THINK PIECE: HOW TO SHOP FOR MUTUAL FUNDS or UITFS

My tip: check the Cumulative and Annualized Performance report of the funds and pit them against each other.

 

These two indicators are important because they give us an idea on the possible return on our investment based on historical data, but with no guarantees.

  

Here is the “nosebleed” part! By definition, a “cumulative return on an investment (or cumulative performance)” means the aggregate amount that the investment has gained or lost over time, independent of the amount of time involved.[1] While an “annualized performance” is the rate at which an investment grows each year over the period to arrive at the final valuation.[2] Let us skip the definitions and go straight to the application.

 

Below is the Fund Fact Sheet dated 30 April 2021 of one of the most popular mutual funds in the Philippines, ATRAM Alpha Opportunity Fund, Inc.

Snapshot of ATRAM's Fund Fact Sheet dated 30 April 2021

Simply bring your attention to the 5-year (long-term), 3-year(medium-term) and 1- year (short-term) returns, which give us the following information:

 

Cumulative ->           5yrs: 5.81%;               3 yrs.: -19.75 %;         1 yr.: 30.49%

Annualized ->           5 yrs.: 1.14%;             3 yrs.: -7.07%;            1 yr.: 30:49%

 

How can we interpret the numbers in simplest terms?

 

Cumulative, it means if you would invest in the fund 5 years ago, and sell it on 30 April 2021, you would earn 5.81% from staying invested over that 5 years; if you started investing 3 years ago, you lost -19.75% over that 3-year span; if you invested just last year, you would generate 30.49% return on investment over 1 year of staying invested. (“kung nag-invest ka sa fund 5 years ago, nag-increase na investment mo ng 5.81% as of 30 April 2021; kung nagsimula ka nag-invest 3 years ago, talo ka na ng -19.75%; kung last year ka lang naginvest, kumita ka na ng 30.49%”).

 

Annualized, it means your initial investment 5 years ago would grow constantly by 1.14% every year for five years, and the profits were reinvested at the end of each year; if you started investing 3 years ago, your initial investment would lose -7.07% every year for that 3-year span; if you invested just last year, your initial investment would grow by 30.49% after a year. (“kung naginvest ka sa fund 5 years ago, lumalago siya every year ng 1.14% until 30 April 2021; kung naginvest ka 3 years ago, natatalo ang fund ng -7.07% every year; kung last year ka nag-invest, kumita ka ng 30.49% after a year. In short, Compounded Annualized Growth Rate. For easier recall, “kapag annualized performance ang pinaguusapan, isipin niyo na lang na parang utang na compounded ang interest”.)

Gets? 

Understanding Cumulative and Annualized Performance becomes handy when you are looking for several mutual funds to invest in, and cannot decide which one is better.   

Let us say, you are torn between ATRAM Alpha Opportunity Fund, Inc., and PhilEquity Fund, which is another popular mutual fund in the Philippines. You can check PhilEquity’s Fund Fact Sheet dated 30 April 2021 below and compare it with ATRAMS’s.

Snapshot of PhilEquity's Fund Fact Sheet dated 30 April 2021

Based on the information above, the respective performances of the two funds can be summarized  as follows:

 

Cumulative	5 yrs	3 yrs	1 yr
ATRAM	5.81	-19.75	30.49
Philequity	-8.28	-16.88	11.87

 

Annualized	5 yrs	3 yrs	1 yr
ATRAM	1.14%	-7.07%	30.49
Philequity	-1.71%	-5.98%	11.87

 

Now, ceteris paribus, which fund do you think performs better in the last five years? Which one is worth the risk? You may answer in the comment box below.

Happy Shopping 7.7!

(DISCLAIMER: This is not an investment recommendation.)

You can also check Fitz Villafuerte's vlog on Cumulative Performance vs Annualized Performance on the link below:

https://youtu.be/Q9TVmc1h37s

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[1] Investopedia, Cumulative Return, https://www.investopedia.com/terms/c/cumulativereturn.asp

 

[2] Investopedia, Annualized Rate of Return, https://www.investopedia.com/terms/a/annualized-rate.asp

 

THINK PIECE: To buy or not to buy MerryMart at its IPO price of Php 1.00 per share?

(Disclaimer: This is not a stock or investment recommendation. I am just thinking aloud. )

  

Image courtesy of https://merrymart.com.ph/

I am thinking about it.

Since I am not fully convinced in buying MerryMart Consumer Corp. (MM) at its Initial Public Offering (IPO) price of Php 1.00 per share, the answer is NO...for now. But I will monitor MM's stock price on  June 15 (listing date) and perhaps do some intraday trading if the price is right.

As you may have already known, MM is a new player in the grocery and pharmacy retail industry, aiming to compete against the likes of Puregold, Robinsons, Mercury Drug, Metro Gaisano, and SM. MM's primary shareholder is Injap Investments, Inc. , which is the investment holding company of the Sia family --- the family behind Mang Inasal and Double Dragon Properties Corp.

MM seems to be attractive based on its prospectus. However, as of this writing, I am uncertain if it will be a good buy at Php 1.00 per share. I have considered the following factors:

1. Valuation.

MM is overvalued because it has a Price-to-Earnings Ratio (PER) of 271.2x in 2019 as compared to the average industry PER of 20.39x in 2019; this PER suggests that investors are willing to pay Php 271.2 for every peso of MM's earnings, when in fact, on the average, investors are only willing to pay Php 20.39 per peso-earnings in the retail industry. 

Puregold only has a PER of 19.88x in 2019, while  RRHI, the group that operates South Star Drug, has 32.13x. You can compare the PER of MM to the PERs of its competitors as shown below:

Image courtesy of https://www.abcapitalsecurities.com.ph

For an IPO, I prefer to buy stocks at a price close to the average industry PER regardless if it is above or below the average industry PER. In this case, MM's PER is 1,230% greater than the average industry PER. It is a huge difference, thus stockholders will definitely be paying a premium for a share of MM stock at Php 1.00.

When a stock is overvalued, its price tends to go lower. Hence, there is a huge possibility that MM's price would drop from Php 1.00/share. If it happens, stockholders who bought the stock at Php 1.00 would be at loss, unless they managed to immediately sell the stocks at a higher price or managed to cost-average.

2. Use of IPO proceeds. 

A company is attractive if a substantial amount of the IPO proceeds goes to expansion rather than debt repayments. As investor, I do not want to invest in a company which will use my money just to pay off its debts. I want the company to use the money to grow and reap profits.

In the case of MM, substantial amount of IPO proceeds will go to capital expenditure and working capital for store network expansion thereby making MM very attractive. In fact, MM's prospectus shows that no IPO proceeds will be used for debt repayment. 

Screenshot of MM's prospectus re: Use of Proceeds 

However, it bears noting that MM wants to achieve faster expansion through franchising according to its prospectus. This begs the question: what really are the IPO proceeds for if MM will capitalize on the financial capabilities of its own franchisees for its expansion?

3. Business Model and niche market. 

A company is attractive if it will address specific market needs which a very few establishments only satisfy. As investor, I do not want the company to dip into a saturated market.

 

In a saturated market, there is already a lot of companies offering the same products and services meeting the demands of the market. There is no untapped demand in a saturated market, hence there is no need for a new player to come in unless the new player introduces an innovation in the market.

In the case of MM, its "innovation" is its "three-in-one concept", which combines a mini-grocery, personal care shop, and pharmacy in one store. According to MM's prospectus, this innovation of 3-in-1 store "will eliminate the need for several management positions and streamline this requirement to one pharmacist who will also act as the branch manager of the said three-in-one household essentials store."

You may observe that Mercury Drug, South Star Drug and Watsons already have this 3-in-1 concept. In all of these stores, you could buy your groceries and personal care products, and at the same time buy your medicines. Mercury Drug and South Star Drug also have 24/7 stores like any other convenience store.

But it would be nice to have more convenience stores with pharmacies scattered all over the country, right?! That could be MM's market niche.

4. The fact that Edjar "Injap" Sia is the man behind MM.

Injap Sia was successful during the IPO of Double Dragon Properties Corp. when its price rose 50% at its PSE debut. Manny Villar was also successful during the IPO of Golden Haven Memorial Park when its price rose 49.90% at its PSE debut, but he did not get the same results during the IPO of AllHome Corp. This begs the question, will there be a repeat successful performance for Injap Sia? History taught us that there is no guarantee for a repeat successful performance. But anything is possible. 

5. Increased demand for groceries and pharmaceuticals during the COVID-19 pandemic.

During the Enhanced Community Quarantine, supermarkets, convenience stores and pharmacies were one of the few establishments which were allowed by the Philippine government to operate. They are considered essential. Thus, it is nothing but natural for MM to gain interests from investors because its operations are not as hardly hit by the pandemic as the other establishments; this is the reason why MM is already oversubscribed, according to PNB Capital.  This might also be the reason why MM is overvalued. Its business is essential and resilient in times of pandemic, and investors believe that it could produce higher earnings in the future.

Conclusion:

Will I buy after processing my thoughts? I am still thinking about it. 

If I finally decide not to buy MM at its IPO Price, I will observe MM's price action on June 15 and see if it is worth a trade. 

THINK PIECE: Where to start to invest?

Image courtesy of https://www.bpiassetmanagement.com/pages/bpi-investment-funds/

The answer is: Start with your Bank!

1. Investing in and through your bank is the first step in exploring investment opportunities simply because that is where your money is.

Banks have what they call, "Unit Investment Trust Fund (UITF)". UITFs are like Mutual Funds (MF). They are both pooled investments being managed by a trust entity or investment management company. The managers of UITFs/MFs invest the fund in equities and other securities, and if the fund earns, you earn proportionately to the size of your subscription or portfolio.

You could buy or subscribe to UITFs/MFs straight from your bank accounts. It does not require investment experience. Hence, if you are just starting to invest or just starting to build your confidence in making riskier investment decisions, UITFs/MFs are good stepping stones.

Navigate your online bank accounts and look for UITF to subscribe

2. Barring recession and depending on the fund you choose, you can earn from UITFs at a rate of 4% to 20% per annum; these rates are better compared to .025% to 2% per annum that you can earn if you only let your money sleep on your savings accounts.

However, with higher rewards come higher risks. UITFs do not a guarantee a return. There will be times that UITFs have negative calendar year performance. Just don't panic and don't sell. They only reflect the natural movement of the stock market ---up and down. For down times, it is important to manage your risks by diversifying your portfolio. There goes the saying, "do not put all your eggs in one basket". It means, do not put 100% of your savings to UITFs.

3. In my experience, UITF was my first investment. From UITFs, I shifted to MFs and then to stocks. 

My first UITF investment was BPI Balanced Fund because that was the golden mean between the bonds fund and the equity fund. Based on my assessment at that time, I found the ROI in bonds fund too low for me, and the market volatility in equity fund too high for me. Thus, I just chose to invest in balanced fund because it got both bonds and equities in its investment allocation.

4. Hindsight 2020. I should have invested in equity fund for higher returns, now that I understand how the stock market works.

THINK PIECE: How to save money

Image courtesy of https://www.slideshare.net/luizdeasis/building-wealth-through-philippine-stock-market-investing

Pay yourself first, then live within or below your means! That is the ultimate tip.

1. It just means that every time you receive your allowance or income, you immediately allocate a portion thereof to your savings.

There is no hard and fast rule on what percentage of your allowance/income should you allocate for savings. You can even start with just 1% or 2% of your allowance/income, but you have to save consistently and regularly until it becomes your habit. No buts, no ifs, no don'ts.

2. Whatever is left from your allowance/income, you allocate it to your expenses ---your budget for expenses. Then, you have to "live within your means". Meaning, you adjust your spending to make everything fit to your budget; this actually compels you to observe yourself and be mindful of the prices of goods you are spending on.

Once it becomes your habit to Pay Yourself First, that is the time that you can (gradually or drastically) increase the percentage of your savings allocation because you already have insights about your spending tendencies or habit, like you are now able to identify what expenses are dispensable. You may reallocate some of your funds from the expenses side to the savings side as you please.

With your hard-earned savings, you are now in a position to explore investment opportunities!

THINK PIECE: To buy or not to buy a Variable Life Insurance?

Simple answer: Buy only if you have dependents. If you do not have dependents, it is best that you invest your money in other income-generating securities for maximum capital appreciation or income growth.

1. Yes, buy a variable life insurance if there are other people relying or depending on your income (e.g. a family who depends on your financial support).

A life insurance guarantees that your beneficiaries (e.g. dependents) would get a certain amount of money in case of your demise. Thus, if you are concerned about the financial situation of your dependents after your death, then you need to buy a life insurance. 

It is best that you buy a life insurance as soon as you have a dependent (e.g. as soon as you build your family) because premium payment goes higher as you get older.

2. No, do not buy a life insurance if you do not have dependents (as in nobody relies on your financial support). If you prematurely buy it, you lose the chance of focusing your funds in other higher income yielding investments for maximum income growth or capital accumulation, because a portion of your premium payment in variable life insurance answers for the cost of insurance, which serves no purpose if you do not have a dependent.

At this point, what you can to do with your money is to invest it in mutual funds or other income-generating tools (e.g. stocks, bonds, unit investment linked fund) to earn more money.

Do not be worried about paying higher premium for variable life insurance should you decide to have a family later in your life, because you will be able to afford it because of the capital or income you have already accumulated in the past.

For a concurring expert opinion on the matter, you may watch the interview of Suze Orman with Karen Davila on ANC at 19.19 timestamp.