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Moving onward and upward

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The trust industry of the Philippines saw its assets grow in 2017 on the back of strong macroeconomic fundamentals and favorable investment climate, according to Bangko Sentral ng Pilipinas (BSP). In “A Report on the Philippine Financial System,” BSP said the industry’s total assets reached P3.42 trillion, up 15.9% from 2016.

“The expansion in the stock of financial assets, mostly investments in equities, lifted the growth in the industry’s total assets,” the central bank said. Of the total assets of the entire Philippine banking system by the end of 2017, 22.5% were held by trust entities.

The central bank noted that the expansion was in part a reflection of the industry’s flexibility in finding alternative investment outlets following the restriction of access to its deposit facilities. It made the move in November 2016, expecting that trust entities would wind down outstanding placements in its Overnight Deposit Facility and Term Deposit Facility by June 2017.

“The regulation underscores the view that the BSP deposit facilities serve as monetary policy instruments for managing domestic liquidity and are not intended to become investment outlets by banks and trust entities,” the central bank said.

“The restriction of the access to BSP deposit facilities posed a challenge to the industry which caused the trust participants to be more innovative in their investment decisions so as to provide clients with their required yield,” China Banking Corporation (China Bank), which has trust operations, told BusinessWorld in an e-mail.

But not all trust entities were significantly affected. BPI Asset Management and Trust Corporation (BPI AMTC), a subsidiary of Bank of the Philippine Islands, was one of those entities. “We were able to retain most of our AUM (assets under management) in the MM (money market) funds,” the company told BusinessWorld in an e-mail.

The central bank said trust entities increased their exposure in financial assets while at the same time reducing their cash and due from banks accounts. Thus by end-2017, the financial assets of the industry climbed 24% to P1.98 trillion. The change in asset mix was most conspicuous in universal/commercial banks, where cash and due from accounts was reduced from P284.4 billion to P2 billion.

As of the end of last year, there were 37 financial institutions with active trust operations. Of those, 16 were universal banks, which accounted for the bulk of the total assets — P2.14 trillion or 62.6%. Non-bank financial institutions — four investment houses and three trust corporations — had combined assets of P876 billion or 25.6% of the total. The rest of the assets were owned by seven commercial banks (P358.2 billion or 10.5% of the total) and seven thrift banks (P45.4 billion or 1.3%).

Unit Investment Trust Funds (UITFs) had a rough 2017, dropping 8.2% to P768 billion. BSP was quick to state that the decrease was not a result of investors losing interest in the product but rather of the decline in the market value of the total assets of UITFs.

“UITF remains to be the most efficient investment outlet available in the market today,” China Bank said. “It is one of the most affordable types of investment as investors can start investing with as low as P10,000 while benefiting from expertise of professional fund managers and diversified portfolio,” it added.

BPI ATMC shared the same sentiment. “[It’s] still the star product for building wealth not only for retail investors but for institutional investors given the growth in various fund strategies in the recent years which make it very easy, especially for non-qualified investors, to access a wider universe of good investment outlets,” it said. Compared with direct security investments, the company said UITFs are superior for achieving long-term growth in that they are automatically diversified and very affordable.

UITF is a key product offering of China Bank as it can cater to the needs of a wide set of clients. The bank explained, “There are UITF variants for various risk appetites and investment experiences which allow the bank to cover more clients. China Bank clients continue to participate in UITFs given the off-the-shelf nature of the product — it is available everyday.”

BPI ATMC considers UITF to be “a very efficient” product to create, offer and scale. “It is the most popular investment type among BPI’s retail clients,” the company said. “In fact, last year’s new product offerings have already breached their P1-billion mark.”

Among the different types of UITFs available in the market today, money market funds are still the most popular with investors, which points to their preference for holding short-term securities, according to BSP. Money market funds accounted for P555.3 billion or 71% of the total UITFs. Equity funds were a distant second, accounting for P100.8 billion or 12.9% of the total.

UITFs, China Bank believes, will thrive in the digital space for they allow wider distribution and accessibility. “It is part of China Bank’s digital transformation for the UITF to have a comprehensive online presence and capability to be able to tap more clients including the millennials,” the company said.

Competition in the trust industry will only intensify as more people start to invest and the Philippine economy continues to do well, BPI ATMC noted. For trust entities to remain relevant, China Bank suggests crafting a digital strategy. And to meet challenges posed by investors who become more demanding and whose needs become more complex, China Bank noted the need for continuous UITF product innovations.

BPI ATMC said the regulator has been very supportive of the industry’s proposed innovations. “It recently approved significant regulations which support the creation of more fund products that will be responsive to clients’ needs,” it added.

And it is optimistic about how the trust industry will fare this year. “As investing continues to captivate the population, and as the Philippine economy continues to do well, we expect that competition in the trust business will increase. Trust corporations will continue to innovate new products and investment structures to draw investments, benefitting the investing population (both institutional and retail), while at the same time encouraging higher efficiency within the trust sector,” it said.