Philippine Markets Newsletter

This UITF from a 60-year-old bank outperformed the PSEi, plus its holdings still have potential upside…also, SM tearsheet

August 6, 2021

This unit investment trust fund (UITF) outperformed its benchmark, the Philippine Stock Exchange Index (PSEi). Moreover, the average Uniform ROA for this UITF’s holdings is 5%, almost 2x the as-reported average.

Although as-reported metrics would leave investors confused with the fund’s stock picks, Uniform Accounting helps make sense of the fund’s investments.

In addition to examining the fund’s portfolio, we are including the 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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Rizal Commercial Banking Corporation (RCBC) was established in 1960 as a development bank. RCBC is majority-owned by the Yuchengco Group of Companies, one of the largest conglomerates in Southeast Asia. Today, RCBC is one of the largest private domestic banks in the Philippines, with over 418 branches and 1,375 ATMs.

RCBC offers financial services to its customers through its retail and investment bank, microfinance unit, foreign exchange brokerage house, leasing company, and overseas remittance tie-ups.

We’ve analyzed some of RCBC’s UITFs before:

This week, we’ll be revisiting the Rizal Equity Fund.

The Rizal Equity Fund was established on March 28, 2005. The fund pools together Philippine Peso denominated funds of various investors for investment and reinvestment in a portfolio of local equities and initial public offerings listed in the Philippine Stock Exchange (PSE). Through this, the fund aims to surpass its benchmark, the Philippine Stock Exchange Index (PSEi).

The Rizal Equity Fund is suitable for investors who have aggressive risk appetites and who seek considerably high returns on capital. The fund is currently invested in at least 81% of selected shares of stock, while the remaining 19% is in cash and time deposits.


At its inception in March 2005, Rizal Equity Fund’s net asset value per unit (NAVPU) was at PHP 1.00. After gaining 92% to reach a NAVPU of PHP 1.92 in July 2007, it dropped to nearly half of its value at PHP 1.09 in October 2008 due to the ripple effect of the global financial crisis. The fund recorded a loss of 43%, outperforming its benchmark, the PSEi, which incurred a loss of 55% over the same period.

After reaching this October 2008 low, the fund recovered in the succeeding years. By May 2013, its NAVPU was at PHP 3.77, delivering a 245% gain from its previous low, though still underperforming the PSEi’s gain of 334%.

However, NAVPU dropped by 22% to PHP 2.94 in January 2016 due to the oil price crash. Meanwhile, the PSEi only incurred a loss of 18% in the same period.

By the end of 2019, the fund had rebounded by 32% to a NAVPU of PHP 3.87 before falling once more to PHP 2.34 in March 2020, due to the coronavirus-induced market selloff. The fund recorded a 39% loss since the end of 2019, slightly outperforming its benchmark’s 41% loss.

Currently, the fund’s NAVPU has recovered to PHP 3.29 as of August 2, 2021, a 40% gain that only slightly outperformed its benchmark’s gain of 39%.

Since its inception, Rizal Equity Fund has had a cumulative 229% gain versus its benchmark’s cumulative 224% gain.

As-reported metrics would have investors believe that the fund’s portfolio consists of companies that do not generate economic profit. However, Uniform Accounting reveals the truth behind the companies this fund invests in.

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


All of the companies in the Rizal Equity Fund show as-reported ROAs at or below cost-of-capital levels, suggesting that they are not generating economic profit. Moreover, the fund is generating an average as-reported ROA of 3%, significantly 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 5%.

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 Rizal Equity 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 -162% to 150%, with Ayala Corporation (AC:PHL), SM Investments Corporation (SM:PHL), and Ayala Land, Inc (ALI:PHL), having the highest positive 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% in line with the average cost of capital. Prior to the pandemic, it consistently generated returns of at least 9% through 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%. In reality, this is an average firm with a 6% Uniform ROA. It has consistently generated returns of at least 8% through 2005 to 2019.

Likewise, as-reported metrics understate the profitability of Ayala Land, Inc., suggesting an unprofitable firm with an as-reported ROA of 2%. In reality, it has a 4% Uniform ROA, or exactly double its as-reported ROA. Furthermore, it has generated returns of at least 8% over the past 10 years.

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 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, Rizal Equity Fund’s major holdings are forecasted to significantly outperform with a 59% projected Uniform earnings growth in the next two years, while the market is forecasting a slight outperformance with a 14% projected Uniform earnings growth.

All the companies in the Rizal Equity Fund have a positive Uniform earnings growth spread except for JG Summit Holdings, Inc. (JGS:PHL) and PLDT, Inc. (TEL:PHL). Among these companies, Ayala Corporation, Ayala Land, Inc., and SM Investments Corporation have the highest positive Uniform earnings growth spread.

The market is pricing AC’s Uniform earnings to grow by 4% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 245%.

On the other hand, the market is pricing ALI’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 103%.

Similarly, the market is pricing SM’s Uniform earnings to grow by 8% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 64%.

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

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 companies have intact business models that should drive economic profitability moving forward.

SUMMARY and SM Investments Corporation Tearsheet

Today, we’re highlighting one of the individual stock holdings in the Rizal Equity Fund, SM Investments Corporation (SM:PHL).

As our Uniform Accounting tearsheet for SM Investments Corporation highlights, it trades at a Uniform P/E of 25.0x, around the global corporate average of 23.7x, but below its historical average of 26.7x.

Moderate P/Es require moderate EPS growth to sustain them. In the case of SM Investments Corporation, the company has shown a 67% Uniform EPS shrinkage 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, SM Investments Corporation’s sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 71% and 58% in 2021 and 2022, respectively.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify SM Investments Corporation’s PHP 910.50 stock price. These are often referred to as market embedded expectations.

SM Investments Corporation is currently being valued as if Uniform earnings were to grow by 8% per year over the next three years. What sell-side analysts expect for SM Investments Corporation’s earnings growth is above what the current stock market valuation requires in both 2021 and 2022.

The company has an earning power in line with long-run corporate averages, but its cash flows and cash on hand fall short of obligations from 2022-2025. However, the company has an intrinsic credit risk of just 70bps. Together, these indicate that SM Investments Corporation has a low credit risk but high dividend risk.

To conclude, SM Investments Corporation’s Uniform earnings growth is below peer averages, but is trading 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 the Rizal Equity 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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