Prudentialife Optima Funds - Mutual Funds and Unit Investment Trust Funds

Accrual Method	-	A method for the valuation of fixed income funds which calculates Net Asset Value (NAV) using the assets’ purchase or cost price. Returns on the Fund are from the amortization of the bond cost and the accrual of interest on the securities comprising the portfolio. This method disregards changes in the prices of the underlying securities. The accrual method is distinguished from the marked to market method which values the fund’s securities at the current market price.
Active Management	-	Refers to a style of investment management that seeks to attain returns above a set benchmark or standard by making more active adjustments to the various types of assets and securities within an asset class to take advantage of expected price movements. This is compared to a more passive type of management where a “buy-and-hold strategy” is employed or where the fund manager buys assets that seeks to mirror the composition and return of a desired benchmark.
Annualized Return	-	The value that an investment has achieved over a 12-month period.
Bond	-	A certificate of indebtedness issued by a corporation or government, with a stated interest rate and fixed due dates when interest and principal must be paid.
Coupon	-	The current interest rate for a fixed income security.
Cut-off time	-	The latest time by which subscriptions or redemptions to a fund utilize the applicable NAVPU. Subscriptions or redemptions after the cut-off time will acquire the NAVPU of the next applicable banking day.
Duration	-	Also known as Macaulay duration, is the weighted average time to receipt of the present value of the cashflows from a bond. This is a tool used to determine the risk in a bond (see Modified Duration).
Early Redemption Penalty	-	This is the extra cost charged to the investor for redeeming units of a fund before the Minimum Holding Period has elapsed.
Equity	-	Considered as a one of the general asset classes in an investment portfolio, distinguished from fixed income assets. Equity represents ownership in a corporation, and represents a claim on the proportionate share of the corporation’s assets and profits.
Explanatory Memorandum	-	Document which contains the summary of the UITF’s Plan Rules and Regulations, and the terms and conditions governing the investments of the UITFs.
Fixed Income	-	One of the general asset classes in an investment portfolio, distinguished from equities. Fixed Income securities have a stated return and maturity value. Examples of fixed income assets are bonds, loans, and deposits.
Fund Manager	-	The person or entity responsible for determining the composition, changes, and movements of the fund’s portfolio, in order to optimize fund performance while controlling the risk of the portfolio.
Fund Structure	-	Refers to the regulatory structure that governs the investment fund. In the Philippines, there are currently 3 types of fund structures, mutual funds, common trust funds (CTF) and unit investment trust funds (UITF).
Fundamental Analysis	-	Is a method used to determine the value of a financial instrument by analyzing the economic, political, environmental and other relevant factors affecting the supply and demand for that instrument. For equity investments, the company’s financial situation, business prospects and profitability are some of the factors analyzed. For fixed income investments, the credit risk of the issuer and its yield relative to market interest rates are studied. Fundamental analysis is contrasted from technical analysis which focuses on analyzing price movements by identifying price chart patterns.
Index	-	An index is a collection of selected securities which is used as a representation of the general characteristics and performance of a particular market.
Investment Grade	-	Refers to bonds judged likely to meet payment obligations which are deemed suitable for conservative investors. These bonds have ratings of at least Baa3 from Moody’s or at least BBB- from Standard & Poor’s.
Launch Date	-	The specific date wherein a new product is introduced to the public.
Marked-to-Market (MTM) method	-	A vauation method where assets of the Fund are valued at the current market price, taking into account unrealized capital gains or losses. This is the international standard used to value the assets of both equity and fixed-income funds.
Maturity	-	The date on which a loan, bond, mortgage, or other debt or security is due to be repaid.
Minimum Additional Participation Amount	-	This is the smallest additional amount an existing investor can invest into the fund.
Minimum Holding Period	-	The minimum number of days that an investor must keep his investment in the fund before he can redeem it without penalty.
Minimum Participation Amount	-	This is the smallest amount which must be invested in a fund.
Minimum Redemption Amount	-	This is the smallest amount that an investor can redeem out of his investment in a fund.
Modified Duration	-	This is an estimate of how the price of a bond will change for a given change in yield. The higher the modified duration of a security, the higher its price sensitivity to interest rate movements.
Money Market Instrument	-	Fixed income security with a maturity of less than one year.
Mutual Fund	-	A Mutual Fund is an investment vehicle managed by an Investment Company (IC) that pools money of shareholders in the Fund. The money is invested in a single portfolio comprised of stocks, bonds, and other securities.
Net Asset Value (NAV)	-	The net worth of the assets of a Fund. NAV is calculated by subtracting the Management Fee of the Fund plus other Expenses and Liabilities, from the Total Asset Value, which is the current market value of all the securities and holdings that comprise the Fund Portfolio. NAV = Total Asset Value – (Management Fee + Other Expenses and Liabilities)
Net Asset Value Per Share	-	The current worth of a Share in a Mutual Fund. NAVPS is computed by dividing the current NAV of a Fund by the total number of Units of Participation held by investors.
Net Asset Value Per Unit	-	The current worth of a Unit of Participation in a Unit Investment Trust Fund (UITF). NAVPU is computed by dividing the current NAV of a Fund by the total number of Units of Participation held by investors.
Passive Management	-	Refers to a style of investment management that seeks to achieve performance equal to the market or index returns.
Portfolio	-	An investor's collection of investment holdings, usually with reference to its composition. It may be a mix of different classes of securities, such as bonds, property, shares, and cash.
Redemption	-	The process of selling back one’s Units of Participation/Shares in the Fund. This is done at the applicable NAVPU / NAVPS on the day the Redemption Order is submitted by the Investor. The order must be received by the Trustee on or before the Cut off Time for the day; otherwise, the transaction will be processed on the next banking day.
Redemption Notice Period	-	Redemption Notice Period refers to the number of days after redemption before the proceeds are given to the investor. For instance, if the redemption notice period for a Fund is 4 banking days, this means that if the client redeems by the redemption cut-off time today (Trade Date), the redemption proceeds will be given to the investor on the fourth banking day from now, counting today (Trade Date + 3).
Reserves	-	Also known as legal reserves, it is a percentage of the value of Common Trust Funds (CTFs) that must be set aside for liquidity purposes, as mandated by the Bangko Sentral ng Pilipinas. Unit Investment Trust Funds (UITFs) have no legal reserve requirement.
Return	-	The sum of interest, principal payments, reinvestment income, and any realized and unrealized capital gains or losses expressed as a percentage of principal in annual terms.
Risk	-	The possibility of loss on an investment. Investments with greater risk must provide higher expected returns to be attractive to investors.
Risk Management	-	The process of monitoring and controlling various risk factors in an investment portfolio to ensure that there are no unwanted or unintended risks in the portfolio that could cause performance surprises.
Stocks	-	Also known as shares of a company, it is a certification of ownership of a fraction of the company. These are the specific securities traded in the equity markets.
Subscription	-	The process by which Units of Participation of a Fund are purchased.
Technical Analysis	-	It is an approach to the analysis of price movements of financial instruments and their future trends. It examines the technical factors of market activity, often represented by charting patterns, as contrasted with fundamental analysis. Technical analysts normally examine patterns of price change, rates of change, and changes in volume of transactions, in the hope of being able to predict and profit from expected future trends.
Trustee	-	The entity authorized to hold the assets of a fund for the benefit of the beneficiaries or participants.
Unit Investment Trust Fund (UITF)	-	Is a trust product that pools the money of various investors into a single portfolio managed by a professional investments team. The UITF allows the investor to own participation in a diversified portfolio of stocks or bonds through ownership in units of the fund.
Valuation of the fund	-	This refers to the method used in order to calculate the Net Asset Value of the securities. The two commonly practiced methods are the Accrual Method and the Marked-to-market method.
Volatility	-	It is how much variability there is in the price changes of the investment. The more variability there is, the higher the volatility.
Yield to Maturity	-	The percentage rate of return earned on a fixed income security assuming it is held to its maturity date. It assumes that coupon interest paid over the life of the security is reinvested at the same rate.

What is a fund?

A fund, also known as an investment fund, is a collection of stocks, bonds or other securities owned by a group of investors and managed by a professional investment company.

What is a UITF?

Similar to a Common Trust Fund (CTF), a Unit Investment Trust Fund (UITF) is a trust product that pools the money of various investors into a single portfolio managed by a professional investments team of a trust department of a bank or an institution with a trust license. The Fund allows the investor to own participation in stocks or bonds at a fraction of the costs and minimum investment amounts usually associated with these investments. Moreover, the investor need not track his investment daily, nor worry about what stocks or bonds to buy or sell. This is because skilled fund managers with years of asset management experience handle the portfolio day-in, day-out. But unlike the CTF, a UITF must be valued using the marked-to-market method and is not required to keep any reserves with the Bangko Sentral ng Pilipinas.

What is a Mutual Fund?

A Mutual Fund is an investment vehicle managed by an Investment Company (IC) that pools money of shareholders in the Fund. The money is invested in a single portfolio comprised of stocks, bonds, and other securities.

What are the differences between a Mutual Fund and a UITF?

	UITF	Mutual Fund
Management	The Trust Department of a Bank	Investment Company
Participation	Units of Participation	Shares in the mutual Fund Company
Regulator	BSP	SEC
Valuation Method	MTM	Accrual or MTM
Reserves	None	None, but requires IC P50 M paid-up capital
Taxes	None	Doc Stamps of P1 per P200 par value
Sales License	Standardized training from TOAP-accredited trainor	Agents need SEC license to sell Fund

Why should I invest in a fund?

There are several reasons why it would be wise to invest in a fund rather than in securities directly.

•	Professionally Managed: The fund is constantly monitored by a team of professional investors, making adjustments in order to seek out the fund's best possible performance. Not only is the investor relieved of the burden of constantly researching and monitoring the securities, but also, this responsibility falls on a fund manager or a team whose full time job is to manage the fund. These managers come with a wealth of training and experience under their belts.
•	Diversification: A fund is typically invested in hundreds or even thousands of different securities. No more than 10% of its assets can be invested in a single security, except for government securities. This diversification spreads the risks over a broad base thereby limiting potential loss.
•	Affordability: A fund pools together the resources of many small investors so as to create greater buying power than they could achieve by themselves. In addition, economies of scale come in because funds purchase large volumes of a specific security and thus, are able to spread some of the costs like commissions and processing fees over many investors. In essence, an investor is buying shares or units of participation in the fund. Also, funds allow investors to gradually add to their investments over time.
•	Liquidity: Also, a fund gives investors greater liquidity than do stocks or bond. You can purchase or redeem your shares on any business day.

What are the risks involved in investing?

A.	Market risk	-	is the danger associated with unpredictable events that influence the performance of the entire market. Examples of this include economic recessions, natural calamities, and political scandals. This type of risk cannot be diversified out of an investment portfolio, for it affects most or all securities in the market.
B.	Credit risk	-	refers to the possibility a debtor will default on a loan. This non-payment of the principal usually happens in fixed-income instruments. Investing in bonds with a high credit rating minimizes this risk; keeping a portfolio well-diversified also helps.
C.	Value of the fund may go up or down	-	Returns and performance of the fund are not guaranteed, therefore the investment is subject to possible loss of principal. Even if the Unit Trust Fund has provided high returns in the past, historical performance of the Fund is no guarantee of its future performance.
D.	Not covered by the PDIC	-	Unlike Bank Deposits, which are insured up to P250,000 by the Philippine Deposit Insurance Commission (PDIC), an investment in a UITF is uninsured. This is because investment in the UITF is not considered a deposit with the Bank.

How is the fund's risk and return determined?

The risk and return of the Fund is determined in large part by the asset type or types that comprise it. To illustrate, the graph to the right plots the quantified risk and return characteristics of the various types of Funds over a span of five years. Portfolios invested purely in cash or time deposits would generally have the least exposure to risk, as well as the least return. On the other end of the spectrum, portfolios with holdings composed entirely of equities is high-risk, yet high return. A curve called the risk-return frontier may be used to approximate the trade-off between risk and return.

What are the different kinds of investment funds? What are their differences?

A.	Money Market Fund	-	These funds invest in short-term debt securities, which are fixed income instruments with remaining lifetime of less than a year. Such securities a generally stable asset valuation given that they are close to maturity. The return objective of these low risk, low return funds is usually to perform better than the short-term time deposit rates in the market.
B.	Equity Fund	-	These funds are invested in stocks. Stocks are shares of ownership in a company issued for the purpose of raising capital. They have a tendency to be volatile, with valuations changing considerably along with company developments and market events. However, the returns on these investments, comprised of both dividends and capital gains, are consistently high in the long run. Equity funds aim to achieve capital growth over a long period of time. These funds provide the potential for high returns but with it comes more volatility or risk.
C.	Fixed Income (Bond) Funds	-	These funds are invested in fixed income instruments. Issued by governments and corporations to borrow capital, they are called "fixed income" because they are obligations to repay fixed amounts of interest, plus the principal, in the future. Since the interest returns on these instruments are preset, these securities are less risky than stocks. These funds are conservatively managed than equity funds, and are less subject to variability in returns. The objective is often to preserve capital while producing a moderate income by investing in medium to long-term bonds or fixed income securities issued by the government or corporations.
D.	Balanced Fund	-	are invested in a mix of equities and debt. They combine the growth potential of higher-risk stocks with the less volatile returns of fixed-income securities. Their risk-return characteristics fall between Equity Funds and Fixed-Income Funds.

What are open-end and closed-end funds?

Open-end funds sell as many units as investors are willing to buy. This makes the fund grow bigger as every new investor buys a unit of the fund.

Closed-end funds sell only a fixed number of shares. After that, the shares are traded on an exchange.

What type of fund is best for an investor?

Different types of funds have different objectives. So an investor should choose the fund which satisfies his own needs or preferences.

a. Investment Objective

•	Capital Growth - some funds are focused on giving higher returns. These funds are typically riskier than capital preservation funds.
•	Capital Preservation - some funds are aimed at maintaining the investor's invested capital, usually offering smaller returns at a lower risk.

b. Time horizon

•	Another key characteristic would be how long the investor can afford to leave his money untouched in the investment. This affects considerably how much risk or volatility the investor can handle. Generally, the longer the acceptable time horizon, the greater the tolerance for risk.

c. Risk profile

•	Risk-seeker - the investor prefers investment instruments with high returns even if these vary wildly from period to period.
•	Risk-averse - the investor may opt for stable, predictable performance despite returns that are generally lower.

Example:
An investor wishes to build a vacation house for his retirement in ten years. He can afford to keep the money allotted for this locked up for the entire period, and he can tolerate up to moderate risk if his money can appreciate considerably. Given these characteristics, he may want a fund that delivers capital growth.

Towards this objective, he may prefer an equity fund. Equities provide generally higher growth over debt instruments, in exchange for a higher risk exposure. However, even as they are more volatile than other instruments, returns on equities tend to average out in the long-term. An investor willing to wait out a ten to fifteen year time frame will have the advantage of a greater probability of high returns at low level of risk.

How do you invest in a fund?

In order to invest in a fund, a person must buy shares or units of participation in the fund. The value of one unit can be calculated by dividing the current market value of the entire fund by the number of outstanding units. The market value of the entire fund is equal to the market value of all the securities in the fund. This is known as Net Asset Value or NAV. By dividing the NAV by the number of outstanding units, we get the NAV per unit of participation or NAVPU. The NAVPU is the price the investor must pay for one share or unit of participation.

NAVPU = Total Assets of the Fund - (Management Fee + Other Expenses and Liabilities)
Outstanding Number of Units of the Fund

When are Net Asset Values calculated? Would I know my Net Asset Value per Share/Unit before I invest?

The fund's Net Asset Value per Unit/Share is calculated at the end of the day. This means that if an investor is able to buy into the fund before the cut-off time for the day, he will only find out his Net Asset Value per Unit/Share the following day.

How is the fund valued?

There are two ways to value fixed income funds, the accrual method and the marked-to-market method.

In the accrual method the value of each asset in the Fund is recorded at its purchase price and coupon payments are accrued or accumulated on a daily basis(less tax expenses). Take note that this does not reflect the actual market prices at which assets in the Fund can be traded.

On the other hand, the marked-to-market method values each security in the portfolio at its end-of-day market price plus the accrued interest (less taxes and fund expenses)

For example:
• Take a portfolio made up of two bonds:
   o BOND A maturing in 28 years
   o BOND B maturing in 8 years

• Both are purchased on Jan. 1, 2005 at $103.
• Suppose that on Nov. 5, 2005:
   o BOND A has a market price of $114, with accrued interest of $10
   o BOND B has a market price of $106 and accrued interest of $8.

• Under the accrual method, you would take the purchase cost of each:
o $103 for BOND A and $103 for BOND B
o and simply add the accrued interest for a total NAV of $224 (224=103+103+10+8).

• Under the marked-to-market method, you must use current market prices
o $114 for BOND A and $106 for BOND B
o And again add accrued interest to give a NAV of $238 (238=114+106+10+8).

MTM accounts for all gains and losses of the assets of the Fund on a daily basis. Thus, it reflects the actual net worth of the Fund

1.	when the market is up, you can realize the full gains;
2.	when the market is down, you can buy at market value, reaping potentially higher gains than you would under accrual valuation should the market come back up; and.
3.	you know how much your investment in the Fund is really worth, thanks to a transparent fund accounting method that is the convention for investment-managed Funds worldwide.

How do I earn from my investment fund?

Recall that when purchasing units of participation/shares, the price of each unit is determined by the current day's Net Asset Value. When redeeming units, the amount that the investor shall receive is also based to the current day's Net Asset Value. So an investor can earn on a UITF when the redemption price is greater than the subscription price.

How can I monitor the fund's performance?

Prudentialife Optima Funds sends the following to the investors:

1.	Daily Rates. This is sent to all investors via e-mail every morning of a banking day. This contains the Net Asset Values per Unit (for UITF) and Net Asset Value per Share (for Mutual Fund) of the previous banking day.
2.	Daily Update. This is sent to investors every afternoon of a banking day. This contains the events explaining the movements of the Net Asset Value Of the previous banking day.
3.	Fund Holdings. This is sent to all investors every month and contains the securities where the Funds are invested in.
4.	Fund Ranking. This is sent to all investors every month and contains the ranking of Prudentialife Optima Funds relative to similar funds in the industry.
5.	Quarter Reports. This is sent to all investors every quarter and contains historical financial information of Prudentialife Optima Funds as well as the Investment’s Manager’s comments on what to expect on the following quarter. This is sent to all investors through mail.

The above reports can also be viewed and downloaded from the website: http://optima.prudentialife.com.

When does the investment mature? (No specified tenor - vs. a fixed tenor of most fixed income instruments)?

You need to build on the concept of an "expected time horizon" for funds, long term investing/holding capacity with flexibility to pay-out.

a.	For the UITF and Mutual Funds, no exact time horizon exists, but one can maximize benefits and minimize risks of investing in a fund when staying medium to long term (at least 3-5 years).
b.	Also, the funds feature the flexibility to exit the investment any time, should the investor require to do so.

When would be a good time to invest?

One can never time the market; investing should involve a disciplined process.
Market Timing is an investment strategy that seeks to place the purchase of investment instruments on the time that prices are low so that when prices go up, the instruments bought can be sold for higher prices and thus the investor can earn from the sale. The ultimate goal then for timing the market is to gain the maximum return by buying at the absolute bottom of the instrument's price and sell at the very peak.

That is why the biggest fear of investors is to enter the market is when prices are high and expected returns are lower.

Consider three investors John, Jack, and Joe, who invest in a fund invested in US Dollar denominated fixed income bonds issued by the Philippine government. Suppose now that each of the investor buys $5,000 to invest at the start of each year for 10 years; the only difference is the time that each investor enters the market. John times the market perfectly and enters the market at its bottom, i.e. when prices are low. Jack meanwhile, is a periodic investor who places his investment on the first business day of the year. Lastly, Joe times the market in the worst possible way and invests at the peak of the market, i.e. the prices are high.

The following table shows the investment transactions and the returns for each year of each investor.

	John's Investment	(Lowest of Year)		Jack's Investment	(Start of Year)		Joe's Investment	(Highest of Year)	(Highest of Year)

	Value as of End of Year	Return YoY	Price per Share*	Value as of End of Year	Return YoY	Price per Share*	Value as of End of Year	Return YoY	Price per Share*
1991	2,107.45	7,226.82	44.54%	2,107.45	7,226.82	44.54%	3,385.98	4,498.00	-10.04%
1992	2,919.13	13,863.13	13.38%	3,046.03	13,620.99	11.40%	3,720.03	9,571.81	0.78%
1993	3,287.51	30,855.12	63.57%	3,393.35	30,201.32	62.19%	5,533.46	20,497.56	40.67%
1994	4,436.02	30,721.78	-14.32%	5,503.66	29,182.17	-17.10%	5,707.51	20,989.63	-17.68%
1995	4,439.87	44,675.45	28.07%	4,562.58	42,585.19	24.58%	5,684.20	31,149.52	19.85%
1996	5,684.20	61,858.11	24.52%	5,684.20	59,285.22	24.52%	7,079.94	43,787.58	21.13%
1997	7,078.22	100,196.76	49.86%	7,078.22	96,295.94	49.86%	10,607.76	70,622.16	44.75%
1998	10,162.32	109,517.72	4.11%	10,607.76	105,237.43	3.89%	11,850.41	78,019.96	3.17%
1999	11,020.52	138,513.23	20.95%	11,020.52	133,336.07	20.95%	13,392.91	99,344.30	19.66%
2000	13,329.71	178,418.96	24.32%	13,329.71	171,982.60	24.32%	16,653.33	128,482.65	23.13%
Rate of return (annualized)			28.11%			24.38%			15.85%

* Share Prices are based on the Salomon Brothers Brady Bonds- Phill.

From their investments, John gets the highest rate of return while Jack, who trails only by 0.73% behind John, receives the second highest return. Joe's investment on the other hand, gives him 15.85% return, which is the lowest among the three. In connection to this, at the end of ten years John gets the highest end value which is $178,418 while Jack gets $171,982 ,and Joe $128,482.

From the illustration presented it is clear that the one who enters the market at the bottom, which is John, gains the most returns from the investment while the one who enters at the peak gains the least (Joe).

Market timing is difficult to do. The probability of bad timing is equally present as a good one.

In addition, a good market timing gives only a limited additional return over the long term. In this case, John's return is only 0.73% higher than Jack's, who doesn't time the market and does periodic investment instead