INVESTMENT OPPORTUNITIES AND RISKSINVESTMENT OPPORTUNITIES AND RISKS

Mr. Edmund Go

Director, Metrobank

Former Treasurer, Citibank

Former Treasurer, Metrobank

Briefing on NGO InvestmentsSeptember 30, 2008 | Ramon Magsaysay Center

Ramon MagsaysayAward Foundation

Objectives:

• Present the various investment alternatives / opportunities available in the money and capital markets.

• Discuss the risks inherent in each of these alternatives

• Where does one invest during “times like the one we are in today”?

RISK FACTORSInvesting in Fixed Income Securities

• CREDIT (DEFAULT) RISK

• LIQUIDITY RISK

• PRICE (MARKET) RISK

• Issuer, capital, performance, ownership, management, products, rating, etc.

• Daily volume, market makers, total issue size, etc.

• Change in interest rates, inflation, monetary and fiscal policy, economic performance

RISK FACTORSInvesting in Fixed Income Securities

• FOREIGN EXCHANGE (CURRENCY) RISK

• SOVEREIGN RISK

• RE INVESTMENT RISK

• Foreign exchange rates

• Political, debt levels, trade and current accounts

• Trend of interest rate (declining)

Bank DepositsCredit and default risk: varies from bank to bank. Limited insurance on deposit with Phil. Deposit Insurance Corporation up to php 250,000

Liquidity risk: varies from bank to bank. Depends on availability of funds and ability to generate funds to meet all withdrawals/maturity

Interest rate risk: hardly exists for short term deposits. Exists for those who keep funds in long term deposits, i.e. 1 to 5 yrs. The opportunity to earn a higher interest rate goes up with tenor of deposit.

Currency risk: applies to foreign currency deposits. The risk that a change in the price of the US$ or currency of the country in which the deposit is denominated in will have a negative impact on return for one who uses pesos as base currency

Phil. Government: Treasury Bills (TBills), Retail Treasury Bonds (RTBs) & Fixed Rate Treasury Notes (FXTNs)

Credit and default risk: virtually no credit, event and default risk.

Liquidity risk: hardly exists due to availability of a price quoted by the primary and secondary market players supported by natural demand.

Interest rate risk: If interest rates rise, the value of the FXTN, RTBs, etc. on the secondary market will likely fall and vice versa. The longer the term of the FXTN, the greater will be the decline or increase in the value of the security.

Corporate BondCredit and default risk: Varies significantly from bond to bond depending on Issuer. Company financial condition, operating performance and rating are major indicators.

Liquidity risk: As with many corporate bonds, it can be difficult to find a buyer especially during times when concerns re default is quite high.

Interest rate risk: If interest rates rise, the value of the bond in the secondary market will likely fall.

Event risk: Mergers, acquisitions and other tumultuous events can have an impact on a bond issuer's ability to pay its creditors (accelerate or delay)

Currency risk: The risk that a change in the price of the currency of the country in which the bond is issued will have a negative impact on return to investors using Peso as a base currency

Bank Issued LTNCD/Lower Tier 2 (LT2)Credit and default risk: varies from bank to bank depending on Capital Adequacy. Limited insurance on deposit with Phil. Deposit Insurance Corporation up to php 250,000 but not applicable to Lower Tier 2

Liquidity risk: varies from bank to bank. Depends on availability of funds and ability to generate funds to meet all withdrawals/maturity at short notice. Type of assets held or owned can provide some indication.

Interest rate risk: If interest rates rise above the coupon rate, the holder loses opportunity to earn higher rates in the market since LTNCD and LT2 yield has been fixed. The value will fall and selling before maturity will most likely be at a discount.

Currency risk: none for issues denominated in Philippine Peso. Yes, for issues denominated in foreign currency for investors whose base currency is Pesos.

Republic of the Philippine ($ ROPs)Credit, Event and Default risk: Political events, serious debt burden, and prolonged poor economic fundamentals can result in defaults by governments through debt moratorium or debt repudiation.

Liquidity risk: As with many other bonds, it can be difficult to find a buyer for an emerging market bond especially during times market sentiment is dominated by risk aversion due to financial crisis.

Interest rate risk: If yields rise, the value of an emerging market bond on the secondary market will likely fall and vice versa.

Currency risk: The risk that a change in the price of the U.S. dollar or currency of the country in which the bond is issued will have a negative impact on returns of Investors who use Peso as base currency.

UITFs and Mutual Funds

Default risk: It is possible for a Fund to have lesser cash available to meet redemptions during liquidations due to a drop in the values of its assets.

Liquidity risk: secondary only in the unlikely event that there are no available prices for the assets (securities) the Fund is invested in.

Interest rate risk: The increase or decrease in interest rates directly affects the value of the Fund as represented by the Net Asset Value (NAV). When rates rise, the NAV goes down and vice versa.

Currency risk: exists for investors who have or earn Pesos and invests in $ or Euro denominated Funds. The change in the value of the $ and Euro affects the peso returns to the investor.

StocksBusiness risk: Varies significantly from company to company, industry to industry composed of many factors such as: state of the economy, company performance, products/services, competition, interest rates, commodity prices, foreign exchange, inflation, government policies, etc.

Liquidity risk: There are times it can be difficult to find a buyer. Daily volume turnover gives an indication.

Price risk: Higly volatile and influenced by perception of business risk above. Declining prices reduce value of the stock and vice versa.

Event risk: Mergers, acquisitions and regulatory or tax changes, etc. can have a negative or positive impact on a company’s performance and viability.

Assets for Allocation

Investment Objectives• Interest income and capital preservation• Interest income with some capital gains

potential. Capital loss, if any, will more often than not be equal to or lower than interest income so that principal will not be impaired

• Interest income and capital gains. Principal will be at risk in return for much higher returns

Conservative Portfolio(without Equities)

Cash/Time Deposit(70-80%)

Short Term (1 year <)Securities(20-30%)

Conservative Portfolio(with Equities)

Cash/Time Deposit(65-70%)

Fixed IncomeSecurities

(3 years <)(25-30%)

Moderately Aggressive Portfolio(without Equities)

Cash/Time Deposit(65-75%)

Fixed IncomeSecurities

(3 years <)(30-35%)

Moderately Aggressive Portfolio(with Equities)

Cash/Time Deposit(50-60%)

Fixed IncomeSecurities

(3 years <)(25-35%)

Equities(30-40%)

Equities(5-15%)

SUMMARY: Recommendations• “Cash is King” IF YOU MUST INVEST:• Keep very short and/or reduce duration of existing fixed

income investments • Minimum exposure to selected shares preferably to “blue

chip stocks” • Place funds with and confine debt instruments to most stable

issuers, i.e. Governments and institutions who have least exposure to crisis, i.e. Subprime Mortgages, CDOs, CDS; whose share and debt prices have fallen the least within their industry and whose capital remains strong

• Consider buying protection, i.e. option or CDS to hedge existing exposures / investments (again from highly reputable and stable institutions only)

• MONITOR value of all investments and financial indicators of counterparties regularly and as often as possible