No need to panic over CAP deficiency

Over the past three or four months or so, someone using a yahoo e-mail address had been sending media writers a really scary message about the financial condition of College Assurance Plan (CAP). Last week, just before another daily carried a news item about CAP’s trust fund deficiency, I got that e-mail message twice.

I ignored the message not only because it seemed to have been sent by someone with a serious axe to grind against CAP and is sneaky enough to remain anonymous. More important, it would cause needless worry among CAP subscribers. It is totally irresponsible for anyone, including prospective congressional investigators, to cause CAP so much damage so as to impair its ability to survive.

As pointed out by the response of CAP published in this paper last Friday, the trust fund deficiency will not affect the current ability of CAP to pay the tuition fees of subscribers as they fall due. From personal experience, I still get my reimbursement checks the same day the claim is filed. As it was rightly pointed out by the explanation, there can never be a run for the withdrawal of funds because the pre-need agreement specifies the date when these funds can be withdrawn.

CAP planholders can rest assured that it is not possible all of the children of the planholders will enter college at the same time. In other words, there can be no simultaneous utilization of the plan by the beneficiaries that will make CAP insolvent or unable to meet daily financial requirements.

Having said all that however, there is a need to address that deficiency in CAP’s trust fund of over P2 billion. CAP officials have assured that they will infuse fresh assets to comply with SEC’s requirements. Let us just hope they will put in cash or such assets that can be easily liquified. Hopefully, they will not put in more debt paper or worse, equity in affiliate companies like Fil-Estate and MetroRail.

In a way, one can sympathize with CAP in its current predicament. Anyone who is managing even small personal investments knows how difficult it is these days, to get returns that are at near decent levels. Government debt papers like Treasury bills are yielding less than four percent net of taxes. Investments in stocks are delivering mostly negative yields. Real estate is the pits. Not only are values down, you cannot liquify when you need money in a hurry.

It is no surprise to me that when the yearly review of the trust fund value came around, CAP’s trust fund came up short. Blame the bad economic times for that one, possibly aggravated by above market valuations of Fil-Estate and MetroRail investments. Too bad CAP’s management can’t approach this predicament with clean hands because of the grievous mistake of investing in related businesses like Fil-Estate and MetroRail.

Someone made the nasty comment that CAP’s business has become a sophisticated pyramid scheme. If it fails to attract new subscribers for whatever reason, it may find it difficult to service future demands from current subscribers. That, indeed is a worrisome thought. But it isn’t something CAP’s management can’t deal with if only the older Sobrepeña swears he will stay away from the risky businesses of the younger Sobrepeña.

CAP is important to the national psyche if only because thousands of middle and lower income families, including mine, look up to it for our children’s college tuition fees. It cannot afford to fail, which makes it important for CAP’s management to take the trust factor in its investments a little more seriously. The political, economic and social repercussions of failure are simply unimaginable.

This is why CAP management must understand that dealing with affiliate companies leaves them open to doubts that the transactions were done at arm’s length. Questions on the propriety of their investments in Fil-Estate and MetroRail will always be raised. Their having done the proper due diligence will always be doubted.

In fact, it might be time for CAP to liquify assets related to Fil-Estate and MetroRail, even if this is concededly difficult to do now. It might be better for CAP to hold condo units in Fil-Estate’s high rise developments on Meralco Avenue than Fil-Estate’s debt papers. Maybe a cluster of condo units directly managed by CAP could earn rental income or even be sold somehow for some cash even at today’s prices. Just make sure the valuation is done by a reputable and independent appraiser.

For me, I need to have CAP around in the next two and half years until my youngest daughter finishes college. Doubts about CAP’s trust fund aside, I am fairly confident that CAP will survive because its current problems are still manageable. Besides, I have full trust and confidence in SEC Chairman Lilia Bautista doing a good job of regulation, compared to past SEC leaderships. But if I were just starting now, I’d probably look for plans offered by larger, more professionally managed groups like PhilAm and Ayala.

CAP is a good and innovative idea and the older Sobrepeña should be commended for this pioneering grassroots type of financial planning product. But it cannot be run as a family corporation anymore. It is too big and too important for its fate to hang in the balance at the Sobrepeña family’s dinner table. Their responsibility to the country is simply enormous.
New definitions
An old friend, Gilbert Jose, probably one the country’s original OFWs, e-mailed me these new definitions of business terms.

Institutional Investor
- Past year investor who’s now locked up in a nuthouse.

Profit
- Religious guy who talks to God.

P/E Ratio
- The percentage of investors wetting their pants as the market keeps crashing.

Broker
- What my broker has made me.

Standard & Poor
- Your life in a nutshell.

Stock Split
- When your ex-wife and her lawyer split your assets equally between themselves.

Market Correction
- The day after you buy stocks.

Cash Flow
- The movement your money makes as it disappears down the toilet.

Yahoo
- What you yell after selling it to some poor sucker for $240 per share.

Windows 2000
- What you jump out of when you’re the sucker that bought Yahoo @ $240 per share.

Bull Market
- A random market movement causing an investor to mistake himself for a financial genius.

Bear Market
- A 6 to 18-month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no sex.

Momentum Investing
- The fine art of buying high and selling low.

Value Investing
- The art of buying low and selling lower.

(Boo Chanco’s e-mail address is bchanco@bayantel.com.ph)

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