Philippine Markets Newsletter

By investing in index stocks, this UITF from one of the best digital banks in PH has outperformed its benchmark…also, URC tearsheet

June 11, 2021

This equity unit investment trust fund (UITF) from one of the country’s best digital banks has outperformed its benchmark, the Philippine Stock Exchange Composite Index (PSEi). The average Uniform ROA for its holdings is 6%, 1.5x the as-reported average.

That said, as-reported metrics would leave investors confused as to why the fund would choose to track the index when the stocks in the index appear to have minimal profitability. Uniform Accounting financial metrics help make sense of the fund’s investments.

In addition to examining the fund’s portfolio, we are including fundamental analysis of one of the fund’s largest holdings, providing you with the current Uniform Accounting Performance and Valuation Tearsheet for that company.

Philippine Markets Daily:
Friday Uniform Portfolio Analytics
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The Union Bank of the Philippines (UnionBank) is a universal bank that offers a wide range of banking services. UnionBank started its operations in 1981 and was formed out of a partnership with Aboitiz Group, Insular Life, and Social Security System.

For several years, UnionBank has been recognized as the Best Digital Bank by prestigious institutions such as The Asset, Asiamoney, and the Global Banking & Finance Review. The bank has also been recognized in the areas of transformation, people, and culture.

UnionBank’s products and services include fixed income funds, balanced funds, and equity funds. We’ve written about one of UnionBank’s unit investment trust funds (UITF) before, UnionBank PHP Equity Fund. This week, we’ll be taking a first look at another of the bank’s UITFs, the UnionBank PSE Index Tracker Fund.

Formerly named the Philippine Equity Index Fund Portfolio, the UnionBank PSE Index Tracker Fund is a peso-denominated UITF that invests in a widely diverse set of PSE-listed stocks. The fund tracks its benchmark, the Philippine Stock Exchange Index (PSEi).

The fund is ideal for investors with an aggressive risk profile who have a long-term investment horizon.

The UnionBank PSE Index Tracker Fund was launched in May 2014 with an initial net asset value per unit (NAVPU) of PHP 100.00. After a year, the fund’s NAVPU rose to PHP 117.42 in April 2015. The fund’s 17% gain underperformed its benchmark’s 19% gain.

In the following year, the fund’s NAVPU declined to PHP 88.43 in January 2016 following the oil price crash. The fund’s 25% loss matched its benchmark’s loss.

The fund’s NAVPU was able to bounce back in January 2018 when it reached an all-time high of PHP 130.71. The fund’s 48% gain slightly underperformed its benchmark’s 49% gain.

In November 2018, the fund’s NAVPU fell to PHP 99.91 amid uncertainties caused by Brexit and the US-China trade war. The fund’s 24% loss matched its benchmark’s loss.

The fund’s NAVPU rose to PHP 122.18 in July 2019. The fund matched its benchmark’s 22% gain.

The fund’s NAVPU then dropped to PHP 69.23 in March 2020 due to the market sell off caused by the coronavirus. The fund’s 43% loss slightly outperformed its benchmark’s 44% loss.

As of June 7, 2021, the fund’s NAVPU has slowly recovered to PHP 100.26. The fund’s 45% gain slightly underperformed its benchmark’s 46% gain.

Since inception, the UnionBank PSE Index Tracker Fund’s cumulative gain of 0.26% has outperformed its benchmark’s cumulative loss of 0.98%.

As-reported metrics would have investors believe that the PSEi is composed of companies that do not generate economic profit. However, Uniform Accounting reveals the truth behind these companies.

The table below shows the top 8 core non-financial holdings of the UnionBank PSE Index Tracker Fund along with its Uniform return on assets (ROA), as-reported ROA, and ROA distortion—the difference between Uniform and as-reported ROA.

Most of the companies in the UnionBank PSE Index Tracker Fund show as-reported ROAs at or below cost-of-capital levels, suggesting that they are not generating economic profit. The fund is generating an average as-reported ROA of 4%, lower than the global corporate average returns of 6%.

However, on a Uniform Accounting basis, this UITF’s holdings have actually delivered better returns with an average Uniform ROA of 6%, 1.5x the average as-reported ROA. These companies have strong returns, with some of the companies having Uniform ROAs above global average returns.

The Uniform Accounting framework addresses financial statement inconsistencies attributable to the flaws present in the Philippine Financial Reporting Standards (PFRS). This enables investors to determine the true underlying performance of companies and avoid distorted financial analysis and valuation.

As such, it should not be surprising that when analyzing the non-financial holdings of the UnionBank PSE Index Tracker Fund, the figures that easily stand out are the large discrepancies between Uniform ROA and as-reported ROA for these companies.

While at a glance, the difference between as-reported ROA and Uniform ROA may not seem that great, the distortion in percentage ranges from -232% to 134%, with JG Summit Holdings, Inc. (JGS:PHL), Ayala Corporation (AC:PHL), and SM Investments Corporation (SM:PHL) having the highest distortions.

As-reported metrics understate the profitability of Ayala Corporation, suggesting an unprofitable firm with an as-reported ROA of 2%. In reality, this firm more closely resembles one that is breaking even, with a Uniform ROA of 5% that is in line with average cost of capital. Prior to the pandemic, it consistently generated returns of at least 9% from 2005 to 2019.

Similarly, as-reported metrics understate the profitability of SM Investments Corporation, suggesting a below-average firm with an as-reported ROA of 3% when in fact, it is an average firm with a 6% Uniform ROA. It has consistently generated returns of at least 6% since 2005.

By focusing on as-reported metrics alone, these companies look like anything but profitable businesses.

That said, looking at profitability alone is insufficient to deliver superior investment returns. Investors should also identify if the market is significantly undervaluing a company’s earnings growth potential.

This table shows the earnings growth expectations for the major non-financial holdings of the fund. It features three key data points:

  1. The two-year Uniform earnings per share (EPS) growth represents the Uniform earnings growth the company is likely to have for the next two years. The earnings number used is the value of when we convert consensus sell-side analyst estimates according to the Uniform Accounting framework.
  2. The market expected Uniform EPS growth represents what the market thinks Uniform earnings growth is going to be for the next two years. Here, we show by how much the company needs to grow Uniform earnings in the next two years to justify the current stock price of the company. This is the market’s embedded expectations for Uniform earnings growth.
  3. The Uniform EPS growth spread is the difference between the 2-year Uniform EPS growth and market expected Uniform EPS growth.

On average, Philippine companies are expected to have 5%-6% annual Uniform earnings growth over the next two years. Meanwhile, the UnionBank PSE Index Tracker Fund’s major holdings are forecast to outperform with a 32% projected Uniform earnings growth in the next two years, while the market is forecasting an underperformance with a 24% projected Uniform earnings shrinkage.

All the companies in the UnionBank PSE Index Tracker Fund have a positive Uniform earnings growth spread except for Ayala Corporation (AC:PHL) and PLDT, Inc. (TEL:PHL). Among these companies, JG Summit Holdings, Inc. (JGS:PHL), Ayala Land, Inc. (ALI:PHL), SM Investments Corporation (SM:PHL), and SM Prime Holdings, Inc. (SMPH:PHL) have the highest positive Uniform earnings growth spread.

The market is pricing JGS’s Uniform Earnings to shrink by 242% in the next two years, while sell-side analysts are projecting the company’s earnings to grow immaterially.

Likewise, the market is pricing ALI’s Uniform Earnings to grow by 13% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 104%.

Similarly, the market is pricing SM’s Uniform Earnings to grow by 11% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 68%.

As for SMPH, the market is pricing its Uniform Earnings to grow by 23% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 68%.

Overall, as-reported numbers would have investors incorrectly conclude that this portfolio consists of low-quality companies. While these firms suffer from the adverse effects of the coronavirus pandemic, dragging down their short-term earnings growth expectations, Uniform Accounting metrics show that these mature, low growth, but high return companies have intact business models that should drive economic profitability moving forward.

SUMMARY and Universal Robina Corporation Tearsheet

Today, we’re highlighting one of the individual stock holdings in the UnionBank PSE Index Tracker Fund—Universal Robina Corporation (URC:PHL).

As the Uniform Accounting tearsheet for Universal Robina highlights, it trades at a Uniform P/E of 28.3x, above the global corporate average of 23.7x, but below its historical average of 32.4x.

High P/Es require high EPS growth to sustain them. In the case of Universal Robina, the company has shown a 4% Uniform EPS growth in 2020.

Sell-side analysts provide stock and valuation recommendations that poorly track reality. However, sell-side analysts have a strong grasp on near-term financial forecasts like revenue and earnings.

We take sell-side forecasts for Philippine Financial Reporting Standards (PFRS) earnings as a starting point for our Uniform earnings forecasts. When we do this, Universal Robina’s sell-side analyst-driven forecast is a 29% and 9% EPS growth in 2021 and 2022, respectively.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify URC’s PHP 140 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to grow by 12% per year over the next three years. What sell-side analysts expect for Universal Robina’s earnings growth is above what the current stock market valuation requires in 2021 but below its requirement in 2022.

Furthermore, the company’s earning power is around long-run corporate averages, and cash flows and cash on hand are slightly above total obligations. Based on its operating risk and refinancing capability, it has an intrinsic credit risk of 120bps above the risk free rate. All in all, these signal a low dividend risk and moderate credit risk.

To conclude, Universal Robina’s Uniform earnings growth is above peer averages, and is also trading well above peer average valuations.

About the Philippine Markets Daily
“Friday Uniform Portfolio Analytics”;

Investors who don’t engage in the buying or selling of securities for a living often rely on professionals to manage their own investments within the scope of their investment policies.

With so many funds and managers out there, it can get confusing and difficult to decide which one best suits your needs as an investor.

Every Friday, we focus on one fund in the Philippines and take a deeper look into their current holdings. Using Uniform Accounting, we identify the high-quality stocks in their portfolio which may not be obvious using the as-reported numbers.

We also identify which holdings may be problematic for the fund’s returns that they would need to reconsider from a UAFRS perspective.

To wrap up the fund analysis, we highlight one of their largest holdings and focus on key metrics to watch out for, accessible in our tearsheets.

Hope you’ve found this week’s focus on UnionBank PSE Index Tracker Fund interesting and insightful.

Stay tuned for next week’s Friday Uniform Portfolio Analytics!


Angelica Lim
Research Director
Philippine Markets Daily
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