Philequity: a 13-year old, high-flying start-up
This post kicks off a MoneySmarts series on mutual funds. As I promised in a previous post, I will help investors pound on the doors of mutual fund companies and get answers on issues we all need to understand to make informed decisions about our investments. So I interviewed PhilEquity Management Inc. president Edmundo Marco P. Bunyi. I asked some of you to be a part of the interview by soliciting your questions. Take a look at how the interview went, and, as usual, you are welcome to share your views and comments. Bunyi: I read your blog and the comments about PhilEquity and I am pleased that more people are interested in investing and investing wisely. Let me just share with you candidly what PhilEquity is all about. The story of PhilEquity is all about its fund manager, Wilson Sy. You know Wilson Sy – he was former chairman of the Philippine Stock Exchange, a totally low-profile guy, a very good listener, and exceptionally talented. Are you familiar with the mosaic theory? He has a way of putting things together -- information that are public, non-public and non-material -- in a way that can make money in the market. He was a phenomenal market player and soon colleagues, friends and associates asked him to invest for them too. Eventually, he decided to set up a fund and personally managed it – that was in 1994. That was how PhilEquity began. Wilson is a great trader but not an organization person. (MoneySmarts’ sources confirmed this.) Michael Jordan knew how to shoot the ball but to ask him to handle organizational matters will take time away from what he does best. So for the last years, PhilEquity had no sales force, no marketing people – it only grew via word of mouth. Wilson did it for the joy of trading, with three or four people under him. Sometime last year, some of his close associates prodded him to do sales. The investment market was growing. I joined PhilEquity officially in December last year to set up an organization that will handle the business side of PhilEquity without diminishing the trading prowess of Wilson Sy. The plans are to start doing sales and marketing. We are going to provide better services, train more staff to handle walk-in clients, set up a mini call center to talk to customers and investors. We will improve our website. When I saw it, I was ashamed to own it! We know that our market is Internet savvy so we will use the Internet not just as a channel but also a medium for information that will fortify and cement our relationship with our clients. We are like a 13-year-old start-up. All the changes we are planning will happen. The impact will most likely be felt late this year or next year. With our past performance being what it is, I can say that it will only get better. We want our investors to go through a comprehensive risk profiling. We uphold the standards set by the AIMR. We want our investors to fully consider their investment constraints, return objectives, investment horizon, appetite for risk, and liquidity. We want them to be clear about other considerations like are they okay with investing in tobacco companies? But to go through this they either have to get professional investment advisor or get this kind of service from a private banker. We cannot do that for our clients one on one or else we will have to charge more. Studies show that over the long run, wealth is created due to asset allocation more than anything else. This means how you divide the investment pie will determine your success. We also know that returns are correlated with the risks that you take. Once you have decided how to allocate your assets, you will then decide whether to invest on your own or get a professional manager to do it for you. Here is where PhilEquity can help. There are two kinds of risk: idiosyncratic and systemic risk. When you watch out for systemic risk, you consider inflation, deficit, GNP, and all that – things that affect the entire market. Idiosyncratic or non-systemic risk has to do with your exposure to particular companies. As a fund manager, we help you with the non-systemic risks that you face. The skill of a fund manager is to generate alpha. There is a formula that says r=α+ß+χ, where χ is the return of the stock, ß is the correlation of the stock with the market and α is the excess return. Alpha is that little extra that is determined by how you time the market, how you allocate your assets over several industries, what stocks you choose. Wilson Sy is very good about generating that alpha. MoneySmarts: If you want to make sure that your investors get into this knowing all the risks he is taking, then why does your prospectus reveal very little information about your fund? Bunyi: We are in the process of improving our prospectus. We have performed well over an extended period of time. Our success is driven by our methods so it’s all there – it’s just a matter of enunciating it. We will include a proper description of the risks we take in managing the fund. (Editor’s note: The prospectus in PhilEquity’s website is not a complete version). I was able to compute in December that the volatility of our fund is in fact lower than that of the Philippine stock exchange index. We will make that information available very soon in our website. Another good measurement of risk is sharpe ratio, and we might include that as well. MoneySmarts: Perhaps you might want to include that as the criteria of the awards in ICAP next year? Bunyi: Yes, we can suggest that to the board of ICAP. It will be a good idea to measure performance through both returns and volatility. And the figures show that PhilEquity beat the market on both counts. MoneySmarts: What is the size of PhilEquity now? Bunyi: We have around P3 billion assets under management right now. MoneySmarts: And what investment strategy does Mr. Wilson Sy use? Is he using a top-down approach or is he value-oriented, for example? Bunyi: Let us not be deceived by that “top-down, bottoms-up approach”. What does that really mean? Top down means you look at how the economy is doing, then from there choose the industries that are doing well, and then the companies that you think will make money in that kind of economy. A bottoms-up approach means you look for specific companies that offer you a fair value. You look at their net asset value, maybe use a discounted cash flow method. If you read macro, does that mean you ignore valuations in the market that are compellingly cheap? If you look at particular companies, does that mean you disregard how the economy is doing? Definitely, both these investment strategies are present in our decision making, they are inputs to Wilson Sy and parts of the mosaic that he studies. MoneySmarts: Does he make all the decisions by himself? Bunyi: He is aided by two researchers, but yes, he is the portfolio manager for our equity fund. He also looks at the technicals as well as the fundamentals. He looks at companies that are undervalued, he looks at the sentiment of the market. He times the market well. He has access to information about flows, supplies and demands for particular securities. MoneySmarts: There is no investment committee that serves as an oversight? Bunyi: That is the direction that we are going. We are going to make the process more formal, document the process more diligently, put in place risk management controls. We are not allowed to invest more than 10 percent of our portfolio in a particular stock, and that’s a built-in risk management tool. There are more sophisticated ways, but the overall sense is that we don’t want risk that will affect our entire portfolio. MoneySmarts: Will this include formal guidelines on when to invest in a certain company and when to exit a certain position? Bunyi: Yes, that will be part of that. There are two levels to that and it should include a management action trigger where you have to explain why you hold on to a certain position. MoneySmarts: How will this benefit the company in terms of sustainability? I mean, it will be hard to clone Wilson Sy. Bunyi: Wilson is still young at 54. He has many trading years to go. But we will have a transition to a more formal process. Wilson will still be in the investment committee and he will have several fund managers under him. He will be there for a long period of time. MoneySmarts: So why should I invest in PhilEquity? Sell to me. Bunyi: Two things: performance and better risk management. I told you that I have seen the standard deviation computation for our equity fund. We were less volatile than the market and provided more returns. It’s not an empty boast. You are in the market to make money. We can make you happy because we have the track record of great performance and lower volatility than the overall market. We generate the alpha for you and outperform the market. MoneySmarts: How concentrated is your portfolio? How many positions are there in all? Bunyi: We have around 60 stocks in our portfolio as of May 8. Our top positions are: PLDT (9.4 percent), BPI (7.8 percent), Ayala Land (7.1 percent), Ayala Corp., (5.3 percent), Megaworld (4.6 percent), Meralco B (4.4 percent), SM (3.8 percent), Metrobank (3.2 percent), SMPH (3.1 percent) and Globe (2.8 percent). MoneySmarts: The Philippine stock market is very small compared with other markets. I suspect most of the other funds have the same top picks. Is this true for your fund? Then how do you provide more value? Bunyi: Yes, you are right. We also follow industry limits and liquidity requirements. Then we have the risk controls we talked about and the investment strategies we mentioned. Aside from that, we have confidence in Wilson Sy’s stock picking abilities. He is not a rookie; he doesn’t panic when there is volatility in the market. To me the greatest traders are those that have lost money in the past and have lived to tell the tale, who have experience in managing a fund during a bear market and has seen the best and worst of it. MoneySmarts: What is the total cost to the investor? Why do you charge both front-end and back-end fees. Isn’t this a case of double dipping? Bunyi:We charge a 3.5 percent sales load (this is the part that goes to the agent as commission) depending on the amount of the investment. We charge a 1.5 percent management fee and an exit fee of 2.0 percent if the investment is withdrawn in less than one year, 1.5 percent if withdrawn in less than two years but more than one year
, and one percent if withdrawn in less than one two years. (Sorry for the error. If the investment is kept within the fund for more than two years, there is no exit fee. Doubled checked this with their prospectus to be sure.) As long as we disclose our fees, I don’t think there should be any problem. The operative word here should be transparency. Nobody is forcing you to invest if you think the fees are steep.
MoneySmarts: Other funds charge a performance fee. Do you have that too?
Bunyi:No, we don’t but I think that would be nice incentive to fund managers to do well.
MoneySmarts: But isn’t it true that an investor chooses you because you have promised to outperform the market? Why should he pay a fee for something that you have promised to deliver from the very beginning?
Bunyi:Let’s put it this way. If I was your employer, I wouldn’t mind paying you a fat bonus if you beat the high-water mark. This is exactly the same thing. What is important is that the fee has to be transparent.
MoneySmarts: What is the principal driver of PhilEquity’s decade-long performance? It seems like you were insulated from what has happened in the global equity markets for the last 10 years. The returns look too good to be true.
We were affected by the ups and downs in the global equities markets. There were two or three years of negative returns. (Please see historical returns).
**Bunyi joined PEMI in October 2006. Prior to PEMI, he was senior vice-president and corporate treasurer of International Exchange Bank, chairman of iCurrencies, Inc., and head of FCDU and FX Distribution in United Coconut Planters Bank. The bank credited him for the profitable operations of iBank’s treasury department. Bunyi will be in charge of Philequity’s Money Market Fund and Dollar Income Fund due to his expertise in fixed income trading. Concurrently, Ed has been appointed as President and COO of listed firm iVantage Corporation, an affiliate of Philequity Management, Inc.
PhilEquity Fact Box
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