Financial Blog

Last installment, we discussed PSEi and we referenced one of our UITF Products which is the SB Philippine Equity Index Fund. For this installment, we will be discussing another UITF Product, a special one, which is the Feeder Fund. 

Before we talk about Feeder Funds, let’s revisit what UITFs are

UITF or Unit Investment Trust Fund is an open-ended pooled trust fund in any acceptable currency that is collectively invested in securities approved by Bangko Sentral ng Pilipinas. UITFs are operated and managed by a Trust entity and made available by participation.

UITF is called open-ended because it allows you to participate or redeem any time within the set guidelines of your chosen UITF Product. The most common UITF products being offered are Money Market Fund, Bond Fund, Balanced Fund and Equity Fund. But did you know that there are also Special UITFs? These are Feeder Funds, Fund of Funds, Multi-class Funds and Unit Paying Funds.

We made an entire article discussing what a UITF is that you can read here. 

What is a Feeder fund?

A Feeder Fund is one of the UITF structures that mandates the fund to invest at least ninety percent (90%) of its assets in a single collective investment scheme. Under BSP Rules, when a Trust Entity offers Feeder Fund to its customers, the Feeder Fund’s investment in the target fund must not exceed 10% of the target fund’s market value.

How does a Feeder Fund work?

To better understand why a Feeder fund is a UITF. As illustrated below, the clients’ funds are pooled in the UITF then we, as your Trustee, invest in the Target Fund through the purchase of shares or units of participation in the fund. At least 90% of the pooled funds received from clients as their investment in the UITF, must be invested by the Trustee in the Target Fund. 

As Trustee of the Feeder Fund that invested in the Target Fund, we receive shares from the Target Fund and then we compute for the Net Asset Value (NAV) and Net Asset Value Per Unit (NAVPU) to correspond to the number of units of participation in the Feeder Fund. This is a UITF and therefore, the Feeder Fund is valued daily depending on the value of the Target Fund less expenses which include the Trustee Fees of SBC TAMG. 

Why consider investing in a Feeder Fund?

Access to Offshore Funds

You can access and invest in Asia, US, other Global Investments. You can also invest in offshore thematic funds. Thematic funds are funds where the holdings of the Target Fund follow a thematic strategy, example, investing in technology companies or in companies that have strong ESG characteristics.  

Affordable and Efficient Investing

As an investor, you are able to access offshore funds (like Exchange Traded Funds) at smaller investment amounts, and at lower cost. This, as opposed to investing directly in offshore funds where you are required to open and maintain an offshore account and custody account for your holdings.  Dividends received will automatically be reinvested, and no wire transfer charges when moving fund abroad.

Diversification

Investing in Feeder Funds, you are also able to diversify your portfolio by expanding your risk exposure to hundreds of securities held and invested by the Target Fund.

Liquid

There is no minimum holding period. If you need to redeem your investment, you only need to follow the settlement period. Example, if settlement is T+5, if you redeem today, you will receive your redemption proceeds after 5 banking days. You only need to maintain the minimum investment amount if you want to stay invested in the Feeder Fund.

For SBC TAMG’s Feeder Funds, the Target Funds are all Exchange Traded Funds and we follow a criteria in choosing the Target Funds for the Feeder Funds which include, size of the ETF, the investment objective of the ETF, the expense ratio of the ETF (i.e. the management fees and other costs in the administration of the ETF), the track record of the ETF in terms of return performance and the number of  years that the ETF has been listed in the exchange. 

How will I know if my investment in the Feeder Fund is giving me gains (or losses)?

The returns, coming from market value appreciation of the Target Fund from share price appreciation of the Target Fund’s investments and dividends received from its holdings (think investing in a share of stock) and this is imputed in the Net Asset Value of the Feeder Fund (which includes the trust fees) and by dividing the NAV to the total number of units in the Feeder Fund, the Net Asset Value Per Unit or NAVPU is derived.

Note that since Target Funds are Exchange Traded Funds and therefore, traded in the exchange/s, the value of the Target Fund can also go up and down and therefore, the Feeder Fund’s NAVPU can also go up and down.

As the Feeder Fund increases its value, the value per unit also increases. Conversely, if the value of Feeder Fund decreases, so is the value per unit.

To understand this better, here’s an example

There are 4 clients who invested in a newly set up UITF Feeder Fund called Global Equity Feeder Fund.

Net Asset Value (NAV): USD 200,000.00

Outstanding Units: 200,000

NAVPU (NAV/ Outstanding Units): 1.0

The Fund Manager invests 100% of the funds pooled from investors in in the Target Fund. As an example, the Feeder Fund is the SB ESG Aware Equity Index Fund, the purchase of shares  or investment of the Feeder Fund is in the iShares ESG Aware MSCI USA ETF (ESGU) which is the Target Fund. On launch date, the starting NAVPU is $1.0.

 After 1 month, the market value of the $200,000 that was invested in ESGU is now $202,000.00 and fund expenses is USD100.00

Let’s now compute for your NAVPU and the investment’s fund value of each Client.

Total Fund Value: USD 202,000.00

Payables (charges, taxes, and other fees): USD 100.00

Net Asset Value (NAV): USD 201, 900.00

Outstanding Units: 200,000

NAVPU: 1.0095

To get the investment value for each client, you just simply multiply the NAVPU to their outstanding units.

Am I suitable to invest in a Feeder Fund?

The factors that an investor will consider in investing in a Feeder Fund include: 

• Your risk appetite is aggressive
• Your investment horizon is at least 3 years
• You seek a higher return in  your investments in offshore funds but is ready with the possibility of losing your principal amount of investment in the Feeder Fund because Target Funds can be very volatile. 

What are the Risks involved in investing in Feeder Funds?

Of course, there is no such thing as a completely risk-free investment. For Feeder Funds in particular here are some of the common risks that investors should be aware of:

• Interest Rate Risk
• Market/Price Risk
• Liquidity Risk
• Credit/Default Risk
• Counterparty Risk
• Reinvestment Risk
• Foreign Exchange Risk
• Country Risk
• Emerging Markets Risk
• Equity Risk
• Concentration Risk
• Stock Market Cyclical and Concentration Risk
• Index Sampling Risk

I am interested to invest in a Feeder Fund, does Security Bank offer this?

Yes! Security Bank offers a variety of Feeder Funds which as of this date, include the following:

• SB Asia Ex Japan Equity Index  Feeder Fund
• SB US Equity Index Feeder Fund
• SB Global Equity Index Feeder Fund
• SB ESG Aware Equity Index Feeder Fund
• SB US Technology Equity Index Feeder Fund