­sive funds?

As the name con­notes, ac­tively man­aged funds such as Philequity Fund and Philequity Div­i­dend Yield Fund are han­dled by pro­fes­sional fund man­agers. Fund per­for­mance is, there­fore, driven by in­vest­ment de­ci­sions made by pro­fes­sional man­agers and is not tied to an un­der­ly­ing in­dex. In con­trast, pas­sive funds such as the PSE In­dex Fund and the MSCI in­dex fund mir­ror the com­po­si­tion of a spe­cific in­dex while also track­ing its per­for­mance.

What is the MSCI in­dex fund?

The Philequity MSCI Philip­pines In­dex Fund was launched in part­ner­ship with MSCI. Un­like ac­tively man­aged mu­tual funds, the fund tracks the com­po­si­tion and per­for­mance of the MSCI Philip­pines In­dex. More­over, the MSCI in­dex fund is not man­dated to main­tain a cash buf­fer and is al­lowed to de­ploy 100 per­cent of its in­vestible funds to prop­erly track the move of the un­der­ly­ing in­dex.

Is MSCI Philip­pines In­dex the same as the PSEi? What is MSCI?

MSCI Inc, for­merly Mor­gan Stan­ley Cap­i­tal In­ter­na­tional, is listed in the New York Stock Ex­change. MSCI is the lead­ing provider of quan­ti­ta­tive and an­a­lyt­i­cal tools which are used by in­vest­ment pro­fes­sion­als across all ma­jor as­set classes. The firm has an ex­ten­sive list of clients which in­cludes most of the world’s big­gest as­set man­agers. MSCI has be­come a house­hold name in in­vest­ments as its as­set in­dices are closely fol­lowed and mon­i­tored by al­most ev­ery­one in the in­dus­try.

Both in­dices track the move­ment of the Philip­pine stock mar­ket and are used as per­for­mance bench­marks by both for­eign and lo­cal fund man­agers. Both MSCI and the PSE use data on mar­ket cap­i­tal­iza­tion, trad­ing liq­uid­ity and free float to de­ter­mine the in­dex con­stituents and their re­spec­tive weights. None­the­less, there are still no­table dif­fer­ences be­tween the two and we list these below.

1. Num­ber of con­stituents. The PSEi is com­posed of the top 30 Philip­pine stocks ranked based on size, liq­uid­ity, and pub­lic own­er­ship. On the other hand, the MSCI Philip­pine In­dex is only com­posed of 23 out of the 30 stocks in the PSEi.

2. Top hold­ings. The big­gest com­po­nent of the PSEi is SM In­vest­ments Corp (SM) which has an in­dex weight of 13.7 per­cent. Mean­while, SM Prime Hold­ings, Inc (SMPH) and Ay­ala Land Inc (ALI) are the big­gest con­stituents of the MSCI Philip­pines In­dex, with weights of 13.2 per­cent and 10.9 per­cent, re­spec­tively.

3. For­eign in­clu­sion fac­tor. Un­like the PSEi, MSCI uses for­eign in­clu­sion fac­tor (FIF) as a ma­jor cri­te­ria for its in­dices. FIF is de­rived from a stock’s trad­ing liq­uid­ity and for­eign own­er­ship level. Us­ing FIF en­ables MSCI to select stocks which have ad­e­quate liq­uid­ity and for­eign own­er­ship head­room to ac­com­mo­date the trad­ing of large in­sti­tu­tional clients and for­eign port­fo­lio man­agers.

Should we buy the MSCI in­dex fund or the PSE in­dex fund?

What makes the MSCI in­dex fund dif­fer­ent is the un­der­ly­ing in­dex that it tracks. It is the first and only lo­cal fund which tracks the MSCI Philip­pines In­dex, the bench­mark used and fol­lowed by al­most all for­eign fund man­agers. Large for­eign in­sti­tu­tions and global port­fo­lio man­agers model their Philip­pine ex­po­sure af­ter the MSCI Philip­pines In­dex. For­eign in­vestors also use the MSCI in­dex as the pri­mary bench­mark for their Philip­pine stock hold­ings.

Should we still buy in­di­vid­ual stocks when we can in­vest in mu­tual funds?

For those who do not have the time and knack for trad­ing, putting your money in mu­tual funds may be the more pru­dent and con­ve­nient op­tion. How­ever, for those who have the time and in­cli­na­tion, we rec­om­mend dab­bling in in­di­vid­ual stocks. One can learn a lot about in­vest­ing from study­ing the prospects of in­di­vid­ual com­pa­nies, buy­ing their stocks and mon­i­tor­ing their per­for­mance. Do­ing this can ul­ti­mately teach in­vestors how to make sound and prof­itable in­vest­ment de­ci­sions.

Which mu­tual fund should we buy?

Philequity cur­rently offers six dif­fer­ent funds and each has a spe­cific pur­pose. The MSCI in­dex fund and PSE In­dex Fund are mu­tual funds which track the com­po­si­tion and per­for­mance of an un­der­ly­ing in­dex. In con­trast, Philequity Fund and Philequity Div­i­dend Yield Fund are both ac­tively man­aged funds, with the lat­ter geared more to­wards div­i­dend-pay­ing com­pa­nies. Mean­while, the Dol­lar In­come Fund and Peso Bond Fund are mu­tual funds for those who would like to in­vest in fixed in­come.

Di­ver­sify, di­ver­sify, di­ver­sify

We have al­ways em­pha­sized the im­por­tance of hav­ing an as­set al­lo­ca­tion strategy. We ad­vo­cate di­ver­si­fy­ing one’s in­vest­ments into dif­fer­ent as­set classes such as real es­tate, cash, bonds or fixed in­come in­stru­ments, mu­tual funds, in­dex track­ers and stocks. Main­tain­ing a di­ver­si­fied port­fo­lio will en­able in­vestors to sleep well at night and be at peace with their in­vest­ments even dur­ing times of ex­treme mar­ket volatil­ity. We al­ways tell our read­ers that one must have a cer­tain por­tion of his in­vest­ment port­fo­lio in equities, whether in in­di­vid­ual stocks, mu­tual funds or in­dex funds. Among all the as­set classes, equities still of­fer one of the best re­turns over the long term. How much one should put in stocks should de­pend on his as­set al­lo­ca­tion, risk tol­er­ance and time hori­zon.

Philequity Man­age­ment is the fund man­ager of the lead­ing mu­tual funds in the Philip­pines. Visit to learn more about Philequity’s man­aged funds or to view pre­vi­ous ar­ti­cles. For in­quiries or to send feed­back, please call (02) 250-8700 or email [email protected]

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