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  History of Philippine Mutual Funds  

Similar to the concept of the Filipino tradition of Bayanihan which promotes efficiency in getting tasks done through a collective effort, a mutual fund is an investment company that pools money from shareholders and
invests in a diversified portfolio of securities.

In the Philippine market, the concept of mutual funds is not entirely new as history can be traced way back in the early 1950's.  The birth of Philippine mutual funds was brought about by the growing popularity of off-shore funds worldwide. In the absence of a governing law, the companies were registered as finance companies. Some capitalized on long-term investment programs which made their investors commit to a fixed payment scheme (Php 50 per month for a period of 20 years).  The initial amount invested for the first year served as the commission, thus, forcing investors to make successive payments thereafter before they would be able to break-even, much more so, realize a profit.  Some of these companies charged exorbitant sales charges of 8%.  A fund even charged a front-end load of 50%.

Simultaneous with the collapse of the stock market in the late 1950s, Ka Doroy Valencia (very popular and influential columnist at that time) openly criticized the process by which mutual funds were being sold and managed. Three of the four companies which were operating at that time eventually closed shop.  Only the Filipinas Mutual Fund remained.  It was later transformed into a finance company and much later, into a development company.

As a response to the fiasco of the first mutual funds, the government enacted R.A. 2629, otherwise known as the Investment Company Act.  Patterned after the U.S. Law but legislated as a reaction to the recent debacle, the ICA contained stringent measures which hampered the development of the industry in general.

Under the said law, Trinity Shares was the first company to register in August 1969 and began selling its shares publicly in October of the same year. In a span of 4 months, the company opened 11 branches, doubling its sales each month and its value appreciated to as much as 27% in the 4th quarter.  Mr. Arthur B. Sokolow, the prime mover behind the fund, was able to convince Ka Doroy not only to invest in the new fund, but also to sit as director.  Trinity's success led to the registration of other funds, such as the Pacific and Malayan Funds owned by Alfonso Yuchengco and Ting Roxas' Bancom.

While such companies continued to thrive, the equity market remained thin. This was further aggravated by the political instability brought about by the dawning dictatorial regime, punctuated by the “1st quarter storm”.  Eventually, this led to capital flight and a 30% dive by the Manila Stock Exchange.  Given the heavy dependence of industry to the latter, mutual funds, part or all equity, thrive or die with the stock market.   The absence of other investment outlets limited the sense of diversification of funds then.  As a result, the Securities and Exchange Commission totally banned the sale of mutual funds in 1973.

This death blow to the mutual fund industry led Trinity Shares, Malayan and Pacific Fund to stop operations.  To date, Pacific and Malayan remain dormant. Trinity Shares was acquired by PDCP in 1979 and was eventually bought by Philamlife in 1993.

Evidently, the failure of the mutual fund industry decades ago can be attributed to the following factors: 1) lack of government regulation; 2) deteriorating political and economic condition of the country; 3) the absence of alternative investment vehicles; and 3) an undeveloped equity market.

In the late 1980s, recognizing the increasing role of mutual funds as a vital ingredient for the development of Capital Markets, the Asian Development Bank, through Jardines, initiated a study on mutual funds. In 1989, the SEC, in its effort to revive the mutual fund industry established a taskforce for to oversee the formulation of the Implementing Rules and Regulations (IRR) of the ICA . The resulting IRR was promulgated on October 1989 and took effect 90 days later.

The IRR changed the existing provisions of the said law, increasing paid-up capital from Php 500,000 to Php 50,000,000, adding a 24-month hold out, and increasing required audits to four per annum. All of these provisions were intended to protect the interests of the investors and shareholders.

Under the new IRR, the Galleon Fund (again sponsored by Mr. Arthur B. Sokolow) was the 1st company to register and started selling its shares in Feb. 1, 1991 .   A few other investment companies followed suit, and the numbers have increased ever since.

Within a few years from this new beginning, the investment climate was not as rosy as the Asian financial crisis took its toll on the budding industry.  However, the stability of the Philippine Mutual Fund Industry has a much better chance at this time.  The level of professionalism is much higher.   The necessary controls and regulations exist.  Consequently, this period puts all the players to test, and it is with utmost confidence that Philippine Mutual Funds will be here to stay.
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