Manulife has been in the Philippines since 1907 to provide financial services and life insurance to Filipinos. It was recently recognized at the 19th Philippine Quill Awards for its highly customizable insurance product HealthFlex, and its financial literacy program Peso Smart. Moreover, Manulife kicked off CSR initiatives by partnering with NGOs to address nutrition security and infrastructure development issues and to empower the sustained health and well-being of Filipinos.

We take a look at one of the unit investment trust funds (UITFs) offered by the institution. In addition to examining the fund’s portfolio, we are including a 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 Newsletter:
Friday Uniform Portfolio Analytics
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In 2017, Manulife Philippines launched one of the first in-the-market investment solutions, becoming the first and only trust investment company offering UITFs invested in Asia-Pacific REITs, global REITs, global preferred securities, and India Equity.

Manulife became one of the top investment houses, recognized by The Asset in the 2021 Benchmark Research Awards. It also received recognition from the 19th Philippine Quill Awards for the integrated marketing campaign of its highly customizable insurance product HealthFlex, and its financial literacy program Peso Smart.

As we continue to monitor Manulife’s performance, let’s focus on one of its UITFs — Manulife Equity Wealth Fund (Class I).

Manulife Equity Wealth Fund is a product of Manulife Investment Management and Trust Corporation launched on September 18, 2017. It aims to achieve long-term capital appreciation by investing in stocks listed on the Philippine Stock Exchange, fixed-income securities, and other liquid fixed-income instruments. The Fund’s benchmark is the Philippine Stock Exchange index.

A fund such as this one is suitable for investors who are at least classified as aggressive based on their risk profile. Additionally, investors are advised to stay invested in the Fund for at least five (5) years.

• At its inception in September 2017, Manulife Equity Wealth Fund’s beginning net asset value per unit (NAVPU) was PHP 1.00. The fund’s value dropped by 17% in October 2018 on concerns over high inflation and expectations of additional policy rate hikes before the end of the year from both the Bangko Sentral ng Pilipinas (BSP) and the United States (US) Federal Reserve.
  
  
• On the announcement of the lockdown due to the pandemic, the fund price shrunk by 29% at PHP 0.59. During the period, the PSEi slightly underperformed the fund with a loss of 33%.
  
  
• In January 2021, the fund recovered and maintained NAVPU around PHP 0.89 which lasted for a month, a 51% growth from its lowest in March 2020, as the economy recovers from the effects of COVID-19. PSEi also recovered and climbed by 58% in the same period.
  
  
• The NAVPU slightly shrunk by 14% to PHP 0.76 as the country had another tightening of economic activities and its benchmark slightly underperformed by shrinking 16%.
  
  
• The fund saw a recovery in the succeeding months, reaching another high of PHP 0.92 in November 2021 and maintaining this level until February 2022. This 21% growth is attributed to a more vaccinated population and the easing of travel restrictions in the country. The fund is in line with the PSEi’s gain of 21% in this period.
  
  
• In less than a year, however, the fund’s NAVPU dropped to PHP 0.75 following the Russia-Ukraine conflict, oil crisis, and raising of inflation rate. Furthermore, this 20% shrinkage is slightly outperforming its benchmark’s drop of 23%.

Even though the fund’s performance hasn’t been better than the market’s, it does not mean the companies in its holdings are of lower quality. As-reported metrics would have investors believe that the fund’s portfolio consists of companies that do not generate economic profit. Uniform Accounting reveals the truth behind the companies this fund invests in.

The table below shows the top eight core non-financial holdings of Manulife Equity Wealth Fund (Class I) 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 Manulife Equity Wealth Fund (Class I) show as-reported ROAs below cost-of-capital levels, suggesting that they are not generating economic profit. Moreover, the fund is generating an average as-reported ROA of 4%, slightly lower than the global corporate average returns of 6%.

However, on a Uniform Accounting basis, this UITF’s holdings have actually delivered better profitability with an average Uniform ROA of 8%, doubled the average as-reported ROA.

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 Manulife Equity Wealth Fund (Class I), 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 -259% to 269%, with International Container Services, Inc. (ICT:PHL), SM Investments Corporation (SM:PHL) and Ayala Corporation (AC:PHL) having the highest positive distortions.

Of these holdings, only JG Summit Holdings, Inc. (JGS:PHL) was revealed to have a lower Uniform ROA, presenting a potential cause for concern. Companies such as this need to be closely monitored for drastic changes that could negatively affect the fund itself, especially when the support behind the stocks’ performance begins to wane.

As-reported metrics understate the profitability of International Container Services, Inc., suggesting an above-average firm with an as-reported ROA of 9%. In reality, this firm more closely resembles one that is outperforming, with a Uniform ROA of 33% above the average cost of capital. In addition, the company has consistently generated returns of at least 10% over the past half-decade.

Similarly, as-reported metrics understate the profitability of SM Investments Corporation with an as-reported ROA of 4%. In fact, its Uniform ROA is at 9%. Furthermore, the company reported a Uniform ROA of at least 6% over the past decade.

Likewise, as-reported metrics understate the profitability of Ayala Corporation, suggesting a below-average firm with an as-reported ROA of only 2%, when this company actually has a 5% Uniform ROA. Moreover, prior to the pandemic, the company has maintained to generate returns of at least 10% since 2006.

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 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 two-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, Manulife Equity Wealth Fund (Class I)’s major holdings are forecasted to significantly outperform with a 36% projected Uniform earnings growth in the next two years, while the market is forecasting an average with a projected 26% Uniform earnings decline.

Most of the companies in Manulife Equity Wealth Fund (Class I) have positive Uniform earnings growth. Among these companies, Ayala Corporation (AC:PHL), Ayala Land, Inc. (ALI:PHL), and SM Investments Corporation have the highest positive Uniform earnings growth spread.

The market is pricing Ayala Corporation’s Uniform earnings to grow by 2% in the next two years, while sell-side analysts are projecting 144% growth for the company’s earnings.

Moreover, the market is pricing Ayala Land Inc.’s Uniform earnings to grow by 9% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 69%.

Additionally, the market is pricing SM Investments Corporation’s Uniform earnings to have immaterial growth in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 31%.

Overall, as-reported numbers would significantly understate the expected earnings of these companies as shown by the Uniform-adjusted sell-side estimates.

Uniform Accounting metrics show that these mature, but high growth and 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 largest individual stock holdings in Manulife Equity Wealth Fund (Class I), Universal Robina Corporation (URC:PHL).

As the Uniform Accounting tearsheet for Universal Robina Corporation highlights, the company trades at a Uniform P/E of 22.1x, above the global corporate average of 17.8x but below its historical average of 35.1x.

Low P/Es require low EPS growth to sustain them. In the case of Universal Robina Corporation, the company has shown a 19% Uniform EPS growth last year.

Sell-side analysts provide stock and valuation recommendations that poorly track reality. However, sell-side analysts have a strong grasp of 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 Corporation’s sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 24% and 18% in 2022 and 2023, respectively.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify Universal Robina Corporation’s PHP 109.40 stock price. These are often referred to as market-embedded expectations.

Furthermore, the company has an earning power 1x the long-run corporate averages. Moreover, its cash flows and cash on hand consistently exceed obligations, and it also has an intrinsic credit risk of 280bps. Together, these indicate a low dividend risk and moderate credit risk.

Lastly, Universal Robina Corporation’s Uniform earnings growth is in line with peer averages, and is above peer average valuations.

About the Philippine Markets Newsletter
“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 at the end of the month, 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 Manulife Equity Wealth Fund (Class I) interesting and insightful.

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

Regards,

Angelica Lim
Research Director
Philippine Markets Newsletter
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