SEC lifts limit on foreign investments by mutual funds

The Securities and Exchange Commission (SEC) has lifted the 20 percent net asset limit on investments in foreign securities by mutual fund companies.

The SEC has also allowed mutual fund companies to raise their authorized capital stock and sell the additional securities up to Sept. 30, 2005 and use accrual valuation up to Sept. 30, 2006.

All mutual fund companies, however, are required to submit a report on the monthly portfolio breakdown and comparison of net asset value per share from accrual to mark-to-market valuation.

Investment Companies Association of the Philippines (ICAP) chairman Hector De Leon said these new changes will go a long way in promoting savings and investments through local mutual funds.

De Leon said investments in structured notes must be disclosed in the prospectus and the issuer must have at least an A rating.

He also suggested that benchmarks be set annually based on the ratings at the end of each calendar year. This, he said, will provide fund managers ample time to rebalance portfolios to conform with the set benchmarks in case the Philippine rating gets upgraded during the current year.

De Leon also recommended that fixed benchmarks that should be set by fund proponents should be at least investment grade securities or higher (BBB or higher).

The mutual fund industry contributes to the development of the capital market by pooling money from a large group of investors who have similar objectives. Mutual funds allow small investors to participate in the capital market, as these require only low initial investment requirement.

To strengthen the role of investment companies in the capital formation process, government needs to provide a favorable framework in which these players can operate to facilitate the flow of investment capital and broaden the participation in securities ownership by Filipinos.

The mutual fund industry was introduced in 1957 and attracted both legitimate as well as fly-by-night transactions. One of the reasons for the weak performance of the industry is the negative perception it gained through the years owing to the scandals and high front-end loads during the initial years that contributed to investors’ disappointment.