Philippine Markets Newsletter

Uniform Accounting unveils the secret behind this mutual fund’s 10-year market outperformance

February 28, 2020

The Philippine Stock Exchange is one of the longest operational stock markets in Asia. However, only less than 1% of the Filipino population has capitalized on this to grow their wealth.

Fortunately, thanks to the combined efforts of various retail brokerages and increased awareness of financial independence, even the average office worker can now own a small part of some of the country’s largest companies.

Today’s featured mutual fund was launched around 15 years ago to provide small investors an opportunity to invest in the stock market by offering low initial investment requirements.

In addition, we’re including a deeper look into one of the fund’s largest current holding, 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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Mutual fund investing is not entirely new in the Philippines. According to the Philippine Investment Funds Association (PIFA), the history of mutual funds in the country can be traced back to the 1950s, driven by the global expansion of off-shore funds.

However, the country’s mutual fund industry failed to thrive due to the lack of government regulation, deteriorating economic environment, unstable political condition, and an undeveloped equity market.

Around 40 years later, the increasing role of mutual funds in the development of capital markets revived the industry. The Securities and Exchange Commission (SEC) enacted the Implementing Rules and Regulations (IRR) of the industry and in February 1991, Galleon Fund registered as the first Philippine mutual fund under the new IRR.

Today, despite the improving stability of stocks and mutual funds in the country, the Philippines still lags behind other nations when it comes to equity investing.

According to the Bangko Sentral ng Pilipinas, only 3% of the population invests their money in stocks, bonds, mutual funds, and other managed investment programs as of 2017. Both the lack of capital and financial literacy appeared to be the top reasons why most Filipinos don’t invest in equities.

While there are a lot of mutual funds now with low initial investments (as low as PHP 1,000.00), it was First Metro Investment Corporation (FMIC) that was one of the few who initiated a fund that would cater for small investors.

FMIC launched First Metro Save & Learn Equity Fund on May 27, 2005 to provide small investors with the opportunity to access the capital markets and enable them to reap satisfactory returns on their investments.

First Metro Save & Learn Equity Fund is an actively-managed portfolio of selected quality stocks across multiple industries and sectors. It focuses on stocks with a strong balance sheet, attractive valuation, and growth potential.

The fund has outperformed its benchmark with 399% stock return since inception, versus the 272% stock performance generated by the Philippine Composite Index (PSEi) over the same timeframe.

Relying on the as-reported Philippine Financial Reporting Standards-based (PFRS-based) financial statements will make the fund’s portfolio holdings look ill-conceived. However, Uniform Accounting presents otherwise.

The table below shows the top non-financial holdings of First Metro Save and Learn 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 First Metro Save and Learn 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 162%, with International Container Terminal Services (ICT:PHL), Aboitiz Equity Ventures, Inc. (AEV:PHL), and Ayala Corporation (AC:PHL) 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. First Metro Save and Learn Equity Fund’s top holdings are forecast to surpass that with 13% projected Uniform earnings growth in the next two years.

Meanwhile, the market is seeing these companies grow by 4% a year, mispricing earnings growth by an average of 9%.

Among these companies, JG Summit Holdings, Inc. (JGS:PHL) has the highest Uniform earnings growth dislocation. Just last month, JG Summit and DHL entered into a joint venture to form DHL Summit Solutions Inc. to capitalize on the growing logistics needs of the Philippines.

The market is pricing this conglomerate to grow its earnings by 8% in the next two years. Meanwhile, sell-side analysts are seeing robust 32% Uniform earnings growth.

Another company with understated earnings growth is SM Prime Holdings (SMPH:PHL), one of the country’s top property developers. The market is pricing SM Prime’s earnings to shrink by 1% in the next two years. However, sell-side analysts are expecting no Uniform earnings growth in the same time period.

Meanwhile, there is one company in the portfolio that we recommend First Metro take a deeper look on.

Universal Robina Corporation (URC:PHL) is forecast to see Uniform earnings grow by 18% a year over the next two years, but the market is pricing URC to have 22% Uniform earnings growth moving forward.

With an average as-reported ROA of 5% and market-expected earnings growth of 4% annually, one might think that the First Metro Save and Learn Equity Fund portfolio is weak.

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

Aboitiz Equity Ventures Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in First Metro Save & Learn Equity Fund—Aboitiz Equity Ventures, Inc.

As our Uniform Accounting tearsheet for Aboitiz Equity Ventures (AEV:PHL) highlights, Uniform P/E trades at 13.2x, well below market average valuations and below its historical averages.

Low P/Es require low, and even negative, EPS growth to sustain them. In the case of Aboitiz Equity Ventures, the company has recently shown a 5% Uniform EPS shrinkage.

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, Aboitiz Equity Ventures’ sell-side analyst-driven forecast shows a 23% Uniform earnings shrinkage in 2019, followed by 40% growth in 2020.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 51 per share. These are often referred to as market embedded expectations. Even if Aboitiz Equity Ventures’ Uniform earnings shrinks by 8% over the next three years, they will meet their current market valuation levels.

What sell-side analysts expect for Aboitiz Equity Ventures’ earnings growth is above what the current stock market valuation requires.

To conclude, Aboitiz Equity Ventures’ Uniform earnings growth is below peer averages in 2020. However, the company is trading below average valuations of their peers.

The company has above average earning power—doubling corporate average returns—based on its Uniform ROA calculation. However, their cash flows and cash on hand falling short of obligations within five years signals a high dividend risk.

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 First Metro Save and Learn 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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