Peso Cost Averaging or Lump Sum Investing?

For previous post about peso cost averaging, please refer to the following links:
Cost Averaging in First Metro Save and Learn Equity Fund
Peso Cost Averaging in Philequity Fund
Image Source: ElderlyJournal.com

Many people are asking which investing strategy is the better option between peso cost averaging (PCA) or lump sum (LS). Let us first define what is PCA and LS.

PCA- peso cost averaging is investing a fixed small amount at a regular interval or frequency. For example, investing P5,000 per month or per quarter in UITF or mutual fund.

LS - lump sum investment is investing a big amount, one time at the start of the investment period. For example, investing P200,000 in 2001 then hold until 2010.

As per definition above, let us see the result of the Philippine Equity Mutual Fund performance, assuming we used the 2 strategies, for the last 10 and 5 years.



As you can see in the table above, both for 5 and 10 years, lump sum investment is the clear winner in investing. This only proves that long term investing, meaning holding the investment for a long period of time, will give a better result than timing the market.



However, before we jump into conclusion that peso cost averaging in mutual fund is mediocre compared to lump sum investing, let us take the case of the most recent crisis period.
1. In July 2007, the Philippine Stock Market is at its peak before the 2008 Financial Meltdown.
2. In Sep 2008, the start of 2008 Financial Crisis after Lehman Brothers, a global financial firm in the US, files for bankruptcy.

With the above event, let us assume we invest using PCA and LS in Philippine Equity Mutual Fund starting July 2007 up to July 2009. Below is the result:



One of the disadvantage of investing in stocks and mutual fund particularly equity or growth mutual fund volatility and its price can dive (loss) during bear period specially during crisis. As shown above, both PCA and LS resulted to book losses during the financial crisis period. However, between PCA and LS, PCA will give you less chance of heart attack than LS since the losses in PCA are less than the one in LS. This is one of the clear advantage of peso cost averaging - more peace of mind during rough times.

However, take note that above losses is only book losses and temporary. If you invest in the peak of 2007 and didn't panic during the stock market crash in 2008 and if you keep your holdings up to this period, chances are you have not only break even but also gained from your investments.

In case you want to check how did I arrived with the figures in the above 2 tables, below is the spreadsheet of all the equity mutual fund cases:
Click the tab to select the sheets.  Point to the "> and <" in the right to drag to other sheets

As a conclusion, Lump Sum Investing is a good strategy in the long term while Peso Cost Averaging is a good strategy for those who doesn't have enough money for lump sum and are less risky than LS. If you are still confuse between the 2, just invest your money now and hold it for a long time. Because one thing is for sure, both PCA and LS are better than procrastinating or delaying your investment. After all, time is gold. 

Philam Strategic Growth Fund



For introduction to cost averaging, please read the post: Easy Investing Strategy in Mutual Funds or UITF.

Image: Renjith Krishnan / FreeDigitalPhotos.net
Philam Strategic Growth Fund, Inc. is an equity mutual fund managed by Philam Asset Management, Inc. The investment objective of this fund is to provide investors with capital growth in the long run through investments in equity securities or stocks.

Fund Facts
Incorporation Date: 22 Jun 1998
Minimum investment: P10,000
Minimum additional investment: P1,000
Sales Load or Entry Fee : 5% for investment amount of P10,000 to 99,999
                                        3% for investment amount of P100,000 to 999,999
                                        2% for investment amount of P1Million and above.
Investment period to wave exit fee: 2 years
Early exit fee: 1.0% if less than 1 year
                     0.5% for more than 1 year but less than 2 years.
                     0.0% 2 years or above
Annual Management Fee: 1.5% (included already in daily NAVPS).

Below is a case study on peso cost averaging(PCA) in Philam Strategic Growth Fund. The mechanics of the investment is as follow:
1. A fixed amount of P10,000 is invested every quarter. There are 2 cases, 10-years (2001-2010) and 5-years (2006-2010)
2. No amount will be withdrawn during the entire period.

(click on the tab above to select sheet)

ABS-CBN Corp. Review



ABS-CBN Corporation or ABS is one of the information and entertainment multimedia company in the Philippines. Incorporated in June 1946, ABS involved in producing various entertainment programs in multiple genres, and news programs that are aired on free-to-air TV via Channel 2 and 23.

Business Details:
1.  ABS-CBN Publishing, Inc. - (100% owned) print publishing
2. Star Records - (100%) audio and video production and distribution.
3. Roadrunner Network, Inc. - (98.9%) services-post production.
4. Star Songs, Inc. - (100%) music publishing.
5. Sarimanok News Network, Inc. - (100%) content development and programming services.

6. ABS-CBN Interactive, Inc. - services-interactive media.
7. The Big Dipper Digital Content & Design, Inc. - (100%) digital film archiving and central library of content licensing and transmission.
8. Creative Programs, Inc. - (100%) content development and programming services.
9. Studio 23, Inc. - (100%) content development and programming services.
10. TV Food Chefs, Inc. - services-restaurant and food.
11. ABS-CBN Film Productions, Inc. (Star Cinema) - (100%) movie production
12. ABS-CBN Integrated and Strategic Property Holdings, Inc.  - (100%) real estate.
13. ABS-CBN Global Cargo Corporation - (100%) non-vessel common carrier operations.
14. Sky Cable Corporation - (79.3%) cable television services
15. Culinary Publications, Inc. - (70%) print publishing.
16. E-Money Plus, Inc. - (100%) services-money remittance.
17. ABS-CBN Multimedia, Inc. - (100%) digital electronic content distribution.
18. Other International subsidiaries.

Business Performance:
For the year ending 2010, ABS' consolidated revenue is P32.2 billion,  a 30% increase from previous year. Excluding the sales on political advertisement, the company's revenue increased by 21%.

 ABS posted a net income of P3.2 billion in 2010 or 87% higher than last year.

For 1Q-2011, the consolidated revenue is P6.56 billion, a 15% decreased year-on-year while the net income of the company declined by 10% to P976 million compared to 1Q-2010. However, excluding the 1-time gained in 2011 due to sale of Sky Cable PDRs and election-related income in 2010, the net income would have increased bu 12% year-on-year.

Note: For reference about ratio and stocks analysis, read here.

Profitability:
ROE = 19.65%
Average ROE for 5 years = 7.56%
OCF/Equity = 30.78%
Net Profit Margin = 12.29%

Growth:
Annual Net Income Growth Rate (5 yrs) = 43.93%

Debt and Risk:
DE Ratio = 55.86%
Current Ratio = 1.35

Though leverage level is healthy, the liquidity level has to be improved since the current ration is below 1.5 which is the considered good level of current ratio.

Dividend:
Dividend Yield (2010) = 2.47%

Recently, ABS distributed dividend at P2.1 per share or a dividend yield of 5.2% based on closing price of P40.45 last Jun. 06, 2011.

Other factors:
Both GMA7 and ABS claimed that their audience shares climbed in May on higher primetime viewership.

Valuation:
PE Ratio = 9.49
PB Ratio = 1.81
Intrinsic Value = P74.1/share
Current Price = P40.45/share
Upside = 83.18%


Recommendation:
Long term buy is recommended for ABS.

How Much Do You Need to Invest in UITF?



In my post "A Primer on UITF", I have mentioned that UITF or Unit Invest Trust Fund which is offered by several bank in the Philippines is a good alternative to mutual funds. Also UITF is a good way to invest indirectly into various stocks, bonds and other securities at a small capital. Since the money is pooled and invested strategically in various instruments, your invesment will have sufficient diversification advantage like lower risk and higher potential return.

Investment is a must to reach your financial goal.
Below is the table summary of selected UITF offered by various banking institution in the Philippines. This table covers only the 3 main types of UITF namely: Equity UITF, Balanced UITF and Bond UITF. Money Market UITF was excluded since it is a short term investment and considered inferior in giving returns in the long run since its normal average gain is below the inflation rate. For the definition of each type of UITF, please refer to the post "Kinds of Mutual Fund in the Philippines", since both UITF and mutual fund types are very similar.

Note that the Return of Investment mentioned in the table is based on the NAVPU as of May 25, 2011.

One advantage of UITF over mutual fund is it doesn't have any Sales load or Exit Fee. Also, the fees mentioned above (Management and Other fee) is included in daily NAVPU calculation. Custodian fee may vary depending on the institution but are usually very small (less than 0.5%). Take note that the same with mutual fund, it requires early redemption fee (ranging from 0.5-2%) if the investment is pulled out prior to the end of the prescribed holding period. Fortunately, most UITF have shorter holding period compared to mutual funds so we can count it as another advantage of UITF against mutual fund though this doesn't matter if you are long-term investor.

If you are in a tight budget, BPI UITFs (BPI Equity Fund, BPI Balanced Fund and BPI Premium Bond Fund) is the best option since it requires both the lowest initial investment of P10,000 and lowest min transaction of P1,000 (additional or redemption).

Mutual Fund Performance - May, 2011





Below is the performance of the Mutual Funds of the Philippines as of end of Jun 01, 2011.



* - NAVPS as of the previous banking day
** - NAVPS as of two banking days ago
Source: ICAP

Quit Smoking to Become a Multi-Millionaire






It's all over the news, smoking are now banned in public places in Metro Manila and for a while it became a hot topic for debate between the smokers and non-smokers.


I used to smoke a lot before. On the average, I consumed 1.5 packs or 30 sticks per day of Marlboro Red from 2001 up to 2007. When I arrived in South Korea in 2007, the price of cigarette is 2500 won or P100 per pack Then I started to get sick probably due to cold weather during autumn and winter plus aggravated by my chained smoking habits. But what makes me finally decided to let go of my smoking habit is the price...I was astonished by the amount that I can save if I stop smoking...

If you are a smoker and at the same time dreaming of becoming a Peso Multi-Millionaire, this is the chance you are waiting for...quit smoking and invest the amount you save...if you don't believe me see the calculation below:


There you see it, in 30 years you can earn:
if you smoke 20 sticks per day you will earn: P3,211,503 if you quit
if you smoke 10 sticks per day you will earn: P1,605,751 if you quit
if you smoke 5 sticks per day you will earn:   P802, 876 if you quit.

Did I forget to tell you that No Smoking  have health benefits too?

Using Net Income in valuation of MPI




There's a question raise about my intrinsic value calculation of MPI in one of the forum. Consensus target price is P4.57 while my calculation is P9.3 which is very high(see my previous post about MPI Stocks Review here. But this is just the figure I get after plugging in the data (operating cash flow) of MPI in 2010.  Remember that stocks or any asset value is equal to the present value of all the income (cash or money) it can create in the future. Discounted cash flow uses operating cash flow as the basis since it is more predictable. Net income are inclusive of intangible values and are so are more prone to manipulation so not recommended for projecting the future cash flow.


Let us assume that the operating cash flow of MPI in 2010 is too good to be true and is not a good basis for its valuation. Also, let us assume that Net Income is the more realistic basis of future cash flow and recompute the stocks value based on the total present value of this future cash. Below is the result:



As per the calculation, the stock price is P5.4. Of course you should buy lower than that. Suggestion is to buy it at P3.5 or lower (35% margin of safety).

Related Posts Plugin for WordPress, Blogger...