Philippine Markets Newsletter

They find ways! BDO’s equity UITF beat PSEi, 310% vs 286%, since 2005—Uniform Accounting shows the real type of companies they buy

March 6, 2020

Filipinos in search of the best investment vehicle have surely come across unit investment trust funds or UITFs. But others may still wonder what UITFs really are and how they differ with mutual funds.

We aim to answer those questions in today’s PMD.

We also take a look at the country’s top UITF provider and its first equity UITF, which has delivered +300% investment returns since it launched almost 15 years ago.

As-reported financial numbers would lead investors to believe that the firm is managing an average trust fund. However, Uniform Accounting shows that their portfolio managers know what they are doing.

In addition, we’re 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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Unit investment trust funds (UITFs, trust funds), like mutual funds, are pooled money from various investors who seek to preserve or grow their capital. Both of them have four broad types—money market, bond, balanced, and equity. Investment returns are not guaranteed for each of them, but they are handled by professional money managers who attempt to mitigate losses.

While the birth of mutual funds in the country can be traced back to as early as the 1950s, the creation of UITFs commenced 50 years later.

In September 2004, the monetary board of the Bangko Sentral ng Pilipinas (BSP) phased out Common Trust Funds (CTFs) and shifted to UITFs to align the management of pooled funds with global best practices, position UITF as a critical instrument in supporting the evolving domestic capital market, and provide investors more investment opportunities.

BSP has made huge progress in this cause as they saw the country’s UITF industry balloon from around Php 25.7 billion at the onset of 2005 to a whopping Php 768 billion as of 2017.

The major difference between mutual funds and UITFs is that mutual funds are operated by their respective mutual fund companies, while UITFs are offered by banks.

The country’s largest UITF provider is BDO Unibank with a 37% market share. BDO is the largest bank in the Philippines in terms of sheer size with Php 3.97 trillion assets. Currently, BDO has 27 investment funds, boasting Php 214 billion assets under management.

BDO launched its first equity trust fund, BDO Equity Fund, in May 2005. The fund seeks to generate investment returns similar to or greater than the Philippine Stock Exchange Index (PSEi) over the medium to long term.

The fund has outperformed its benchmark with a 310% stock return since inception, versus the 286% stock performance generated by the PSEi over the same timeframe.

The table below shows the top non-financial holdings of the BDO Equity Fund along with their Uniform return on assets (ROA), as-reported ROA, and ROA distortion—the difference between Uniform and as-reported ROA.

Looking solely at the as-reported ROA numbers, you may wonder why several of these companies were chosen since their returns look quite poor. Most of them have returns less than the global corporate average returns of 6%.

Contrary to what as-reported numbers suggest, these companies are actually quite profitable, with real earnings well above cost-of-capital levels.

Uniform ROA metric paints a different picture, showing robust returns ranging from 7% to 14%.

As such, it should not be surprising that when analyzing the non-financial holdings of the BDO Equity Fund, the figure that stands out is the huge discrepancy between Uniform ROA and as-reported ROA.

While the difference in raw figures may not seem too distant, the distortion in percentage ranges from 29% to 153%, with Ayala Corporation (AC:PHL) and International Container Terminal Services (ICT:PHL) both having distortions greater than a hundred percent.

This chart shows three interesting data points:

  1. The 2-year Uniform 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 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 6% annual Uniform earnings growth over the next few years. BDO Equity Fund’s top holdings are forecast to surpass that with 14% projected Uniform earnings growth in the next two years.

Meanwhile, the market is seeing these companies grow by 3% a year, mispricing earnings growth by an average of 11%.

Among these companies, JG Summit Holdings, Inc. (JGS:PHL) has the highest Uniform earnings growth dislocation. The market is pricing this conglomerate to grow its earnings by 2% in the next two years. Meanwhile, sell-side analysts are seeing robust 32% Uniform earnings growth.

Another company with understated earnings growth is SM Investments Corporation (SM:PHL), one of the country’s top conglomerates. The market is pricing SM’s earnings to shrink by 1% in the next two years. However, sell-side analysts are expecting 21% Uniform earnings growth in the same time period.

Meanwhile, International Container Terminal Services (ICT:PHL) is forecast to see Uniform earnings grow by 2% a year over the next two years, but the market is pricing ICT to have a 13% Uniform earnings shrinkage moving forward.

With an average as-reported ROA of 5% and market-expected earnings growth of 3% annually, one might think that the BDO Equity Fund portfolio is below average.

However, through the lens of Uniform Accounting, for the most part, BDO Equity Fund’s portfolio looks like a high-quality, undervalued set of stocks with businesses displaying strong earning power potential.

SM Prime Holdings Equity Ventures Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in BDO Equity Fund—SM Prime Holdings, Inc.

As our Uniform Accounting tearsheet for SM Prime Holdings (SMPH:PHL) highlights, Uniform P/E trades at 28.3x, above global corporate averages but slightly below its historical averages.

High P/Es require high EPS growth to sustain them. In the case of SM Prime Holdings, the company has recently shown a 20% Uniform EPS growth.

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, SM Prime Holdings’ sell-side analyst-driven forecast shows a Uniform earnings growth of 12% in 2020 and 13% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 38 per share. These are often referred to as market embedded expectations.

In order to meet the current market valuation levels of SM Prime Holdings, the company would have to have Uniform earnings grow by 11% each year over the next three years. What sell-side analysts expect for SM Prime Holdings earnings growth is just above what the current stock market valuation requires.

The company has an earning power greater than long-run corporate averages—based on its Uniform ROA calculation. However, with cash flows and cash on hand falling short of obligations within five years, SM Prime Holdings has a high credit and dividend risk.

To conclude, SM Prime Holdings’ Uniform earnings growth is above peer averages in 2021. However, the company is 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 oftentimes 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 the BDO Equity Fund interesting and insightful.

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


Angelica Lim & Joel Litman
Research Director & Chief Investment Strategist
Philippine Markets Daily
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