Bdo Ucp Handouts v2

Certified UITF Sales Person
(CUSP) Review
Presented by BDO Trust and Investments Group
The enclosed training presentation is based on: (1) reference materials provided by the Trust Officers Association of the Philippines (TOAP) and (2) applicable BSP Circulars.
OUTLINE
I. UITF PRODUCTS
II. UITF & OPERATIONS
III. UITF SALES PROCESS
IV. FUNDAMENTALS OF INVESTMENTS
V. CODE OF CONDUCT & ETHICS
MODULE 1:
UITF Products
What is a Trust?
Trust is a fiduciary relationship whereby a “person” (TRUSTOR) delivers
property/ies to another “person” (TRUSTEE) who manages/administers
the property/ies for the benefit of designated “person/s”
(BENEFICIARY/IES)
•“PERSON” means an individual/natural person or a juridical entity

like a corporation or institution.
•TRUSTEE holds legal title to the property/ies (but is not entitled to its
benefits) for the benefit of benificiary/ies
4
Basics of Trust
TRUST is
A relationship created at the direction of a person or persons, in

which one or more hold(s) the property to use and protect for the
benefit of others, subject to certain guidelines.
An entity created to hold assets for the benefit

of certain persons or entities, with a trustee managing the trust
(and often holding title on behalf of the trust).
Basics of Trust
Parties to a Trust
Trustor
Trustee
Beneficiary
Must have a subject of trust (corpus/res)

Legal ownership is vested on the Trustee*
(* not to be confused with an Agent in an Agency arrangement which also falls within the
trust business)
Types of Trust
Public or Private
Implied or Express
Revocable or Irrevocable
Non-discretionary (Limited) or UITFs
Discretionary Private
Express
Revocable
Discretionary
Trust Funds vs Deposits
Trust funds are NOT public borrowings
 Not covered by PDIC
 Return on investment or of principal is not guaranteed
 Past performance does not guarantee future
performance
 Income, if any, may fluctuate depending on market
conditions
 Losses, if any, shall be exclusively for the account and
risk of the trustor (client)
UITF vs. Deposits
UITF Deposits
 Trustor-trustee  Creditor-debtor
Relationship Relationship
 Earnings Based On  Guaranteed
Actual Performance Of Returns
Fund, No Guaranteed
Yields/ Mtm
What is a Fund?
A FUND is…
 Investment Vehicle
 Access to the Financial markets (bonds, equities, etc)
 Pools your money with other investors
 Investment Manager
What is a UITF?
 Established by a trust entity as allowed under Section
83.6 of the General Banking Law
 An open-ended pooled trust fund denominated in pesos
or any acceptable currency
 Made available by participation; participation or
redemption may be as often as stated in relevant plan
rules (Declaration of Trust)
 Uses the mark-to-market method in valuing the fund's
securities.
 Replaced the Common Trust Funds (CTFs)
UITF, Defined
 Unit Investment Trust Funds - are
• open-ended pooled trust funds, in
• any acceptable currency,
• operated by a trust entity, and
• made available by participation
 established, administered and maintained by
a Trust entity subject to BSP approval
How Does a UITF Work?
Investment Manager
Investors
Cash
Money is pooled… …and invested in a portfolio
UNITS OF PARTICIPATION
10
Benefits in Investing in Funds
•Team
•Full time
Professional Management •Shops for the
best value
•Experience
1 2
Diversification
•Not only in one
type of investment
Option A Liquidity
Option
B
Option C
Affordable
UITFs versus Mutual Funds
SIMILARITIES UITFs MUTUAL FUNDS
 Pooled and open-ended YES YES
investments
 Managed by fund managers on YES YES
full discretion basis
 Involves risk while offering YES YES

better yields and capital growth
 Not insured by PDIC YES YES

• Reserves None None, but requires IC P50
M paid-up capital
• Sales License None Agents need SEC license
to sell Fund
* Uniform rights and privileges for unit holders
* Both UITF & MF are not guaranteed

UITFs versus Mutual Funds
DIFFERENCES UITFS MUTUAL FUNDS
 Structure Non-legal entity; Legal entity; Corporation
Managed fund
 Participation via purchase Units Shares
of
• Offered by Banks, Trust Investment Companies
Companies
• Fund Manager Trust Entity Appointed by Investment
Company
• Price NAVPU NAVPS
• Fees Trust fee Management Fee
•Regulator BSP SEC
•Distribution Qualified Trust Licensed Agents
Personnel
MODULE 2:
UITF Regulation and Operation
Objectives of the UITF Rules
• To align the operation of pooled funds with international
best practices and to ensure differentiation from deposit
products
• To enhance the credibility of pooled funds to retail
investors, enabling them to evolve as major institutional
investors that can support the deepening of the domestic
capital markets
UITF Regulations
Rules for Establishing UITFs
 A trust entity may establish, administer and maintain one or more
UITFs
 each UITF shall be subject to a separate set of Plan rules, adopted

by the bank and submitted to BSP prior to implementation
 trustee should have exclusive control over each UITF and shall
have no other capacity except as Trustee.
UITF Plan Documentation
Declaration of Trust
 Written plan rules in the form of a trust agreement
 Approved by Trust entity’s Board of Directors
 Copy submitted to the BSP for prior approval
 Copy of Plan made available at the principal office
of Trustee for inspection by any person having an
interest in the fund or by his authorized
representative.
UITF Plan Documentation
Minimum Elements of a Declaration of Trust
 Title (product/brand name)
 Investment objectives and policies
 Investment powers of trustee
 Unitized NAVPU valuation methodology
 Terms and conditions governing the admission or
redemption of units of participation
 External audit requirements
(
UITF Plan Documentation (continued)
Minimum Elements of a Declaration of Trust
 Basis to terminate Plan
 Trustee Liability Clause
 Fees and allowable charges
 Other matters affecting rights of participants in Plan
Terms of Admission/Redemption of
Units, Minimum Features
 Basis for setting the admission and redemption price,

which should be the market value of underlying
investments at such time
 Frequency of admission or redemption, if other than
daily
 specific policies on suspension of redemption
UITF Accounting and Operating Methodology
 Pooled fund accounting method

 Valuation of participations should be through units under a
unitized NAVPu methodology
 Investments should be marked-to-market instead of
accrued
 Total Net Assets is the sum of the market value of each
investment less fees, taxes and qualified expenses
defined in the Plan.
UITF Disclosure Requirements
 Investments - a list, updated at least quarterly, of

prospective and outstanding investment outlets shall be
made available to all UITF clients
 Marketing materials - should clearly state:
• Name of Fund and Trustee
• that participation is not a “deposit account” and trustee
is not liable for losses except for negligence
(continued)
 No PDIC insurance cover

 No indicative rates except present relevant historical
performance purely for reference and indication that future
results are not guaranteed
 Minimum information on:
• investment mix and risk profile
• particulars on pricing and cut-off time
• charges against the fund
• availability of Plan rules upon request
• Customer and Product Suitability standards
(continued)
 Evidence of Participation shall include:

 Participation Trust Agreement
 Confirmation of participation and redemption with details
 Fund’s NAVPU should be published at least once weekly
and shall include info on:
• Current NAVPu
• Year-to-date (YTD) ROI
• Year-on-year (YOY) ROI
Exposure Limit of
UITFs To Single Entity
 Should not exceed 15% of the market value of

the UITF Fund
 However, limit does not apply to non-risk
assets as defined by BSP
 when limit is breached due to M-to-M or
extraordinary circumstances, trustee is given
30 days to correct the same
UITF - Allowed Investments
 Bank deposits
 Exchange-listed securities
 Securities issued or guaranteed by the Phil. Govt,
BSP, the govt of a foreign country, any political
subdivision of a foreign country or any supranational
entity
 Marketable securities traded in an organized
exchange
UITF - Allowed Investments (Cont’d)
 Loans traded in an organized market
 such other tradeable investment outlets/ categories as
BSP may allow
 appropriate hedging derivative instruments or
investment outlets for purely hedging purposes or for
investment and risk diversification, provided it is in
accordance with the trust entity’s risk management and
hedging policy approved by its Trust Committee
Meaning of “Loans Traded in an
Organized Market”
 The underlying loan documents should be free from any
prohibition on assignment, or the novation of credit
 it must be marketable, thus “quoted prices” are readily
and regularly available from an exchange, broker, dealer,
industry group, pricing service or regulatory agency, and
prices represent actual and regularly occurring
transactions on arm’s length basis
Foreign Currency Denominated UITFs
 UITFs denominated in any acceptable foreign

currency may be established
 Such funds may only be invested in allowable

investments in pesos or any acceptable forex
currency expressly allowed in the fund’s plan
rules and disclosed to participants.
Exemptions from Statutory Reserves
 UITFs are exempt from the following statutory

limits applicable to trust funds in general:
• Reserve requirements
• Single borrower’s limit (except the 15% SBL within
each fund)
• DOSRI ceilings
Required Support from Institution
 Backroom Operations: Systems to support

requirements of daily marking- to-market of
investments should be available
 Custody of Securities: investment in securities

shall be held for safekeeping by BSP accredited
third party custodians who shall perform
independent marking-to-market of such securities.
UITFs are Classified
According to Allowed
Underlying
Investments
Various Types of UITF
1. Money Market Funds
Purely Fixed Income with Weighted Average Duration <1

• Conservative
Can only be invested in outlets that have no price risk
• Moderate
Can be invested in bonds provided that weighted average
duration is less than 1
2. Bond Funds
Purely Fixed Income

Intermediate :
1 < Weighted Average Duration < 3
Medium Term:
3 < Weighted Average Duration < 5
Long Term:
Weighted Average Duration > 5
3. Balanced funds
• Combination of cash, fixed income, and equities
4. Equity funds
• Majority exposure in equities
5. Feeder funds/fund-of-funds
•Classification will depend on allowed investments of

the target fund/funds
Let’s Put It All
Together….
0 TIME HORIZON 100
100
Balanced UITF
R
E
T Equity UITF
U Money
R Market UITF
N Bond
S UITF
0
100 LIQUIDITY NEEDS 0
Types of UITF
 Fixed Income Fund- primarily invested in fixed income

instruments such as TBills, FXTNs, bank deposits and other
types of financial instruments offering regular income at
prevailing interest rates
• Money Market (less than one year)
• Bond Fund (more than one year)
 Equity- primarily invested in stock issues.

 Balanced Fund- both invested in fixed income and equities.
27
TOAP classification of Funds
Classification Maximum Duration
Money Market Fund 1 year
Intermediate-term Bond 3 years

Fund
Medium-term Bond Fund 5 years
Long-term Bond Fund >5 years

Feeder Funds
Fund of Funds
Multi-class Funds
Income Paying
Funds
BSP Circular 767:
Amendments to UITF Regulations
Subsection X410.2/4410Q.2 Establishment of a Unit
Investment Trust Fund.
 A UIT Fund may be allowed to operate as a feeder

fund, or a fund-of-funds; provided, that the plan rules
and related documents shall state that the UIT Fund is
a feeder or a fund-of-funds, and provide an explanation
or illustration of such structures.
BSP Circular 767
 Feeder Fund: A UIT Fund structure that mandates the
fund to invest at least 90% of its assets in a single
collective investment scheme
 Fund-of-Funds: A UIT Fund structure that mandates the
fund to invest at least 90% of its assets in more than 1
collective investment scheme
 Target Fund: A local or foreign collective investment
scheme in which the UITF invests all or a portion of its
assets
BSP Circular 853
 MULTI-CLASS UIT FUND; the plan rules and
related documents shall state that the UIT
Fund is a feeder fund, fund-of-funds, OR
MULTI-CLASS FUND, and
 provide an explanation or illustration of such
structures.”
REGULAR UITF STRUCTURE

BSP Circular 767
FEEDER FUND
STRUCTURE
BSP Circular 767
FUND-OF-FUNDS
STRUCTURE
BSP Circular 853
MULTI-CLASS
STRUCTURE
BSP Circular 767
Subsection X410.8/4410Q.8 Exposure Limits.
 Combined exposure of the UITF to any entity
and its related parties shall not exceed 15% of
the mv of the fund
 UITF invested in exchange traded equity
securities shall be subject to the 15%
exposure limit to a single entity/issuer
BSP Circular 767
Subsection X410.8/4410Q.8 Exposure Limits.
 In the case of an exchange traded equity security which is
included in an index and tracked by the UITF, the exposure of
the fund to a single entity shall be the actual benchmark
weighting of the issuer or 15%, whichever is higher
 In the case of FF/FoF, the exposure limit shall be applied on
the target fund’s underlying investments. Furthermore, the
investments in any one target fund shall not exceed 10% of
the total NAV of the target fund
BSP Circular 852
Subsection X410.7/4410Q.7 Minimum
Disclosure Requirements.
 Each participant should be given a participating trust

agreement and a risk disclosure statement that is given
to a client every time he participates in a different fund
BSP Circular 852
Subsection X410.7/4410Q.7 Minimum Disclosure Requirements.
 Compute NAVpu daily
 Publish at least weekly NAVPus
 Make available historical NAVpus, declaration
of trusts, other disclosure documents via their
own or TOAP’s website
BSP Circular 852
Subsection X410.7/4410Q.7 Minimum Disclosure Requirements.
Board approved policies regarding:
 Duties and responsibilities of UIT marketing personnel

 Conduct and diligence check of UIT marketing
personnel including ongoing monitoring and review
 Conduct of continuing training & education especially
on updates to fund products
BSP Circular 853
“Subsection X410.5/4410Q.5 Operating and accounting
methodology.“
 The total assets and accountabilities of each fund shall be accounted

for as a single account referred to as pooled-fund accounting method.
 THE INVESTMENTS OF MULTI-CLASS UIT FUND SHALL REMAIN

AS ONE POOL AND ARE NOT SEPARATELY ALLOCATED TO
CLASSES.
BSP Circular 853
methodology.“
 Contributions to each fund by clients shall always be through

participation in units of the fund;
 IN THE CASE OF MULTI-CLASS UIT FUND, UNITS SHALL

BE ISSUED AS UNITS IN A CLASS OF A FUND and each unit
shall have uniform rights or privileges, as any other unit.
BSP Circular 853
methodology.“
 Amount of fees/commission and other charges to be
deducted from the fund
 For multi-class UIT fund that have different level of
trustee fees and expenses, there shall be a policy for
allocating between unit classes any costs, charges, and
expenses payable out of the fund, which are not
attributable to any particular unit class.
BSP Circular 853
methodology.“
 Where there is a different fee structure for each unit
class, such difference shall be reflected in the NAVPU of
each unit class.
 To arrive at the unit class’ NAVPU, the net assets for
each unit class is divided by the total outstanding units of
such unit class.
BSP Circular 853
methodology.“
 The total net assets of the multi-class UIT fund is the

summation of the market value of each investment less fees,
taxes and other qualified expenses, as defined in the plan
rules, excluding trustee fees and expenses applicable to each
unit class.
BSP Circular 853
methodology.“
 The net assets for each unit class is the proportionate share on
the total net assets of the multi-class UIT fund less trust fees.
 The trustee fees applicable to the unit class shall be applied

on the class’ proportionate share on the net assets of the
multi-class UIT fund.
Sample Structure
Each class of shares have equal rights of payments (Pari-passu)
Unit Class Trust/Management Fee Minimum Investment
A 1.00% 10,000,000
B 1.50% 5,000,000
C 2.00% 1,000,000
Unit Paying UITFs
 A Unit Paying Fund‘s goal is to provide a regular stream of
income to participating investors.
 The fund may invest in various income- generating securities like
dividend paying stocks, preferred stocks and/or coupon paying
bonds.
 The investment objective will be generally to provide participating
investors a non-guaranteed stream of additional income and also a
potential for capital appreciation.
 Instead of paying cash dividends outright, the fund shall give out
additional units to participating investors (called Unit-dividends) on
a pro-rata basis.
Unit Paying UITFs
 All dividend income and coupon payments received by the fund
shall be accrued to the fund itself.
 The DOT provides the guidelines and shall state the frequency
(quarterly, semi-annual or annual) of unit payment to the investors.
 The DOT sets an ex-date & a date payable.
 The ex-date shall refer to the cut-off date for the unit-dividend
entitlement whereas the date payable shall refer to the day when
the unit dividends are actually paid out to the investors.
 The DOT provides, in plain and simple language, how the
computation is made for the UNIT payouts.
Unit Paying
UITFs
Unit Paying UITFs
Unit Paying
UITFs
MODULE 3:
UITF Sales Process
Valuation
 NAV is a summation of the market value of each investment less fees, taxes,
and other qualified expenses
 All Funds to be marked-to-market on a daily basis
 “Total Net Assets” = Market Value - (Fees + Taxes + Other Qualified
Expenses)
Portfolio comprised of: Net
Management Fee
Other Expenses
and Liabilities
Asset
Taxes
Cash Value
valuation + valuation +valuation - expenses =
Valuation
 Mark to market (MTM):
is the act of assigning a value to a position held in

a tradable financial instrument based on the current
market price for that instrument
What is Net Asset Value (NAV) ?
Aggregate Market Value of Investments P111,111,111.11

Less: Fees, Taxes, Qualified Expenses (11,111,111.11)
Net Asset Value (NAV) P100,000,000.00
NAVPU Valuation Methodology
 Basis for admission and redemption of participation
 Determines the beneficial interest of each participation unit
NAVPU is computed by dividing thefund’s total Net
Asset Value (NAV) by the total outstanding units.
Formula:
Net Asset Value (NAV)
Total Outstanding No. of Units
Marked-to-Market vs. Accrual
128
Bond Fund
124
120
116
112
108
104
100
96
Jan-03 Mar-03 May-03 Jul-03 Sep-03 Nov-03
128
Bond Fund
124
•Accrual not
120 reflective of true
market value
116
•Overvalued assets
a business risk in
112
3/20/03 event of massive
Accrual: 105 redemptions
108
MTM: 101 •Unable to reap
104
full market
potential
100
(w/ MTM, you buy
at lower prices,
giving you more
96
units)
128 128
Bond Fund
124
•MTM reflects
120 true value of
assets
116
•Less
problematic
112
3/20/03 when massive
Accrual: 105 redemptions
108 108
MTM: 101 happen
104 •allows you to
6/18/03 participate in
100
full potential
of the market
96
How do you measure each UITF’s
performance?
 The fund’s daily Net Asset Values per unit are compared against a
benchmark.
 A benchmark is normally an index or collection of different securities.
 The benchmark and the fund are composed of similar securities. In
other words, you must compare “apples to apples.”
 Whenever the fund’s value is greater than that of the benchmark, the
fund is said to be outperforming the benchmark.
 If the fund’s value is below that of the benchmark, then the fund is
underperforming.
Computation of the Moving
Return on Investment (ROI)
Year-on-Year (YOY) return is the current return computed
compared to same period last year. Remember past
performance is not an indicative of future results.
Formula:
NAVPU (current) – NAVPU (same period last year’s figure)

NAVPU (same period last year’s figure)
Computation of the Moving
Return on Investment (ROI)
Year-to-Date (YTD) return is the current return computed on an absolute
percentage basis and not annualized to eliminate the effect of projection.
Remember past performance is not an indicative of future results.
Formula:
NAVPU (current) – NAVPU (last year’s end figure)

NAVPU (last year’s end figure)
Computation of ROI –
Year on Year (YOY)
 Application
A B C D
NAVPU NAVPU (B–A) A % YIELD YOY
06/15/2008 06/15/2009
1)
100 104
2) 100 108
3) 100 110
4) 100 112
Computation of ROI –
Year to Date (YTD)
 Application
A B C D
NAVPU NAVPU (B-A) A % YIELD YTD
12/31/2008 06/30/2009
1)
200 208
2) 200 210
3) 200 212
4) 200 215
Sharpe Ratio
Sharpe Ratio
What is Sharpe Ratio? –
 this is the excess return per unit of risk. It's broken down into just
three components: portfolio return, risk-free rate and standard
deviation of return of the portfolio. After calculating the excess
return, it's divided by the standard deviation of the portfolio to get its
Sharpe ratio. The higher the better.
Sharpe Ratio
For example:
Fund manager A generates a return of 15%
Fund manager B generates a return of 12%
Standard deviation of fund A is 8% while fund B is 3%.
The risk free rate is 5%
Sharpe Ratio is
Fund A: 15% - 5% Fund B: 12% – 5%
8% 3%
Sharpe Ratio is
= 1.25% = 2.33%
Based on these calculations, manager B was able to

generate a higher return on a risk-adjusted basis.
Information Ratio
Information Ratio
What is Information Ratio? –
 The information ratio tells an investor how much excess return is
generated from the amount of excess risk taken relative to the
benchmark. The higher the number the better
Rp = Return of the portfolio

Ri = Return of the index or benchmark
Sp-i = Tracking error (standard deviation of the difference between
returns of the portfolio and the returns of the index)
Information Ratio
For example:
Manager A might have returns of 13% and a tracking error of 8%
Manager B has returns of 8% and tracking error of 4.5% The index has returns of -1.5%
Manager A’s IR = [13-(-1.5)]/8 = 1.81

Manager B's IR = [8-(-1.5)]/4.5 = 2.11
Manager B had lower returns but a better IR. A high ratio means a
manager can achieve higher returns more efficiently than one with a
low ratio by taking on additional risk.
Additional risk could be achieved through leveraging.

When would be a good time to
invest?
 One can never time the market

 Investing should involve a disciplined
process.
 The biggest fear of investors is to enter the
market when prices are high and expected
returns are lower.
Observations
 Track record is very important.

 But past performance is not indicative of future
results.
 Last year’s “star” may be this year’s “dog” & vice-
versa.
 Difficult to forecast this year’s top performing fund
(just like financial markets) especially if markets are
volatile.
Observations
Get to Know your Fund Manger:

 Historical performance
 Investment Managers skill, experience,
and processes
 Consistent returns
 Transparency
Classification of Clients
1. Conservative
• Client wants to ensure preservation of capital at all

times, prefers investment products with minimal
risk and short investment horizon, and is best
suited for deposit products only
Source: BSP Circular 618

*Emphasis provided by lecturer
2. Moderate
•Clients intends to settle for returns on investment that is
higher than the regular deposit product, and is aware
that a higher return is accompanied by a higher level of
risks. Client is willing to expose the funds to a certain
level of risks in consideration for higher returns
3. Aggressive
•Client wants capital to appreciate over time and willing to

accept higher risks involving volatility of returns and
even possible loss of investment in return for potential
higher long- term results

Determining The Customer Risk Classification
• Personal data
• Investment objective
• Risk Tolerance
• Investment time frame and liquidity requirements
• Investment limits
• Investment experience
• Knowledge and financial situation

Determining Product Suitability For Each Customer Classification
The rationale is to guide the clients in choosing investment outlets suited to his
objectives, risk tolerance, preferences and experience using the CSA
Client must fill up the CSA form. Certified marketing personnel will assist by
explaining question if unclear to client
After classifying the client according to his financial sophistication and risk
profile, the results are related to the client
Both client and certified UITF marketing personnel must sign on the CSA form
If a client insists on a product that is riskier than his classification, a waiver must
be signed. The waiver is the client’s attestation that he understands the
potential adverse consequence of the investment
There must be a mechanism to advise clients of the need to notify the Trustee of
any change in their characteristics, preferences, or circumstances, to enable the
Trustee to update clients’ profile at least every three years
Understanding The Investor
Return Risk
Constraints
Objectives Objectives
• Required • Ability to Take • Liquidity
Return Risk • Time Horizon
• Desired Return • Willingness to • Unique
• Target Return Take Risks Circumstances
Return Objectives
•Required Return and Desired Return •Target Return
Required return-return level Return objective that the

necessary to achieve critical financial investment will strive to attain
objectives given the following:
Average return level necessary for
Required/desired return
to build a nest egg for basic
retirement support Risk objectives
Constraints
Desired return- return level
necessary to achieve client’s
secondary goals
Average return level necessary for
to build a nest egg to maintain
lifestyle after retirement
Risk
Objectives
Ability To
Take Risks Willingness
To Take Risks
Ability to Take Risks
Increased Ability Size of Portfolio Criticality of the

relative to Goal
financial goals
Decreased Ability
Time Frame to Impact of interim
meet objectives losses on ability to
meet short/long-
term goals
Willingness to Take Risks
Financial
Literacy
Psychological Investment
Factors Experience
Constraints
Liquidity
Time Horizon
Unique Circumstances
Liquidity
Portfolio’s ability to efficiently
meet expected and unexpected Client’s liquidity demands against
the portfolio
demands for distribution
Transaction costs Ongoing expenses
Transaction fees/bid-ask Emergency reserves

spread/market impact
Negative liquidity
Price volatility
Events
Time Horizon
Duration Of Liabilities
Time Horizon
When does your client need the
cash ?
Anytime Next
Month Next
Year
20 Years from
now
Unique Circumstances
Employment Status/Nature of the Job
Family Status
Investment Sophistication
Level of Financial Sophistication
Understand The Client’s

Appreciation of the
Risk-Reward Implications
Risk Profiling Questionnaire
Notes on the CSA
What if answers are inconsistent ?

•No such thing as inconsistent answers. Conflicting considerations are
expected. For example, client may be financially savvy but have a short
time horizon
•Answer each question independently and truthfully
•The composite score balances conflicting considerations
What if there a multiple account owners ? who does the
CSA?
•Your procedure manuals dictate the treatment. May be principal
account holder only or all account holders depending on approved
policies
Rule Of Thumb
Determine The Maximum Risk Or Volatility That The Client

Can Safely Absorb (Capacity)
Choose The Highest Yielding Uitf Within The Client’s Risk

Limits
Temper Recommendation Based On The Client’s Risk

Preference Appreciation Of The Risk-reward Implications
Typical Retail Investor
Psyche
Preoccupied with accounting losses on each asset

rather than overall wealth created
Never wants to be called “Aggressive”; Attributes

positive connotation to the term “Conservative”
Disconnected responses for return objectives and risk

objectives
Provide
Equip Framewo
A.O.s to rk to
Properly Profile
Explain Customer
Framework Instill s
to Customer
Customers Ownershi
p of CSA
Results
Arrive at a CSA that is consistent with the needs and

actual risk tolerance & capacity of the client
This cannot be achieved without client

understanding of basic investments concepts and
financial needs analysis
What Is The C857 About?
Financial Consumer Protection
Outlines the Consumer Protection Standards of

Conduct for BSP Supervised Financial Institutions
Core Principles
•Disclosure and Transparency

•Protection of Client Information
•Fair Treatment
•Effective Recourse
•Financial Education and Awareness
Core Principles
Key competencies:
•Disclosure of complete information
•Provide written copy of T&C, advise customer to read T&C
•Adequate time to review T&C
•Advertising and marketing materials do not make false, misleading, or
deceptive statements that may materially and/or adversely affect the
decision of the customer to avail of a service or acquire a product.
•Promotional materials disclose the fact that it is a regulated entity and
that the name and contact details of the regulator are indicated.
Core Principles
Disclosure and Transparency
•Ensure that their consumers have a reasonable and holistic
understanding of the products and services, which they may be
acquiring or availing.
•Full disclosure and utmost transparency are the critical elements that
empower the consumer to make informed financial decisions.
•Provide the consumer with ready access to information that
accurately represents the nature and structure of the product or
service, its terms and conditions, as well as its fundamental benefits
and risks.
Mandatory disclosure in arial “12”
•(Name of financial institution) is regulated

by the Bangko Sentral ng Pilipinas. For
inquiries or complaints, you may contact
(name of financial institution) through
Or BSP financial consumer
protection dept. At tel. No. 708-7087.
Core Principles
Protection of client information
•Ensure that a well-articulated information security

guidelines, well-defined protocols, a secure
database, and periodically re-validated procedures in
handling the personal information of their financial
consumers are in place.
Core Principles
Key competencies:
•Have a written privacy policy to safeguard its customers' personal
information.
•Privacy policies are regularly communicated throughout the organization.
•Appropriate systems in place to protect the confidentiality and security of
the personal data of its customers against any threat or hazard.
•On sharing of customer information, inform customer in writing and
explain clearly to customers as to how it will use and share the
customer's personal information.
Core Principles
Fair treatment
Ensure financial consumers are treated fairly, honestly, professionally and not sold
inappropriate and harmful financial products and services.
Key competencies:
•Affordability and suitability of product or service
•Prevention of over-indebtedness
•Cooling off period
•Objectivity
•Institutional culture of fair and responsible treatment of clients
•Remuneration structure
Additional clarifications :
cooling off provision-UITF
•Cooling off period is at least two (2) days after the
date of the agreement
•Market/price risk is borne by the client
•Discretionary pre-termination penalties such as
holding period fees are waived
Core Principles
Effective Recourse
• Ensure that Customers are provided with
accessible, affordable, Independent, Fair,
Accountable, timely, and efficient means for
resolving complaints
• Have in place mechanisms for complaint
handling and redress.
Core Principles
Key competencies:
•Consumer assistance management system
•Develop internal policies and practices, including time for processing,
complaint response, and customer access.
•Maintain an up-to-date log and records of all complaints from customers.
•Information on how to make a complaint is clearly visible in the premises
and websites.
•Provide for adequate resources to handle financial consumer complaints
efficiently and effectively.
Core Principles
Financial Education and Awareness

•Financial education initiatives give consumers the
knowledge, skills, and confidence to understand and
evaluate the information they receive and empower them
to make informed financial decisions.
•Integral to the good governance
.
Core Principles
Key competencies:
•Define a financial education and awareness program.
•Clearly distinguish between financial education from
commercial advice.
•Regularly track, monitor, and assess campaigns and
programs and use the results of the evaluation for
continuous improvement.
ETHEL BARYMORE
ITS WHAT YOU
LEARN
AFTER YOU KNOW
THAT COUNTS
Matching the UITF to the client
 Client Factors that Determine the Suitability of

Each Type of UITF
• Size/ Capability to invest
• Horizon (Time horizon)
• Objective (Investment Objective)
• Risk- return profile
• Experience (investment experience)
 Not confined to just one Fund per client!
Risk- Return Profile
 Risk Seeker
An investor who is willing to take on additional risk
for an investment that has a relatively low expected
return.
 Risk Averse
An investor who is more likely to choose an option
with a more predictable cashflow
Profiling Exercise:
Profile:
•Housewife with three children (2 yrs old, 5 years old, & 8 yrs old)
•Receives regular remittance from husband (OFW), and is able to save approx. $ 1,000/
month after current household expenses
•She is solely in-charge of the finances of the family
•She is looking into saving up already for the high school education of her children.
RISK
What does RISK mean to you?
Why would you take RISKS?

Risk
Likelihood That
Expected Cash
Timing Fails To Amount
Materialize
Risk = Volatility Of Cash

How Far Or How Likely Will Actual Cash
Flow Vary From What I Expected?
What Are The Components
of Investment Returns?
Time
Value of
Expected Money
Time Inflation
Value of
Money
Risk
Nominal
Premium
Return
Expected
Inflation
Return
How Do You Choose Between
Alternative Investments?
Investment A Investment B
Return Return
Risk Risk
The Risk-Reward Rule
10
The potential for higher R

E
income is always T
U
R
accompanied by higher N
probabilities of loss 0 RISK 10

The Risk-Reward Rule
Some Applications
•30day TD Vs. GS Maturing In 30
Days
•GS Maturing In 1 Yr vs. GS
Maturing In 5 Yrs
•5 Yr FXTN vs. 5 Yr Government PN
TYPE OF RISKS
 Market/Price Risk
 Interest rate Risk
 Liquidity Risk
 Reinvestment Risk
 Credit Risk/Default Risk
 Foreign Exchange Risk
 Country Risk
Understanding the
Risk Disclosure Statement
A document wherein the client attests that :

•The risks of the investment were explained by the
marketing officer
•The client fully understands those risks
•The client wholeheartedly accepts those risks and is are
ready for its consequences
What risks do you remember from the risk

disclosure statement?
4 c’s of credit
Credit Risk Issuer • Character
• Covenants
•The person or
• Collateral
company who
will pay your • Capacity to pay
money back
cannot give Stronger 4c’s =
the cash to higher likelihood of
you when it is Bond
interest and
due Holder principal
repayment
POP QUIZ
What/who is the source

of credit risk in a UITF?
BTr
Counterparty auctions new 10Y GS
Risk Primary
Issue
•The person or Bank A
company who
“brokered” or Risk that agent
purchases the 10Yr
GS from BTr
served as
intermediary to will not deliver Secondary
your the cash or Trade
transaction
cannot deliver the asset
Individual Client
the cash or the
purchases the 10Yr GS
asset from Bank B
POP QUIZ
What/who is the source of counterparty

risk in a UITF ?
Market/Price Risk
• Likelihood that price will move up or down
PSEIw/ Dividends
PSEIw/ Dividends
70.00%
60.00%
58.51%
50.00%
40.00% 42.24% 40.33%
30.00% 35.23%
20.00%
23.70% 24.81%
17.13%
10.00%
7.28% 3.70%
0.00% -1.87%
-10.00%
-20.00%
-30.00%
3/27/1992
6/27/1992
9/27/1992
3/27/1993
6/27/1993
9/27/1993
3/27/1994
6/27/1994
9/27/1994
3/27/1995
6/27/1995
9/27/1995
3/27/1996
6/27/1996
9/27/1996
3/27/1997
6/27/1997
9/27/1997
3/27/1998
6/27/1998
12/27/1991
12/27/1992
12/27/1993
12/27/1994
12/27/1995
12/27/1996
12/27/1997
-40.00% -38.88%
-50.00%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
POP QUIZ
What is the price risk

of a time deposit ?
Interest Rate Risk

Interest Rate Risk
•Price risk associated with bonds

•Bond price movements associated with
changes in interest rates
Bond Price and Yield
Inverse relationship:
Bond Price
 Bond prices rise as yields fall
Or
 Yields fall as bond prices rise
Yield
Interest Rate Risk:
Why will the bond price fall if interest rates
increase?
Cash to be Received
Coupon Face Year 1 Year 2 Year 3 Year 4 Year 5
Rate Amount
30- 10.0% 1,000,000 100,000 100,000 100,000 100,000 1,100,000
Jun
Interest Rate Risk:
increase?
Rate Amount
30- 10.0% 1,000,000 100,000 100,000 100,000 100,000 1,100,000
Jun
Interest Principal Investment Cashflows
Rate
1-Jul 12.0% 833,333 ? 100,000 100,000 100,000 100,000 1,100,000
M-T-M Loss (166,667)

Interest Rate Risk:
increase?
Cash to be Received
Rate Amount
30-Jun 10.0% 1,000,000 100,000 100,000 100,000 100,000 1,100,000
Interest Rate Risk:
increase?
Cash to be Received
Rate Amount
30-Jun 10.0% 1,000,000 100,000 100,000 100,000 100,000 1,100,000
Interest Principal Investment Cashflows

Rate
1-Jul 8.0% 1,250,000 100,000 100,000 100,000 100,000 1,100,000
M-T-M Gain 250,000

Yield Curve
21
16
11
6
1 5 7 20
TBONDS TBONDS+200bps
Given a 2% increase in interest rates : If the price of

the 1Yr Tbond will change by 1.6%, the absolute
change in price of the 20Yr Tbond must be:
A. Smaller than 1.6%

B. Equal to 1.6%
C. Greater than 1.6%
MV
Net Price = ----------------------------------- + CPNAMT x 0.8 MV x CPN% x 0.8 x
YTM x 0.8 N-1+ DSC/E N------------------------------------- t 360
1+ ----------------  YTM x K – 1 +DSC/E
2 K=1 1 + 0.8
2
Net Price = MV ( 1 +
YTM) T
TERM TO MATURITY
Longer terms lead to bigger discount factors

Term to Maturity
Price if % Price
Current Price
(1.00%) Change
5-year Bond 100.11 104.65 4.54%
10-year Bond 94.74 101.88 7.53%
>20-year Bond 96.86 111.92 15.55%
Price if % Price
Current Price
+1.00% Change
5-year Bond 100.11 95.79 -4.31%
10-year Bond 94.74 88.18 -6.93%
>20-year Bond 96.86 84.45 -12.81%
MV
Net Price = ----------------------------------- + CPNAMT x 0.8 MV x CPN% x 0.8 x
YTM x 0.8 N-1+ DSC/E N------------------------------------- t 360
1+ ----------------  YTM x K – 1 +DSC/E
2 K=1 1 + 0.8
2
Net Price = MV ( 1 +
YTM) T
COUPON PAYMENTS
Coupon Payments
> 20- Year Bond Price @ % Price

Current
Coupon (-) 1.00% Change
Price
4.6250% 96.86 111.92 15.55%
4.0000% 88.15 102.31 16.06%
> 20- Year Bond Current Price @ % Price

Coupon Price ( +) 1.00% Change
4.6250% 96.86 84.45 -12.81%
4.0000% 88.15 76.52 -13.20%
Duration
•Measures the rate of

change in bond prices,
taking into account both
term to maturity and
coupon payments
Duration Illustration: Coupon Paying Bond
Say a 2-Year Bond with a Face Value of P1,000 and which pays out
coupon a coupon of P50 semi-annually. Duration is computed as:
Total Cash flow

= (P50 x 4) + P1,000
= P1,200
0 0.5 1.0 1.5 2.0
Duration= 0.5(50/1200) + 1(50/1200)+ 1.5(50/1200)+ 2(50/1200) + 2(1000/1200)

= 1.875
Note, however that maturity is 2 years.

Duration as a Related-Measure
Price –Yield
•Length of time to Curve
120
get paid 100
80
•Measure of 60
sensitivity to 40
20
interest rates
0
15% 16% 17% 18% 19% 20%
Bond Price
Duration as a Measure of Volatility
% Change in Price
-
= ( ) Duration x Change in Interest Rates
Duration : illustrations
•Given a Duration of “2”
•The price of the bond will change by 2% every time the yield of the bond
changes by 1%
•Ex. The bond was initially selling at P100
•If interest rates increase by 1%, new price will be P98
•If interest fall by 1%, new price will be P102
•What will be the new price of the bond if it was originally trading at
p100 and
•Yields rose by 0.25%?
•Yields fell by 0.25%?
Interest Rates In The Philippines
3M PDST-R2 10 yr PDST-R2 25 yr PDST-R2
10
On April 30, 2010, you bought a 25-year
government security at par value with a
9 yield of 9.125% p.a. How much of annual
8 interest payment will you receive for every
P100 of investment ?
7
6
On April 30, 2012, the yield on your
government security has fallen to 5.77%
%
5 p.a. How much of annual interest

4 payment will you receive for every P100
of investment ?
3
2
Yield on 3-month GS on July 31, 2010,
Oct. 31, 2010, Feb. 28, 2011, and April
1 30, 2011 are 4.06%, 3.74%, 3.2%, and
0 0.6%, respectively.
Assuming you invested P100 on July 30

and reinvested quarterly, how much is
your approximate interest for 1 year ?
Liquidity Risk
•Inability to sell the investment or investment can only be
sold at a big discount
Reinvestment Risk
•Failure to “lock” returns now could mean low returns in
the future
Trade-off Between Interest Rate Risk and
Reinvestment Risk
Why not err on the side of safety?
Stay conservative and have zero-loss at all times
Failure to match the spending rate will produce a

vicious cycle of declining capital and declining
incomes
Failure to meet target returns mean unfulfilled

financial goals
Income Requirements
YEAR CAPITAL EARNINGS EXPENSES EXCESS
INCOME
1 500,000.00 40,000.00 80,000.00 (40,000.00)
2 460,000.00 36,800.00 80,000.00 (43,200.00)
3 416,800.00 33,344.00 80,000.00 (46,656.00)
4 370,144.00 29,611.52 80,000.00 (50,388.48)
5 319,755.52 25,580.44 80,000.00 (54,419.56)
6 265,335.96 21,226.88 80,000.00 (58,773.12)
7 206,562.84 16,525.03 80,000.00 (63,474.97)
8 143,087.87 11,447.03 80,000.00 (68,552.97)
9 74,534.89 5,962.79 80,000.00 (74,037.21)
10 497.69 39.81 80,000.00 (79,960.19)
11 (79,462.50) (6,357.00) 80,000.00 (86,357.00)
The Case Of Pedro Masinop
I. Pedro is 50 years old
II. His family lives a frugal lifestyle of
P50K/month
III. He has savings amounting to P1,000,000
IV. Investment returns is at 5% p.A.
V. Inflation is at 5% p.A.
VI. He expects a retirement pay of p5 million at
age 60
VII. He wants his retirement nest egg to support
him until age 80
Retirement Planning for Pedro
Age Capital Earnings Expense Net Cash
60 19,546,736 977,337 977,337 -
61 19,546,736 977,337 1,026,204 (48,867)
62 19,497,869 974,893 1,077,514 (102,620)
63 19,395,248 969,762 1,131,389 (161,627)
64 19,233,621 961,681 1,187,959 (226,278)
65 19,007,343 950,367 1,247,357 (296,990)
66 18,710,354 935,518 1,309,725 (374,207)
67 18,336,147 916,807 1,375,211 (458,404)
68 17,877,743 893,887 1,443,972 (550,084)
69 17,327,658 866,383 1,516,170 (649,787)
70 16,677,871 833,894 1,591,979 (758,085)
71 15,919,786 795,989 1,671,578 (875,588)
72 15,044,198 752,210 1,755,156 (1,002,947)
73 14,041,251 702,063 1,842,914 (1,140,852)
74 12,900,400 645,020 1,935,060 (1,290,040)
75 11,610,360 580,518 2,031,813 (1,451,295)
76 10,159,065 507,953 2,133,404 (1,625,450)
77 8,533,614 426,681 2,240,074 (1,813,393)
78 6,720,221 336,011 2,352,077 (2,016,066)
79 4,704,155 235,208 2,469,681 (2,234,474)
80 2,469,681 123,484 2,593,165 (2,469,681)
81 0 0
Retirement Planning
Required Retirement Capital 19,546,735.52
Less: Retirement Pay 5,000,000.00

Required Retirement Savings 14,546,735.52
Less: Value of P1M at age 60 1,628,894.63

Gap 12,917,840.89
At an ROI of 5% p.a., How much does Pedro need to

save annually to have P12.92mn at age 60 ?
 P1.027M annually or P83.18K per month

Why “Low Risk” Is Still
A Risky Proposition
High Risk Low Risk

Strategies Strategies
Credit Risk/Default Risk

•An investor losses money because the borrower is
unable to pay the principal and/or interest as they fall
due.
Foreign Exchange (FX) Ri

•Investor may lose money due to fluctuations in FX rates.
Country Risk
•An investor may experience losses arising from
investment in securities issued by/in foreign countries
due to political, economic and social structures of other
countries.
How Does A UITF Vary From A Direct Investment?
UITF
Pools cash
Purchase
then invests in
units of
various assets
participation
to form the
Investment
Investors Portfolio
Pro-rata share
of Principal
Assets, Income
and Gains
What determines It’s the returns
the returns and and volatility its
underlying
volatility
investments
of a UITF?
UITF Returns
n
Wi (X) i
Portfolio Return = ∑
i =1
w i = Percentage weight of asset i in the

UITF Portfolio
(𝑥 ) i = Return of Asset i
= (Weight1 ∗ 𝑥 1)
+ (Weight 2 ∗ 𝑥 2)
+ (Weight3 ∗ 𝑥3 )
+ (Weight4 ∗ 𝑥4 )
Expected Return of A UITF
Asset % Weight Return Weighted

Return
Time Deposit 50.0% 2.5% 1.3%

Listed Stock 50.0% 15.0% 7.5%
Total 100.0% 8.8%
Volatility of a UITF
Marketing and Distribution
Preselling
UITF Plan Documents – (Declaration of Trust)
Board approval prior to BSP submission
BSP approval prior to launch
Marketing Personnel
Authorized branch managers / officers
Qualified trust marketing personnel
Undergo standardized training program
Objectively make a judgement on client suitability
Clearly explain to investors the inherent risk of
investing in UITFs. 188
Preselling
Trust Marketing Personnel
Board authorized
Qualified
Adheres to TOAP Code of Conduct and Ethics
189
POP QUIZ
Can a Trustee marketing

trainee discuss UITF
details with a client?
Selling
Marketing Collateral
Printed marketing materials must clearly provide
• Name and classification of the fund
• Clear explanation of the general risks of investing in UITFs
• Administrative and marketing details (pricing, cut-off)
• All charges made against the fund
• Statement that participation is not a deposit and not insured by PDIC
• A balanced assessment of potential gains and losses; that participations do not carry any
guaranteed rate of return
• Advisory that investors must make their own assessment or seek professional opinion as
necesary
191
Selling
Minimum Onboarding Documents

KYC forms
Customer Suitability Assessment Form
• Profiling process
• To guide clients in choosing best investment to suit his objectives, risk tolerance,
preferences and experience.
• To classify clients according to financial sophistication
• Undertaken on a per client basis
• Signed by both client and Trust marketing personnel
CSA waiver
• As applicable
192
Selling
Investor Protection Measures

Client Suitability or Risk Profiling
Determines clients objectives
Determines clients risk appetite
Ascertain knowledge and exposure to financial instrument
Past investment experience
Minimum Disclosure Statements / Requirements
General
Description of attendant risks in invest in in UITFs.
Enumeration of the various types of risks and how these are mitigated by the Trust Entity
Specific
Enumeration of risks that are specific to the UITF of choice
Sign-offs
Client
Trust Marketing Personnel
193
Selling
UITF Investment Documentation

Evidence of Participation
Participating Trust Agreement
Confirmation of Participation
Fund NAVPU on day of Purchase
Number of Units purchased
Absolute Php or FCY value
CSA
Waiver, if applicable
General Risk Disclosure
KIIDS (Key Information and Investment Disclosure Statement)
194
POP QUIZ
When will I know

the number of units
purchased and at
what price?
Selling
Sample Marketing Spiels
The UITF Is a retail trust product that can provide a client with
access to alternative wealth management products
The UITF is a unitized trust product which is valued on a
marked-to-market basis which really means that the price
reflects the accurate value of the fund at the time of your
investment / redemption
The year-on-year / year-to-date performance of the fund is ….
I regret that I cannot provide an indicative yield….
196
Selling
Sample Marketing Spiels

The UITF Is a retail trust product that can provide a client with
access to alternative wealth management products
The UITF is a unitized trust product which is valued on a marked-to-
market basis which really means that the price reflects the accurate
value of the fund at the time of your investment / redemption
The year-on-year / year-to-date performance of the fund is ….
I regret that I cannot provide an indicative yield….
197
Selling
Marketing No-No’s
The UITF Is a retail trust product BUT it is just like any other bank
product.
The indicative yield of this UITF product is ….
The annual yield of this UITF product is …
Our fund is so great I can almost guaranty that you will not lose in
this fund.
Invest in our Bond Fund, trust me, you will not lose, it’s a fixed
income fund!
198
Account Administration
Post onboarding
Ensure that the following documents are complete and on
file:
KYC COP PTA
CSA RDS KIIDS
Waiver (if applicable)
Quarterly Disclosures
Quarterly Disclosure StatementInvestment Objective
Investment Policy Requirements and Restrictions
List of outstanding investments Prospective investment outlets
Admission and Redemption Policies
Frequency, Date, Time and Other Requirements
Pricing / Currency
Fees / Other Terms and Conditions
As necessary, remind clients of their investment objectives/ CSA results
199
Trustee Rights
• Exclusive management and control of each UITF
under its administration
• Sole right at any time to sell, convert, reinvest,
exchange, transfer or change or dispose of the
assets comprising the fund
• Has no other relationship with such fund other than
its capacity as trustee of the UITF
• Backroom operations with adequate system to
support the daily marking to market of UITFs financial
instruments.
200
Account Termination
Redemption Notice
Policy on cut off times and payment of redemption proceeds.
Documents for submission and cancellation
Time of NAVPU computation and end of the day release of NAVPU
and crediting of proceeds
Fund Termination
•Board Approval
•Notice to all Participants
•BSP Approval
•Fund termination and release of proceeds per Declaration of Trust
201
Practical Application
• How will you handle a client who insists on investing hard earned money
in UITFs, but has no experience in investing outside of time deposits and
savings account?
• Your client insists that you give her an indication of the fund’s annualized
yield because she is used to this having invested in Treasury for a very
long time. What will you do?
• Your client does not want to sign a waiver that will allow her to invest in an
Equity Fund. Her profile as an investor is Conservative. How will you
handle this?
• Your bank has decided to terminate a UITF, discuss the process you will
take with your clients.
• Your client direly needs funds in the morning of the day he submitted a
Money Market UITF Redemption Notice. He only needs a portion of the
funds before noon time. What will you do?
• How is the KIIDs different from the Risk Disclosure Statement?
202
MODULE 4:
Fundamentals of Investments
What is an Investment?
Why Do Capital/
Financial Markets Exist?
Nature and
Excess
Cash/Source
Certainty/risk
of cash flow to
ASSET
Funder
CLASS
Intermediaries/
Financial Group of investments
+Capital that have similar Risk-
Markets Return
or cash flow
Need/Use characteristics
Cash
Commitments
of Users of
Funds
Primary And Secondary Markets
• Issuer BTr
• Who is responsible for Issuer
auctions new 10Y
committed payments GS
(whether guaranteed
or not) of the investment
contract ?
Primary
Issue
• Type of issue
• Was the investment
Bank B Bank A
purchased from the issuer
purchases the 10Yr purchases the 10Yr
or from another investor/ GS from Bank B GS from BTr
creditor? Secondary
Trade
What is an Asset Class?
• Cash and short term instruments
• Fixed income investments
• Equities
• Alternative investments
• Derivative investments
• Real estate
• Commodities
 A group of individual securities or investments that have:
A common financial form
 e.g. common stocks, bonds, real estate, etc.
 Perform in a significantly similar fashion distinct from other asset types
 Typically, the major asset classes are:
Cash
Fixed Income/ Debt instruments
Equity
Real Estate
Alternative Assets
Cash
 Currencies
 Legal tender or coins that can be used in exchange goods, services, or debt.
 Bank deposits/SSAs
Fixed Income Securities/ Debt Instruments

A type of investing for which real return rates or periodic income is received in
regular intervals at reasonably predictable levels.
The most common type of fixed-income security is the bond.
Bond- A debt investment with which the investor loans money to an entity (company
or government) that borrows the funds for a defined period of time at a specified
interest rate.
4
Fixed income securities or bonds are debt securities issued either by Government
institutions or Private Corporations. They give coupon or interest payment on a regular
or fixed basis.
1. Government Securities (GS)

 Fixed Rate Treasury Notes (FXTNs) - pays coupon or interest on a regular or
fixed basis
 Treasury Bills (T-bills) - traded at a discount to its face value
2. Corporate Bonds - issued by private corporations
3. Euro Bonds/Foreign Bonds - issued by Sovereign or Corporates in currencies in
which it is denominated.
210
Equities or stocks represent ownership in a corporation through shares of stock.
Common shares
• Owners share in success when company profits
• Owners at risk if company falters
Preferred shares
• Dividend payment guaranteed (subject to retained earnings)
• Dividend don’t increase if company prospers
How can stocks provide returns/income:

• Capital appreciation/Increase in stock price – dependent on market sentiment and news such
as good profits, possible company expansion or favorable management decision. However, this
makes the stock price vulnerable to market risk.
• Pay dividends – a profit sharing exercise done by companies based on actual earnings.
211
Real Estate
Land plus anything permanently fixed to it, including buildings, sheds and other items attached to
the structure
Unlike other asset classes, real estate is dramatically affected by the condition of the immediate
area where the property is located. With the exception of a global recession, real estate is
affected primarily by local factors.
Alternative Assets
 Hedge funds
 Art
 Commodities
 Jewelry
 Venture Capital
6
The Investible Universe
• Higher returns imply higher risk
• Less risk will give lower returns OTHERS
Venture Capital
Real Estate
EQUITIES
Return
Jewelry
Exchange-listed
Stocks
BONDS
T-Bills
DEPOSITS FXTNs
Time Deposits
ROPs
Savings Accounts
Risk
Various Asset Classes
1. Cash/Cash Equivalents
• Term To Maturity Of < 1 Year
• Primarily Used For Servicing Liquidity
• Time Deposits
• Short Term Bonds/PNs
 Low Returns But Certainty Of Expected

Cash Flow Is High
Deposits
Money Market
2. Fixed Income
• Term To Maturity of > 1 Year
• Treasury Bills
• Government Bonds- FXTN, RTB
• Corporate Bonds
• Loans
 Primarily Used To Generate Higher and

Steady Income
Fixed Income
Outright Purchase- Coupon Paying Bonds
T+0 CPN CPN……. Maturity

-P AMT AMT MV+ CPN AMT
P = Price of the B o n d
MV = Principal Payment due on Maturity
C P N A M T = M V x C o u p o n R a t e x ( Te r m / 3 6 0 )
x ( 1 - w h t rate)
Fixed Income
3. Equities/Stocks
• Gains are primarily from stock appreciation although some stock may
give regular income in the form of dividends
• High long-run average returns but very high year-to-year volatility
• Very unpredictable cash flows
• Primarily for capital growth
Equities
4. International Securities/ FX Effect
Income Variable
Risk High Risk
Term Open
Taxes Taxable
5. Real Estate
6. Alternative Assets
• Hedge funds
• Art
• Commodities
• Jewelry
• Venture capital 8
7. Derivatives
•Securities That Derive (Base) Their Value On The
Value Of Another Security
• May only be used by UITF for Hedging purposes
• Hedging - Investment in alternative instruments is used
for the sole purpose of minimizing NAVPU volatility
8
Derivatives For Hedging
Put Option
•Option of the Investor to sell the to the Issuer at specified price and date or period in the
future
Interest Rate Cap
•Upper limit to increases in coupon rate for floating rates bonds/notes
Interest Rate Floor

•Lower limit to downward adjustments in coupon rates for floating rate bonds/notes
Automatic adjustment of coupon rates if bond is not redeemed on a certain date
Forwards/Futures
•Right to buy/sell a security at a specified price on a specified date
•Swap are a series of (multi-period) forwards
The Risk-reward Rule
10
The potential for higher R

E
income is always T
U
accompanied by higher R
N
probabilities of loss
0 RISK 10
Investment Sales Principles
- Diversification
- Cost Average
- Goals-based Investing
- Horizon Matching
- Asset / Portfolio Allocation
- Life Cycle Based Investing
228
Diversification:
Diversification is the process of mixing a variety of investments to lower the risk
of the portfolio. It is used as a tool/strategy for risk management.
• More diversified = better risk management

• Less diversified / more concentration = higher risk
Diversification works best in non-correlated industries in order to manage

.
seasonality of sales.
RAINY SEASON SUNNY SEASON

229
Diversification:
The Power of Diversification
There Is Not A Single Product That

Addresses All These Needs
Simultaneously
But.....
Several Investment Products Can Be Packaged
Together To Achieve The Required Results.
Combination
Diversification:
Portfolio Management
Systematic Combination Of Investment
Instruments To Produce An Optimal
Combination Of:
•Liquidity
•Returns
•Risk
Diversification:
How Does Diversification Work?
YTM Volatility Covariance (A,B)
Investment A 10% 15%

Investment B 10% 15% -1
60%
50%
40%
30%
Investment A
20%
10% Investment B Total
0% Portfolio
-10% 1 2 3 4 5 6
-20%
-30%
-40%
Because Most Assets Are Correlated,

We Need A Wide Variety Of Assets To
Diversify Volatility Away
Diversification:
Diversification:
The Basic Principle Of Modern Portfolio Theory
•Through Diversification…..
•Investors Achieve Higher Returns For
The Same Level Of Risk
•Investors Achieve The Same Return
For A Lower Level Of Risk

Cost Averaging:
Cost Averaging Strategy refers to the practice of investing a

specific amount in the same investment over a period of
time in order to avoid the devastating effect of a drop in the
price of a particular fund after investing a single lump sum.
Cost Averaging:
Peso-Cost Averaging
Peso-Cost Averaging
Goals-based Investing:
Investing based on the clients specific life goals such as

saving for children’s education or building a retirement
nest-egg, rather than focusing on generating the highest
possible portfolio return or beating the market
Goals-based Investing:
Goals Based Investing
Income
Supplementation
Certain Cash Education Of Children
Flow From Family Car Expenses
Investments Of Goals
Family Home
Retirement
Asset Allocation:
Asset allocation is the mix of cash, bonds and equities to balance risk and
reward based on individual’s risk profile and investment objective.
Higher allocation in Higher allocation in
Cash or Cash
Bonds (Fixed Income Equities (Stocks)
Equivalent (TDs,
Securities)
SDAs)
the less risky the pooled RISK the more risky the pooled
fund is. fund is.
Horizon Matching
Time Horizon
When Do You Need The Cash ?
Anytime
Next Month
Next Year
20 Years From Now
Life Cycle Based Investing
The Circle Of Life
• The Early Career Stage

• The Mid-to-late Career Stage
• Retirement Stage
• Gifting Stage
The Early Career Stage
•Typically small net worth relative to liabilities
•Long investment time horizon and growing stream of discretionary income
Investment implications
•Priorities include:
Savings account/s for liquidity,
Insurance for loss-of-income protection, and, if possible, investments for
future financial independence
•The long productive years that lay ahead and growing incomes may allow
more high-return, high-risk, and gain-oriented investments
The Mid-to-late Career Stage
•Income begins to exceed expenses - income may have grown or
expenditures may have declined
•Excess income accumulates to form the investment portfolio
•Time horizon to retirement or loss of earned income is still relatively
long but capital preservation gains importance
•Capital gain investments are balanced with lower-risk assets
The Retirement Stage
•Living expenses no longer covered by earned income but by
accumulated Assets
•Low likelihood of going back to work
•Heavy reliance on personal investments
•Investment assets must have relatively stable values
•Investment cash flows must be predictable to synchronize with living
expenses
•A small portion of the portfolio must still provide an inflation hedge
Risk/Return Position at Various Life Cycle Stages
10
EARLY
CAREER
R MID-TO-LATE
E CAREER
T
U
R
N
0 RISK 10
RETIREMENT
MODULE 5:
Code of Conduct and Ethics
Code of
Conduct
and Ethics
Partially Lifted from the Enhanced UITF Certification Program of
Why Ethics?
Why talk about ethics?
Is it relevant to the trust and fiduciary business?
Can ethics be taught?
 Protect customer trust
 Improve efficiency
 Expand compliance efforts
 Increased shareholder confidence
 Enhanced productivity
 Attract and retain a quality workforce Institute for Global Ethics
2018
A Dilemma?
An ethical dilemma is a complex situation that often involves
an apparent mental conflict between moral imperatives, in
which to obey one would result in transgressing another.
2018
A Dilemma?
Conducting Personal Business on Company Time
Because employees tend to spend so much of their weekday hours on the job, they often are
tempted to conduct personal business on company time. This can include setting up doctor's
appointments on company phone lines, making vacation reservations using their employer's
computers and Internet connections or even making phone calls for a freelance side business
while on company time. At first glance, this ethical dilemma is fairly clear: It is an abuse of your
employer to conduct personal business on company time. But there are shades of gray here.
What if your spouse calls to tell you that your children are ill? Is it OK for you to schedule a
doctor's appointment? A good rule of thumb is for an employee to check with his manager or
human resources supervisors to clarify what counts as an actionable offense in the company.
2018
Common Ethical Workplace Dilemmas by Don
Rafner
A Dilemma?
Taking Credit for Others' Work
Employees often work in teams to create marketing campaigns, develop new products or
fine-tune services, yet rarely does everyone in a group contribute equally to the final
product. If three members of a five-person team did all the work, do those three members
demand to receive proper credit while pointing out that two members of the team did not
pull their weight? This is a tricky question. If employees single out their co-workers in a
negative light, it could fuel resentment. The same thing could happen, however, if all
employees accept equal praise even though only a select few did the real work. The best
way to resolve this ethical dilemma is to not let it happen. Team members should insist
Common Ethical Workplace Dilemmas
that all employees perform specific tasks to help complete a project. by Don Rafner
A Dilemma?
Access to information
Your boss and you were buddies in college and have become really close at work, always looking
out for each other, for all the right reasons. An emergency occurred which required retrieving an
information that resided in your boss’ files. The info was urgently needed for a big presentation but
the boss was on international business travel. In a desire to make a great presentation and clinch
the account the boss decides to share the password to log on to his account {the boss’}.
Upon log-in, you realize that the computer had not been properly shutdown and you saw an email
order for a personal trade sent to one of your brokers. It had a Notation: confidential no compliance
clearance.
What will you do?
2018
The Importance of Ethics
in Organizations
 Ethics are the principles and values an individual uses to
govern his activities and decisions.
 In an organization, a code of ethics is a set of principles that

guide the organization in its programs, policies and decisions
for the business.
 The ethical philosophy an organization uses to conduct

business can affect the reputation, productivity and bottom
line of the business.
2018
Why Have a Code Of Ethics?
 "There has been a dramatic increase in the ethical
expectations of businesses and professions over the past ten
years.
 Increasingly, customers, clients and employees are

deliberately seeking out those who define the basic
ground rules of their operations on a day to day...."
(quote from the website of the International Ethical Business Registry)

2018
Enforcer of the
highest level of
ethical
standards
Code Of • Main
Conduct Influences/Bases
And
• Creation
Ethics -
• The Code Visited
TOAP
Main Influences/Bases
 General Banking Law Of 2000
 Prudent Man’s Rule
 Manual Of Regulations (BSP) PART IV – “Rules
And Regulations On Trust, Other Fiduciary
Business and Investment Management Activities of
Financial Institutions”
2018
Prudent Man’s Rule
A trust company, or any bank, authorized to engage
in the business of a trust company, shall administer
the funds or properties under its custody with the
skill, care, prudence and diligence necessary under
the circumstances then prevailing that a prudent man,
acting in like capacity and familiar with such matters
would exercise in the conduct of an enterprise of a
like character and with similar aims.
2018
Manual of Regulations
 Sec. 1401-Statement of Principles
 Cardinal Principle for all trust & fiduciary relationships =
 FIDELITY
 Predicated upon this are : Confidentiality, Scrupulous Care,
Safety, Prudent Management ; all done with probability of
income, proper accounting and appropriate reporting.
 No right or obligation, legal or moral, to accept any business
if contrary to law or regulations, public order and public
policy
 Sec. 1401-Statement of Principles
Cardinal Principle for all trust & fiduciary relationships =
FIDELITY
Predicated upon this are : Confidentiality, Scrupulous Care,

Safety, Prudent Management ; all done with probability of
income, proper accounting and appropriate reporting.
No right or obligation, legal or moral, to accept any business if

contrary to law or regulations, public order and public policy
2018
Sec. 1406 - Organization & Management
- Organizationally, Operationally, Administratively and

Functionally separate and distinct from other units/business
- Organization/duties/responsibilities must reflect adherence to
internal control standards prescribed by BSP
- provision for legal assistance for Trust
 Can trust officers sign

banking transactions?
 Can bank officers sign
trust transactions?
2018
 Sec. 1406 (cont’d) – trust group staffed by persons of
competence, integrity, honesty and technical
expertise ;
 Responsibilities of administration defined for board,

Trustcom, trust officer, trust group
2018
No bank shall undertake any of the trust and other fiduciary business and,
whenever applicable, investment management activities outside the direct
control, authority and management of the trust department or through any
department or office which is involved in the other businesses of the bank, such
as the Treasury, Funds Management or any similar department, otherwise, any
such business shall be considered part of the bank’s real liabilities.
The trust department, trust officer and other subordinate officers of the trust
department shall only be directly responsible to the bank’s trust committee
which shall, in turn, be only directly responsible to the bank’s board of directors.
No director, officer or employee taking part in the management of trust and
other fiduciary accounts shall perform duties in other departments or the audit
committee of the bank and vice versa. However, branch managers duly
authorized by the board of directors may, for or on behalf of the trust officer,
sign pre-drawn trust instruments such as CTFs.
265
Best Practices
 To institutionalize proper safeguards for the
protection of its clients and itself.
Best Execution
Personal Investment Policy
Chinese Wall
Confidentiality & Materiality of Information
2018
Best Practices
 Ensures that clients get the best deals at all times.

 Conflicts of interest is prevented by showing 2 competitive bids
from counterparties.
Best Practices
 Ensures the protection of the institution when carrying out different

functions and responsibilities across different investment
management activities.
Best Practices
 Ensures that the interest of the clients are protected against trading
of investments for personal gains of Trust personnel.
Best Practices
Best Practices
 Clients as well as counterparties are integral parties to the

discharge of fund management functions in a UITF. Clients and
counterparties regardless of size and relationship with the Trust
Entity must be treated equally and equitably.
271
Best Practices
272
Best Practices
X409.3 (Trust) and X411.5 (IMA) Transactions requiring prior authority. Full disclosure and
authorization in writing by the client prior to investment execution.
a. Lend, sell, transfer or assign money or property to any of the departments, directors, officers,
stockholders or employees (DOSRI) of the trustee or fiduciary,
b. Purchase or acquire property or debt instruments from any of the DDOSRI
c. Invest in equities of, or in securities underwritten by, the trustee or fiduciary or a corporation
d. Sell, transfer, assign, or lend money or property from one trust or fiduciary account to another trust
or fiduciary account except where the investment is in any of those enumerated in Items “a” to “d”
of Subsec. X409.2 (Lending and Investment Disposition)
273
Best Practices
 The valuation process of service providers including the Custodian should be compliant
to the TE’s policy and regulations.
274
Best Practices
 Self-dealing is not prohibited per se, but such transactions must be

Fully Disclosed and Authorized in Writing by the Client.
275
Trust Organization (Typical)
Cir 766 Aug 17, 2012
Board of Directors
Trust Committe
Other Trust-related
Committees (i.e. Trust Trust Risk Officer
Investment Com, etc)
Trust Officer
Investments/
Business Operations
Portfolio
Development
Management
The Creation of the Code
 Germinated Sometime 1994 – Board = Josie Sulit, Guia
Legaspi, Ed Chaves, Bobby San Juan, Reevie Vergara
 First Draft Discussions At 1996 Toap Convention- Fort

Ilocandia
 Approval By Members=>TOAP Convention In May 1997 At

The Baguio Country Club
 All CEOs Informed Of Code; Commitment Required

2018
Who are Trust Practitioners
in the Room?
 Is a trust relationship just the same as a banking
relationship?
 Fair to say that one relationship is a notch higher than

the other?
 Whose side does Trust represent? Client’s or

Institution’s?
2018
The Code Visited
PREAMBLE emphasizes commitment to :
 Highest standards of integrity & prudent expertise
 Serve the best interests of : Society, our clients, our

profession, government and our institutions/banks
2018
The Code
Sec. 1 & 2 – coverage
 Any officer or non-officer who exercises discretion or judgment, or

acts as a fund or asset manager
2018
The Code
Sec 3 – Trust Officer & SOCIETY
 Social dimension; services NOT prejudicial to public good and
consistent with what is moral, just and legal; delivered with
loyalty and integrity
 Creation/promotion of public awareness of trust; promote
services which do most good for a greater number in society
 Treat all accounts/clients equitably 1
 Charge fees. Justly. 2
3
The Code
Sec 3 – Trust Officer & SOCIETY [cont]
 Stresses mutual benefit & satisfaction

 TO may refuse on moral grounds, to accept trust business that could
impair the good reputation of the institution
 Fees must be commensurate to services rendered & based on : time
spent, extent of business relationship, personnel required, degree of
difficulty and performance, responsibilities/risks, nature of the
fund/assets
 May give due consideration where account is for benevolent or
charitable purposes
2018
The Code
Sec. 4 – Trust Officer And The Client
 Welfare & Interest Of Client Is Paramount, Characterized By Care,

Diligence, Candor And Good Faith; Arms-length Transactions
 Utmost Fidelity To Clients, Fair Deal For All Accounts, Avoid Conflict
Of Interest (Self Dealing / Self Serving Transactions)
 Proper Accounting/Records/Reports, Appropriate Controls, Full

Disclosure, Get Approvals/Clearance When Appropriate
2018
The Code
Section 4. Trust officer and the client [con’t]]
When full discretion is given by client :
 Safety of principal is primary, income only secondary

 Clear understanding of client guidelines, objectives,
 Restrictions
 Comply with all terms and conditions
 Conduct business at arms length basis
2018
The Code
Sec. 5 – T.O. & Gov’t/its agencies
 Full cooperation, show respect and fairness to
regulators without violating trust/confidence of clients;
must keep informed and up to date; espouse or
ensure compliance with all rules/regulations
2018
The Code
Sec. 6 – T.O. & Members Of The Trust / Fund Management
Profession
 Uphold the integrity and dignity of our profession;

 Support and participate in activities which promote
professional development;
 Observe mutual respect, courtesy, cooperation, friendship and
professionalism with members
2018
The Code
Sec. 6 – T.O. & Members Of The Trust/Fund
Management Profession [Con’t.]
Maintain healthy competition

 No negative criticism, derogatory remarks,
misrepresentation of facts; ensure ads/promo materials
have clear/factual disclosure; not misleading
2018
The Code
Sec.7 – T.O. & Own Institution
 Coordinate with institution to ensure loyalty, compliance with internal
policies, observance of integrity /honesty
 Develop skills/knowledge
 Educate/inform institution & other officers
Does your CEO
have a copy of
the TOAP Code?
2018
The Code
Sec. 8 – Sanctions
 Procedures prescribed by TOAP Board & ratified by

Members quorum
 Admonished; Suspended (for 1 month); Expelled (by 2/3

vote of members)
2018
The Code
Sec. 9 –Amendment & Modification
 requirement : ¾ vote of membership
2018
Lack of Ethics:
Harmful to Investors
Source: 10 Most Shameful Bank Scandals of 2013
NBI Spokesperson Ferdinand Lavin

During presentation of MVLopez to the public, July 2017
2018
Final words…..
Ainah Najiha 22
January 2018
http://en.goodtimes.my/2018/01/22/lady-graduated-prestigious-university-told-no-company-want-hire-one-thing-
took-granted/
2018
Trust Practitioners
We are the gatekeepers of our clients’ welfare and interest.
Nothing should come between us and our fiduciary duties
to (ALL) our clients. We must know when to draw the line
when the boundaries of ethics are challenged. We must
uphold our Code of Ethics at all times.
2018
IMPORTANT REMINDER
USPs with confirmed schedules have until seven (7)
days prior to the examination to cancel their
enrollment. Any changes made after the seven-day
period shall be charged accordingly.
BDO will only shoulder the examinee’s first take

(cancellation is for the account of the examinee).
Thank You!

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Certified UITF Sales Person

•“PERSON” means an individual/natural person or a juridical entity

A relationship created at the direction of a person or persons, in

An entity created to hold assets for the benefit

Must have a subject of trust (corpus/res)

 Involves risk while offering YES YES

 Not insured by PDIC YES YES

* Both UITF & MF are not guaranteed

 each UITF shall be subject to a separate set of Plan rules, adopted

 Basis for setting the admission and redemption price,

 Pooled fund accounting method

 Investments - a list, updated at least quarterly, of

 No PDIC insurance cover

 Evidence of Participation shall include:

 Should not exceed 15% of the market value of

 UITFs denominated in any acceptable foreign

 Such funds may only be invested in allowable

 UITFs are exempt from the following statutory

 Backroom Operations: Systems to support

 Custody of Securities: investment in securities

Purely Fixed Income with Weighted Average Duration <1

Purely Fixed Income

•Classification will depend on allowed investments of

 Fixed Income Fund- primarily invested in fixed income

 Equity- primarily invested in stock issues.

Money Market Fund 1 year

Intermediate-term Bond 3 years

Medium-term Bond Fund 5 years

Long-term Bond Fund >5 years

 A UIT Fund may be allowed to operate as a feeder

REGULAR UITF STRUCTURE

 Each participant should be given a participating trust

 Duties and responsibilities of UIT marketing personnel

 The total assets and accountabilities of each fund shall be accounted

 THE INVESTMENTS OF MULTI-CLASS UIT FUND SHALL REMAIN

 Contributions to each fund by clients shall always be through

 IN THE CASE OF MULTI-CLASS UIT FUND, UNITS SHALL

 The total net assets of the multi-class UIT fund is the

 The trustee fees applicable to the unit class shall be applied

Unit Class Trust/Management Fee Minimum Investment

Portfolio comprised of: Net

 Mark to market (MTM):

is the act of assigning a value to a position held in

Aggregate Market Value of Investments P111,111,111.11

NAVPU (current) – NAVPU (same period last year’s figure)

NAVPU (current) – NAVPU (last year’s end figure)

Fund A: 15% - 5% Fund B: 12% – 5%

Based on these calculations, manager B was able to

Rp = Return of the portfolio

Manager A’s IR = [13-(-1.5)]/8 = 1.81

Additional risk could be achieved through leveraging.

 One can never time the market

 Track record is very important.

Get to Know your Fund Manger:

• Client wants to ensure preservation of capital at all

Source: BSP Circular 618

•Client wants capital to appreciate over time and willing to

Source: BSP Circular 618

• Investment time frame and liquidity requirements

• Knowledge and financial situation