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JCFAP Lecture Series:
Insular Life Edition
Insular Life MPH, Makati City August 24, 2013
ARMAN V. CRUZ, CSE, LPT, MBA, DPA
Founding President Finance Educators Association (Fin.Ed) Professor & Former Chairperson Finance and Economics Department, Adamson University Independent Consultant United States Agency for International Development (USAID) @ University of the Philippines Diliman Member: Association of Marketing Educators (AME); Council of Economics Educators (CECON)
PLAN OF TALK Reality Check & Financial Planning Simulation The Lecture: Financial Market & All About Bonds The Business Situation Investment Options Draw from Personal Experience Final Words __________________________________ __________________________________ __________________________________
Risk mgmt. CHIEF FINANCE OFFICER Ayala Land, Inc. I.T. Lets start with the business game Reality Check & Decision Making To be a Millionaire To be a Millionaireby fate To be a Millionaireby choice To be a Millionaire by chance To be a Millionairebe an artist To be a Millionaire be a sports enthusiast
Perception Exercise (A) Perception Exercise (B)
Inter-connected Disciplines Accounting Past
Management Present
Finance Future You and you alone set the limits of your performance. You and you alone set the limits of your success. Emil Quinto It doesn't matter who you are, where you come from. The ability to triumph begins with you. Always.
- Oprah Winfrey 16 Now what you have??? Income Savings = Expense Financial Management Process Resources Generation
Fund Allocation
Capital Structuring
Profit Supervision
Control Financial Planning Simulation Client Suitability Assessment ANSWER No. of Answers x Points = Total Score per Answer A B C D Total Risk Score Financial Planning Simulation Client Suitability Assessment Investment Needs Financial Planning Simulation Client Suitability Assessment 1. Investment Objective:
What is your key investment objective?
a.) To protect principal amount of investments and earn steady stream of interest income. b.) To preserve capital or real value of investments c.) To achieve growth through a balance between interest income and capital gain over a medium term period. d.)To achieve significant growth or capital appreciation over the medium to long term period Financial Planning Simulation Client Suitability Assessment 2. Investment Period:
What portion of your investment can be placed in medium or long term investments, ie. more than 3 years?
a.) 10% to 30% b.) 40% to 60% c.) 70% to 80% d.) 90% to 100% Financial Planning Simulation Client Suitability Assessment 3. Liquidity:
Do you have regular liquidity requirements?
a.) I need to draw regular income from my investments and may use a portion of the principal in the short term b.) I do not need to draw regular income from my investments nor do I see the immediate need to use any portion of the principal in the short term. c.) I have other sources of liquidity and do not see a real need to use funds for the next 5 to 10 years d.) I have other sources of liquidity and do not see a real need to use funds for the next 10 years Financial Planning Simulation Client Suitability Assessment Risk Appetite Financial Planning Simulation Client Suitability Assessment 1. Investment Knowledge and Experience
1.1 What is your knowledge and experience on investments?
a.) Minimal. I know bank deposits, BSP SDA, T-Bills and Money Market placements. b.) Low. Outside deposits and short term government securities, I have experience investing in money market funds such as corporate bonds and fixed income bonds. c.) Medium. I have experience investing in mutual funds, UITFs, foreign currencies and direct investment in listed stocks and bonds. d.) High. I have an extensive experience in investing and have a broad understanding of the domestic and global capital markets in general. Financial Planning Simulation Client Suitability Assessment 1. Investment Knowledge and Experience
1.2 How many years of experience have you had investing in securities, either directly or through a fund manager?
a.) 1 year or less b.) More than 1 year up to 5 years c.) More than 5 years up to 10 years d.) More than 10 years Financial Planning Simulation Client Suitability Assessment 2. Risk Tolerance
2.1 What is your tolerance for risk?
a.) I accept steady and minimal returns without any fluctuation in the principal amount of my investments b.) I accept minimal fluctuations in the principal amounts of my investments for commensurate returns. c.) I accept a fair amount of fluctuation in the principal amount of my investments in order to achieve above average returns and capital growth over the medium term. d.) I am prepared for high degree of volatility and possibly losses for certain periods in the principal amount of my investment in order to achieve high returns or capital growth over a period of 5 years or more Financial Planning Simulation Client Suitability Assessment 2. Risk Tolerance
2.2 If the value of your portfolio decreased by 20% in one year, how would you react?
a.) I will be very concerned and will immediately put my investment back to cash ( ie. in the form of deposits and/or short term government securities) b.) I will be very concerned and will find safer investment outlets which are not necessarily cash c.) I will be concerned and I will review the aggressiveness of my portfolio d.) I will NOT be concerned about the short-term fluctuation of certain investments in my portfolio Financial Planning Simulation Client Suitability Assessment 2. Risk Tolerance
2.3 What is your average net worth for the last 2 years?
a.) Php5 Million (US$100,000) and below b.) Over Php5 Million (US$100,000) up to Php30 Million (US$600,000) c.) Over Php30 Million up to Php60 Million (US$1.2Million) d.) Over Php60 Million Financial Planning Simulation Client Suitability Assessment ANSWER No. of Answers x Points = Total Score per Answer A 5 B 10 C 15 D 20 Total Risk Score Financial Planning Simulation Client Suitability Assessment Up to 70 points
Conservative. Principal protection or capital preservation is the main concern; would settle for lower but fixed returns
75 to 100 points
Moderately Conservative. Seeks a relatively stable return on investment that is slightly higher than tha of traditional term deposit
105 to 130 points
Moderately Aggressive. Seeks a relatively higher return on investment and is willing to invest in securities with tenors of more than 1 year, seeks a balance between growth in capital and income
Over 130 points
Aggressive. Growth and earning the highest returns are the main concern and is willing to take possible loss of initial investment in return for potential higher long term results. Financial Planning Financial Planning is planning for and managing lifes financial outcomes
WHAT FINANCIAL PLANNING CAN DO FOR YOU? Put You In Control of Your Financial Situation
Provide Clarity and Purpose Toward Fulfilling Lifestyle Goals
Provide Financial Peace of Mind
Financial Market Overview Overview of the Financial Market Financial Market Money Markets Bank accounts Treasury bills Commercial Papers Capital Markets Bonds Equities www.pseacademy.com.ph Risk and Reward Principle Low risk High risk Options Futures Stocks Real estate Equity mutual funds High income bonds or debt Government bonds or debt Money market or bank accounts Cash deposits, notes, bills Cash and cash equivalents Base Middle Summit moderately aggressive moderately conservative conservative aggressive Overview of the Financial Market www.pseacademy.com.ph Two Methods of Long-Term Financing Resources = Sources Stockholders Equity Assets Liabilities Equity Financing: Stockholders Debt Financing: Bondholders Bondholders Bonds (debt)Interest payments to bondholders are an expense that reduces taxable income. Stock (equity)Dividend payments are made from after tax net income and retained earnings. Earnings per share on common stock can often be increased by issuing bonds rather than additional stock. Why issue bonds rather than stock? Stockholders Two Methods of Long-Term Financing BONDS Bond Terminology Copyright 2009 Pearson Prentice Hall. All rights reserved. Capital Market Participants
Primary issuers of securities: National and local governments: debt issuers Corporations: equity and debt issuers
Largest purchasers of securities: You and me Characteristics of Bonds Payable A bond contract is called a bond indenture or trust indenture. Long-term debtrepayable 10, 20, or 30 years after date of issuance. Issued in face (principal) amounts of $1,000, or multiples of $1,000. Contract interest rate is fixed for term (life) of the bond. Face amount of bond repayable at maturity date. Characteristics of Bonds Payable 4 When all bonds of an issue mature at the same time, they are called term bonds. If the maturity dates are spread over several dates, they are called serial bonds. 4 Bonds that may be exchanged for other securities are called convertible bonds. 4 Bonds that a corporation reserves the right to redeem before maturity are callable bonds. 4 Bonds issued on the basis of the general credit of the corporations are debenture bonds. The Present-Value Concept and Bonds Payable When a corporation issues bonds, the price that buyers are willing to pay depends upon three factors: 1. The face amount of the bonds, which is the amount due at the maturity date. 2. The periodic interest to be paid on the bonds. This is called the contract rate or the coupon rate. 3. The market or effective rate of interest. Copyright 2009 Pearson Prentice Hall. All rights reserved. Bonds Bonds are securities that represent debt owed by the issuer to the investor, and typically have specified payments on specific dates.
Types of bonds we will examine include long-term
1. Government bonds (T-bonds), and 2. Corporate bonds. Treasury Bond No default risk since the Treasury can print money to payoff the debt Very low interest rates, often considered the risk- free rate (although inflation risk is still present) Treasury Inflation-Indexed Securities: the principal amount is tied to the current rate of inflation to protect investor purchasing power Treasury STRIPS: the coupon and principal payments are stripped from a T-Bond and sold as individual zero-coupon bonds.
Treasury Notes and Bonds Treasury Bond Interest Rates Treasury Bond Interest Rates: Bills vs. Bonds Corporate Bonds Typically have a face value of $1,000, although some have a face value of $5,000 or $10,000 Pay interest semi-annually Corporate Bonds Cannot be redeemed anytime the issuer wishes, unless a specific clause states this (call option). Degree of risk varies with each bond, even from the same issuer. Following suite, the required interest rate varies with level of risk. The degree of risk ranges from low-risk (AAA) to higher risk (BBB). Any bonds rated below BBB are considered sub-investment grade debt.
Debt Ratings Making money: Interest and capital gains There are two ways to make money from a bond either by earning interest or capital gains. Let's say that you have a $1,000 bond that pays 6% interest for five years. If you hold that bond until the very end of this term (known as the maturity date), youll collect five interest payments of $60 for a total of $300. $60.00 Year 1 (6% interest on $1,000) Year 2 (6% interest on $1,000) $60.00 Year 3 (6% interest on $1,000) $60.00 Year 4 (6% interest on $1,000) $60.00 $60.00 Year 5 (6% interest on $1,000) $1,300.00 Total principal and interest (at maturity date of 5 years) Principal amount $1000.00 You could also decide to sell that bond to someone else for $1,100. In that case youd earn a capital gain of $100 (plus whatever interest payments you had received in the meantime).
Now, why would someone pay you $1,100 for a bond that only cost you $1,000? Selling bonds @ Premium & Discount Your $1,000 bond pays 6% interest. Since you bought that bond, however, interest rates have gone down. Similar companies are now only offering a 5% interest rate on their bonds. Your original rate looks pretty good to another investor. So you can sell that 6% bond at a higher cost than you paid for it, which is called selling for a premium. However, if interest rates have gone up, and similar companies are now offering 8%, you may have to sell your bond for less which is known as selling at a discount. Interest rates and bond prices, then, are like a see- saw when interest rates go down, bond prices go up (and vice versa). Areas of Consideration Bond Market Top-Down Approach A. Economy (Phils.) B. Industry (Banks) C. Company (BPI) I. FUNDAMENTAL ANALYSIS Measures of Economic Activity Consumer Spending Inflation Gross Domestic Product Foreign Exchange Rate Interest Rate Unemployment National Debt Balance of Trade I. FUNDAMENTAL ANALYSIS Involves examination of a firms accounting statements and other financial and economic information to assess the economic value of a companys stock
Getting to know the company background and history Understanding the corporate culture management styles and practices, industry standing, diversification policies
Ratio analysis Trend analysis company valuation Qualitative Quantitative I. FUNDAMENTAL ANALYSIS Financial Statements Income Statement Balance Sheet Cash Flow Statement I. FUNDAMENTAL ANALYSIS Financial Ratios RATIOS A. Profitability B. Asset-Utilization C. Liquidity D. Debt-Utilization E. Market/Price F. Others FIGURE/RATIO 1. Net Income 2. Dividend Yield 3. Earnings Per Share 4. Price Earnings 5. Price to Book Value 6. Return on Equity 7. Du Pont Analysis I. FUNDAMENTAL ANALYSIS II. Technical ANALYSIS Chart CANDLE STICK = = Personal Finance and Investment RISK REWARD TRADEOFF
Higher Risk Higher Return of Product Potential
Lower Risk Lower Return of Product Potential
The Business Situation Know the economic scenario. The world remains in a slump as the global economy experiences one of the worst crises. In the US, 15 Million people have lost their jobs since 2007. Former Federal Reserve Chairman Allan Greenspan said that, last month, another 260,000 US citizens became unemployed such that unemployment rate will most likely hit double digits. Now. ..Bernakes announcement of tapering investment
The moment one gives close attention to anything, even a blade of grass, it becomes a mysterious, awesome, indescribably magnificent world in itself. - Buddha The Asian financial crisis 65 Enron and other scandals 66 The U.S. subprime mess 67 | 4
Eurozone: A Continuous Gloom and Contagion
The countries of the Eurozone are suffering from an excessive level of Debts.
The recent bailout of banks in Spain saved the Spanish Financial system and the corner stone of the contagion (firewall) of the Greek crisis.
A crisis usually starts by a default of payment: July is the big redemption month.
BPI-Philam Life Assurance Corp. confidential and proprietary information. Not for distribution. BPI-Philam Life Assurance Corp. Confidential and proprietary information. Not for distribution Financial Crisis Reduction in customers of saving accounts. Due to low interest rate Insecurity policies of the bank, etc. Inability of customers to repay the loans Bad borrowing practices Elevated interest rates Unemployment and other external factors Financial Crisis Wiliness or Ability to Repay the loan Fore closures (inventory of homes) Value of houses Stability / liquidity of Banks Safe deposits/ Investmen ts Business loans and economic Activity Unemploy ment Subprime Mortgage Crisis Fall of financial institutions Fall of other Economic structures Investment Options What is the best FINANCIAL PRODUCTS COMMON FINANCIAL PRODUCTS YIELD MIN INV RISK ADVANTAGE DISADVANTAGE Low High Savings Savings / ATM 0.25% 1.00% 2,000 Low Liquidity / Access Low Interest Checking 0.00% 1.00% 5,000 Low Payment Convenience Low or No Interest Time Deposit 0.50% 3.00% 10,000 Low High Interest ST Lockup, Pre-term Chrg Special Dep Acct 3.50% 6.00% 1,000,000 Low Higher Interest 5Yr Lockup, High Entry Loans Credit Cards 18% 42% 3,000 n.a. Payment Convenience Interest & Annual Charges All Purpose Loan 12% 24% Equity n.a. Funds for All Purpose High Loan Rates / Reqs Home Loan 10% 15% Equity n.a. Funds for Property Purchase High Loan Rates / Reqs Auto Loan 10% 18% Equity n.a. Funds for Auto Purchase High Loan Rates / Reqs Business Loan 12% 24% Equity n.a. Set Up / Operating of Funds High Loan Rates / Reqs Insurance Life n.a. n.a. Ins Prem Low Answers "What If?" Low ROI Non-Life n.a. n.a. Ins Prem Low Property Conservation Cost / Claim Req Health n.a. n.a. Ins Prem Low No Cash Out Medical Cost of Insurance Pre-need n.a. n.a. Ins Prem Med Need Specific Reputation Variable ? ? Ins Prem Low-Med Insurance w/ Investment High Entry Investments Money Market 1.50% 5.00% 10,000 Low Short Term, Liquid Low Yield Trust Funds 3.00% 25.00% 50,000 Low-Med Diversification High Initial Entry Mutual Fund 3.00% 30.00% 5,000 Low-Med Fund Owner, Diversify, Low Initial Long Term Bonds 3.00% 12.00% 100,000 Med More Secure Moderate Yield High Initial for Corp Bonds Stocks ? ? Lot Size High High Return Potential Volatile, Min brokers Fees Personal Finance and Investment Low High Savings / ATM 0.25% 1.00% 2,000 Low Liquidity / Access Low Interest Checking 0.00% 1.00% 5,000 Low Convenience Low or No Interest Time Deposits 0.50% 3.00% 10,000 Low Higher Interest Lockup, Pre-term penalty Special Deposit Accounts 3.50% 6.00% 1,000,000 Low Higher Interest Lockup, Pre-term penalty Money Market 1.50% 5.00% 10,000 Low Short Term, Liquid Low Yield Trust Funds 3.00% 25.00% 50,000 Low-Med Diversification High Initial Entry, Long Term Mutual Funds 3.00% 30.00% 5,000 Low-Med Fund Owner, Diversification, Low Initial Long Term Bonds 3.00% 12.00% 100,000 Med More Secure Moderate Yield High Initial for Corp Bonds Stocks ? ? Lot Size High High Return Potential Volatile, Min brokers Fees RISK ADVANTAGE DISADVANTAGE Savings Investments COMMON FINANCIAL PRODUCTS YIELD MIN INV FINANCIAL PRODUCTS Personal Finance and Investment Investment STOCKS Mutual Fund Investment is a form of a Collective Investment Scheme, where Professional Fund Managers avail of many Prime Investments which require high investment funds to acquire. Investment returns are passed back to the investors reflected in the Net Asset Value of the Mutual Fund.
Investor I N V E S T
I N V E S T M E N T
R E T U R N S
Investor Investor Investor Investor Investor Investor EQUITY FUND (STOCKS) BOND FUND Investor Investor Investor Investor Investor Investment Fund Management & Securities Investment Returns thru NAVPs Pooled Funds Investment MUTUAL FUND Board Rate %
Asia United Bank 1.250 Banco De Oro 1.875 Bank of Commerce 1.750 Bank of the Phil. Island 2.125 Chinabank 2.750 Chinatrust 1.500 Deutsche 2.000 East West Bank 2.875 Metrobank 1.875 Phil. National Bank 2.000 Planters Bank 3.625 RCBC 2.250 Security Bank 2.500 Sterling Bank 3.625 UCPB 0.875 Union Bank 2.875 J une 2012 30 Day Peso Time Deposit Rates (Gross per annum, P1M) Board Rate %
Asia United Bank 0.750 Banco De Oro 0.375 Bank of Commerce 1.000 Bank of the Phil. Island 0.375 Chinabank 0.500 Chinatrust 0.500 Deutsche 0.010 East West Bank 1.500 Metrobank 0.250 Phil. National Bank 0.200 RCBC 0.438 Security Bank 0.500 Sterling Bank 1.875 UCPB 0.375 Union Bank 0.400 J une 2012 Dollar Time Deposit Rates (Gross per annum, P1M equiv)
1. Statement of Account 2. Text Message 3. E-mail 4. Official Website 5. Customer Service 6. Investment Servicer 7. Newspapers 8. PIFA Website Investment Monitoring Draw from Personal Experience
My RTBs Earnings Principal: Php30,000.00
Quarterly Interest: Php352.50
Annually: Php1,410.00
At maturity: Php7,050.00 Best practice institutions manage risk, not eliminate them.
The watchwords are:
Risk by choice, not by chance Exposure by choice, not by chance
Final Words
Investors Provide the capital When Profit comes through an exchange of a resource while one party befitting out of other's loss.
1. If the number of people fall in debt increases, IT IS PROFITABLE FOR BANKS.
2. If the number of patients increases, IT IS PROFITABLE FOR MEDICAL COMPANIES AND DOCTORS.
4. If there are competing students, IT'S PROFITABLE FOR A TUTOR.
5. If hundreds of people die every day, THE COFFIN MAKERS WILL BE HAPPY.
Invest in companies that are profitable today and will be more profitable in the coming years ahead. The road to improve profits Operating System called MONEY MONEY Creates Disparity Centralizes Power Brings Social Vices Perpetuates Slavery Feeds Manipulation Feeds Consumerism Controls Resources 95% Crimes are money or property related Medical Tribune (2004), Stitches The Journal of Medical Humour, December 1-15, p. 30 DAR 2007 Unsustainable Lifestyles! What next? Disclosure Accountability Change? 1978 95% The Iceberg of Company Value 2009 Sources: For 2009, Hollender, Orgain, and Nunez, The Business Case for Sustainability [accessed July 30, 2011], Kaplan Eduneering/Seventh Generation Sustainability Institute, February 2010; for 1998 and 1981, Roberts, Keeble, and Brown, The Business Case for Corporate Citizenship, Arthur D. Little, 2002, p. 1; for 1978, Stewart, Accounting Gets Radical, Fortune, April 16, 2001. 1998 1981 Intangibles / Non-Financials / Reputation / Goodwill 25% Market Value / Capitalization 29% Tangibles / Financials 75% 17% 83% 5% 71%
http://www.dreamstime.com/business-teamwork---solution-image2191262 http://www.dreamstime.com/teamwork-image994294 transparency accountability trust intellectual rights diversity sustainability honesty DAR 2007 effectiveness efficiency productive doing the things right doing the right things doing the right things right TASKS RELATIONSHIPS intangibles tangibles In Conclusion The only predictable future is the one that you create!
You are able to recognize who you are, determine what you want to do, conduct research and create a plan of action to take you where you want to go.
You are in control! Networking & Linkages References Dogelio, Joe Marie E. (2010). Career Development & Management Seminar at ACLC Cubao, Security Consultant/Director-Unified Group of Company
Villafuerte, Jay. (2009). Perfect Ramen Optimizing Career Opportunities: Prospects and Challenges for Future Professionals, Credit & Collection Manager-Getz Brothers Philippines, Inc.
Ponce, Christopher (2012). Mutual Funds Investments, Cocolife Asset Management. Thank you
Life is a rope that swings us through hope.
Always believe
Today is better than Yesterday and Tomorrow will be much better than Today!