After several days of contemplation, research, and due diligence, I finally decided to invest bulk of my savings from being an Online Filipino Worker (OFW) for more than 2 years to Philippine Dollar Bond Index Fund.
If you don’t have an immediate need to convert your hard-earned US Dollars into Philippine Peso since peso is continuously appreciating, and yet you want to remain as conservative and liquid as possible with higher returns than traditional time deposits, an option is to invest it in PHILIPPINE DOLLAR BOND INDEX FUND.
What is Philippine Dollar Bond Index Fund?
Philippine Dollar Bond Index Fund is a US Dollar-Denominated Unit Investment Trust Fund (UITF) product of Bank of the Philippine Islands (BPI). It closely tracks the JP Morgan Asia Credit Index (JACI) as its benchmark.
As a bond fund, it is conservative in nature since the fund invests mostly on government and corporate bonds. However, it is considered as an ‘aggressive type’ of investment according to the risk appetite assessment of BPI since it is a long-term bond fund which requires long-term investment for it to generate nice yields. So before you will be able to invest here, you must be considered as an aggressive type of investor in their risk assessment.
UITF works much the same like a Mutual Fund with some minor differences. If you want to know the similarities and differences between a Mutual Fund and Unit Investment Trust Funds, I made an article Mutual Funds vs. UITFs.
Minimum Initial Investment: USD 500
Minimum Additional Investment: USD 200
Minimum Holding Period: None
Cut-Off Time for Investment and Redemption: 12:00 noon
According to the latest available fund performance report as of this writing which is end of month July 2012, the following returns was generated by the fund:
Why Did I Invest?
Now, the biggest question you might be asking is why did I choose this kind of investment. I have several reasons why.
CONSERVATIVE. Since this involves a huge chunk of my portfolio, I want to invest in a conservative type of investment. In one of the investment prospectus that I read in another bond fund, generally NAVPUs in bond fund have a 1% chance that it will go down a maximum of 5% in any single day. Conversely, there’s a 99% chance that it won’t go down higher than 5%.
Bonds are one of the most conservative types of investments as compared to riskier investments such as stocks and FOREX. However, being conservative does not mean that it involves no risk on the part of the investor.
Here are the some of the risks associated with investing in this fund as with any other bond funds:
Market Risk – the risk that movement in the financial markets will adversely affect the investments of the Fund. The markets will fluctuate based on many factors, such as the state of the economy, current events, corporate earnings, interest rate movements.
Interest Rate Risk -the risk that the value of the portfolio will decline as interest rates rise. Bond prices are inversely related to interest rates. That is, if interest rates fall, bonds generally rise and vice versa. Why? It is because a bond offers a fixed interest rate. We can view the following example below.
A bond is issued for Php100,000 for five years with a 3% coupon or interest rate, paid every 6 months. Let’s say that interest rates went up to 5%. If an investor wants to sell this bond, who will buy it when it is paying just 3% as compared to the market interest rate of 5%? So if he want to sell it, he will then be forced to sell it at a lower bond price.
Credit Risk – the risk that the bond issuer may not be able to pay its debt upon interest payments and maturity. The fund invests on corporate bonds with an average Moody’s credit rating of Ba2 or equivalent Standard and Poor’s credit rating of BB.
The NAVPU is based on bond prices in the fund. Thus, if bond prices drop, the NAVPU will go down as well.
GREAT RETURNS. Upon research, this is also the fund with the highest return year-to-date among US Dollar-denominated UITFs and Mutual Funds. Yes, it beat all US Dollar-denominated equity funds as of this writing!
Two other funds from the Odyssey Funds of the same bank BPI, namely Odyssey Philippine Dollar Bond Fund and Odyssey Tax Exempt Philippine Dollar Fixed Income Fund, slightly beat the return of this fund as of this writing. Unfortunately, they do have entry fees of 1% which is deductible upon initial and additional subscriptions to the fund. In addition, both of these funds require higher minimum initial and additional investment and higher trust fees.
The table below shows the differences between Philippine Dollar Bond Index Fund and these two Odyssey Funds:
NO HOLDING PERIOD. As of August 1, 2012, BPI took off all the minimum holding periods in their UITF line of products. This is good news because that means every investor can withdraw their money from the fund anytime they want. It also means that investors can remain as liquid as possible with higher returns compared to other conventional forms of investment.
Since this is a bond fund, the redemption period is very short unlike equity funds. In fact, when an investor orders a redemption of units before the fund’s cut-off time of 12 noon, he can already see the proceeds at the end of the same day.
ONLINE TRANSACTIONS: BPI is the only bank which offers additional UITF investment online through the internet. Investors must open a settlement account with their respective branch of account. In this case, a minimum of USD 500 is required to open a settlement account. Once they have opened an account, they can make additional investment online when they enrolled their investment accounts online.
JP MORGAN ASIA CREDIT INDEX UPGRADED. The JP Morgan Asia Credit Index (JACI) has recently been upgraded by credit rating agency Moody’s into ‘substantially investment grade.’ Since Philippine Dollar Bond Index Fund uses JACI as its benchmark in investing the funds, therefore it suffices to say that it is also substantially investment grade.
PHILIPPINE ECONOMY IS DOING WELL. Since the fund is invested mostly in Philippine Bonds issued by the Government, then it suffices to research how is the performance of the Philippine economy.
With the US and Europe currently experiencing financial crisis in their respective economies, Asian economies in general, including the Philippines is experiencing a spur of growth. In fact the Philippines’ credit rating was upgraded just one notch below investment grade last July 4. Several positive news about the Philippines are also evident in various news sites which includes:
-> New York Times reported that the Philippines is set to become Asia’s newest bright spot with $70 billion in reserves and lower interest payments on its debt after recent credit rating upgrades. In fact, the BSP was able to extend a US$1 Billion loan to International Monetary Fund.
-> According to HSBC estimates, the Philippines is the 44th-largest economy in the world today. But if current trends hold, it can leap to the No. 16 spot by 2050. Late last year, the Philippines ousted India as the preferred hub of call center and Business Process Outsourcing (BPO) companies.
-> Bloomberg reported that hedge funds and money managers, including BlackRock, has set up their bond trading desks here in Asia as Asian bonds remained attractive to foreign investors.
-> UBS Securities says that the Philippine economy is seen to remain most promising in South East Asia.
There you have it! My next article is about my investment on Variable Unit Life (VUL) Insurance as I become a licensed part-time Financial Advisor in one of the most trusted insurance company.