8.2 Fund-of-Funds Structure

Fund-of-funds in Module 2 product geography

After feeder funds, the natural contrast product is the fund-of-funds (FoF). Both structures invest primarily in other collective investment schemes rather than building the entire book as direct single-security holdings. The regulatory and exam distinction is about how many targets and how exposure is spread.

Teach the FoF diversification numbers exactly as used in UCP exam presentation of BSP rules. Do not invent alternate thresholds (for example, do not teach “at least 10 targets” or “15% per target” unless a specific Plan Rules document you are holding says so for a named fund—and even then, the exam’s common structure remains the 5 / 20% frame).

Definition for memorization

A fund-of-funds UITF invests at least 90% of its assets in multiple target collective investment schemes. Under the diversification structure emphasized for UCP:

1. The FoF should hold at least five (5) different target funds.
2. No single target fund should exceed 20% of the portfolio.

Residual assets (under 10% in aggregate if the 90% CIS test is met, conceptually) support liquidity, subscriptions/redemptions, and operational needs as Plan Rules allow—same high-level idea as other UITFs that need cash buffers.

Investor fund vs targets (FoF flavor)

• Investor fund = the Philippine FoF UITF; one Plan Rules set; one (or multi-class) unit structure; local NAVPU.
• Target funds = the several CIS vehicles (other UITFs, mutual funds, ETFs, etc., as allowed) that together absorb ≥90% of assets.

Participants still do not “own five offshore account numbers” at the branch desk. They own units of the local FoF. Economically, performance is a blend of the targets’ results, weights, fees, and currencies.

Why FoF structures exist

1. Manager and strategy diversification

Where a feeder stakes almost everything on one target’s process, an FoF can combine, for example, a global equity CIS, a global bond CIS, a regional equity CIS, and other allowed targets so that no single manager decision dominates the entire book beyond the 20% cap in the tested structure.

2. Asset-class packaging

Trust product teams may design a “global multi-asset FoF” whose Plan Rules objective is balanced growth, implemented by holding several specialized targets instead of trading thousands of individual securities in-house.

3. Risk budgeting narrative (with honesty)

Multi-target design can reduce single-target operational and style concentration. It does not:

• Eliminate market risk
• Create PDIC coverage
• Guarantee positive returns
• Remove layered fees
• Make CSA optional

If all five targets are aggressive equity funds in the same region, “five names” may still behave like one big equity bet. Diversification quality depends on what the targets are, not merely on counting to five.

Worked allocation sketch (exam intuition)

Suppose FoF net assets = PHP 500,000,000. A structure consistent with the taught rules might look like:

Checks:

• Target CIS total ≥ 90% → pass
• Number of different targets ≥ 5 → pass
• No single target > 20% → Target E is exactly 20% (at the cap, still within “no more than 20%” as commonly tested)

If marketing staff casually put 35% into one “hot” target, that would break the UCP-presented FoF diversification structure even if five names appear on a slide.

FoF vs multi-asset direct funds

Do not confuse:

A balanced fund can be diversified without being an FoF. An FoF is defined by target-fund investing, not by the marketing word “balanced.”

Layered fees—still a client conversation

FoF fee stacking is often more complex than a single feeder because each target has its own cost drag, and the local FoF charges its trust fee on top:

Local FoF fees + blended target-level ongoing charges (+ FX/dealing frictions)

NAVPU is still net of allowable accruals at the local level and reflects the fair value of the target holdings. When a client asks, “Bakit mahal ang fees?”, the accurate answer is structural honesty: multi-layer professional management is being paid. Whether the package is worth it is a suitability and disclosure discussion, not something to hide.

Transparency and due diligence themes

CUSP staff are not portfolio managers, but they must know what clients should expect:

1. Look-through complexity — underlying holdings sit inside targets; client reports emphasize FoF units and NAVPU, not every stock line.
2. Valuation dependence — local NAVPU depends on timely, reliable valuation of each target holding.
3. Liquidity dependence — if several targets slow redemptions under stress, FoF dealing capacity can be constrained under Plan Rules and fiduciary processes.
4. Trustee oversight — the trust entity selects and monitors targets within Plan Rules; sales staff must not invent unofficial target lists.
5. Foreign targets — same extra themes as feeders when offshore CIS are used: currency, jurisdiction, information lag.

Suitability implications of layered multi-target structures

Use FoF carefully:

RDS / PHS discipline: describe market risk, possible target-level risks, fees, and non-deposit status. Do not market FoF as “BSP-guaranteed diversification insurance.”

Governance and Plan Rules

Plan Rules should identify FoF classification, investment objective, target eligibility criteria, allocation/diversification constraints consistent with regulations, fees, dealing, valuation, and risk factors. Rebalancing among targets is an investment management function inside those rules—not a relationship manager’s verbal promise to “double the crypto target next week” (which would also fail ordinary eligibility thinking).

Material changes in strategy or significant target framework shifts follow formal amendment and notice expectations (expanded in later Circular 1152 administration chapters). Branch staff use the current approved story.

Performance communication

When showing past performance:

• Use official FoF NAVPU history and approved materials.
• Do not paste five target funds’ best years and imply the FoF captured all of them simultaneously without weights and fees.
• Benchmarks, if any, are comparison tools—not promised returns.
• Relative outperformance of one target does not mean the FoF “cannot go down.”

Exam traps for fund-of-funds

1. Swapping feeder and FoF definitions — most common Module 2 trap.
2. Forgetting the 90% multiple-target rule — FoF is still a target-CIS structure, not random stock picking by definition.
3. Dropping the 5-target / 20% presentation — UCP items often hinge on those diversification markers.
4. Claiming FoF removes the need for CSA — false.
5. Saying FoF units are PDIC-insured — false.
6. Assuming any fund with the word “global” is automatically FoF — classification follows Plan Rules and asset tests, not adjectives.
7. Teaching invented numeric limits beyond the standard 90% / ≥5 / ≤20% frame used here.

Memory hook

FoF = ≥90% in MULTIPLE target CIS; UCP structure: ≥5 targets, each ≤20%. Still a market-risk UITF with layered fees. Contrast with feeder = ≥90% in ONE target.