AI300: Philippines AUM stalls in 2016

Oct 18, 2017

Rising interest rates, inflated equity valuations stunt AUM growth expectations in Philippines, says Banco de Oro’s head of trust and investments group

The Philippines' leading banks saw their institutional assets under management (AUM) decline slightly in 2016, and it could fall further in the coming months, amid wide expectations that interest rates will rise and the peso weaken, warns one leading bank executive.

AsianInvestor's AI300 list of the top 300 institutional investors in Asia Pacific recorded a drop in the AUM of Philippines institutions last year versus the year before. Notably, commercial banks comprise a large part of the country's biggest investors. And , the Philippines' largest bank by assets, is not optimistic that AUM will pick up in the coming year.

BDO Unibank, the Manila-based commercial bank was the biggest gainer in the Philippines. It increased its AUM by nearly 21%. But it was an outlier. The country’s remaining seven asset owners saw combined AUM fall by almost 3%.

Overall, the AUM of local commercial banks and the and central bank decreased by 4% and 3% respectively, with three of the four Philippine commercial banks in the AI300 either remaining relatively stable or shrinking by over 10%.

Increased appetite for risk

Ador Abrogena, head of trust and investments group at BDO, attributed BDO’s standout performance to a growing appetite for risk in a low yield environment.

“Most of this increase was driven by the our cients' need to deliver higher yields than bank deposits, so they are moving up the risk scale into money market funds, bonds, and equity funds,” he told AsianInvestor.

BDO increased its allocation to investment and equity securities by around 18% in the 12 months to March 2017, according to the bank’s financial statements. Last year AUM in collective investment fund types, like unit investment trust funds, increased by 22%, Abrogena said.

The bank also capitalised on investor preference for shorter duration investments, he added, given a market outlook tilted to rising rates. “We focused on providing clients a way to park their funds in the meantime until they were ready to commit to longer term investments.”

Fixed income funds produced the best returns last year due to a continued decline in rates, Abrogena said, even as a downturn in the Philippine Stock Exchange index (PSEi) in 2016—down 1.6% last year according to the PSE—negatively affected BDO’s returns on stock investments.

The BDO Peso Bond Fund, which invests in a combination of short to long-term fixed income securities, and the BDO Money Market Fund, which focuses on low-risk fixed income securities, both had returns of around 1.41% in 2016, according to the industry-sponsored UITF Resource Center (UITFRC). The government securities-oriented BDO GS Fund produced a return of 1.46%.

BDO house funds operate a 50/50 asset mix of bonds and equities for most clients, he said, but many client portfolios actually have a much higher proportion of bonds. “Not many clients are that aggressive,” Abrogena admitted. “Most discretionary accounts would be in the 80/20 mix (of bonds and equities) in favor of fixed income.”

The BDO Equity Fund, which invests in a selection of local exchange-listed equities, saw a negative return of 1.39% in 2016, and the BDO Equity Index Fund, which largely consists of the component companies of the PSEi, had a negative return of 1.86% the same year, according to the UITFRC.

Rising rates

But Abrogena is not optimistic that overall bank AUM will pick up quickly in the coming months. He noted that there are strong expectations of rising interest rates, which will make it difficult to maintain growth momentum, despite a rebound in the local markets this year.

“Fixed income investments are no longer more attractive than parking funds in deposits,” he said, adding that higher equity valuations — PSE data shows the PSEi up around 23% year to date as of October 18 — are prompting investors to move out of equities as their target returns are met.

Rising interest rates would also weaken the local currency versus the US dollar, according to Abrogena, prompting BDO to seek increased exposure to US dollar denominated investments, such as offshore feeder funds. A feeder fund invests its capital into a larger fund, known as a master, which handles all investment and trading activities.

Since the start of the year, the Philippine peso has fallen by around 5.1% against the US dollar as of October 27 according to XE.com, and the bank’s recommendation for clients is to allocate 20% of equity portfolios to offshore funds, Abrogena said. These include feeder funds investing in global, US, European, Chinese, Japanese, and global REIT equities.

The BDO US Equity Feeder Fund, for example, which invests in the Legg Mason ClearBridge US Aggressive Growth Fund, has seen year to date returns of 8.63% as of October 18, Bloomberg data shows.

However, client approval and take up is slow, Abrogena said, and overall offshore investments through feeder funds comprise only about 1% of BDO’s AUM.