Are Philippine Fixed Income Fund Managers Generating Alpha for Their Clients

INTRODUCTION Mutual funds, also known as investment companies, are pooled investment vehicles managed by an asset management firm that seeks to create value for shareholders through tactical allocation of investor funds in various asset classes or in securities within a particular asset category. Typically, mutual funds are classified based on investment style, and can be broadly identified as either a fixed income fund, an equity fund, or a balanced fund (combination of fixed income and equity instruments), depending on the specific assets the fund is allowed to invest in (as stated in the fund's prospectus). Investors consider mutual funds to be a viable alternative to direct investments in equity and debt securities due to a number of benefits that can be derived from pooled fund-investing, which include, but are not limited to, easy liquidity, economies-of-scale, access to otherwise inaccessible markets, diversification, and management of funds by a skilled and knowledgeable investments practitioner. For an asset management firm to act as fund manager and administrator of an investment company, it must be awarded a management and distribution mandate by fund participants (owners). Mandated asset managers are expected to perform the following basic duties in exchange for a periodic management fee: distribute shares in the fund to potential investors, provide ready liquidity to clients who wish to divest their existing mutual fund holdings, act as investment advisor and administrator to the investment company, and manage the fund's securities portfolio for the collective benefit of all fund shareholders. However, asset managers are scrutinized by the investing community on the basis of their ability to generate returns not just relative to competitors but vis-a-vis a chosen benchmark portfolio as well. Since ownership in a mutual fund is dispersed given its pooled nature, the interests of the majority shareholders of the fund, just like in any registered corporation, are represented by a board of directors. And one of the key responsibilities of the board of directors is to prudently select a fund manager and periodically evaluate its performance in all of the five aforementioned aspects, with returns relative to peers and benchmark being one of the more critical aspects in determining investment success for the client. Asset managers that exhibit more than just modest performance are likely to have their mandate as fund manager renewed during each periodic review by the board of directors. This process of performance measurement and evaluation ensures that fund managers remain competitive in the pooled fund investments industry. Mutual Fund Industry Growth in the Philippines To put the competitive landscape of mutual fund investments in proper perspective, assets under management (AUM) in the Philippine mutual fund industry reached a historic high of PHP 95.7-billion as of the end of 2010. This is a dramatic increase from the PHP 1.35-billion AUM of managers of local mutual funds back in 1997 (Valderrama & Bautista, 2003). Of the PHP 95.7-billion, 19.8% represents investments in funds whose main investment style is long-term growth through equity investments, 58.3% is in the form of funds invested purely in short-term to long-term fixed income instruments, and the remaining 21.9% is allocated in balanced portfolios of both stocks and bonds (balanced fund category). In terms of number of players in the industry, the number of mutual funds in the Philippines has grown from 25 in the year 2003 to 45 in 2010, evidence to the intensifying competitive structure of the local pooled investments industry. The sudden surge of unit investment trust funds (UITFs) beginning 2005 due to the phase-out of common trust funds (CTFs) by the Bangko Sentral ng Pilipinas (BSP) likewise facilitated the rise in competition between fund managers, not to mention the improvement in domestic macroeconomic and financial market conditions since 2005 which increased demand for pooled investments. …