7.4 Equity Funds

Equity funds: the growth engine of the UITF shelf

Equity UITFs are the core classification built for capital growth through stock-market exposure. Clients who understand deposits and bond coupons often under-estimate how large equity NAVPU swings can be—both up and down. Module 2 requires the Circular 1152 bright-line test, Philippine naming patterns, risk/return framing from Module 1 (beta, CAPM intuition, standard deviation), and disciplined CSA mapping.

Circular 1152 definition—equity fund (memorize the 80% rule)

Under BSP Circular 1152, an equity fund is a UITF that invests at least 80% of its net asset value (NAV) in equities.

This is the cleanest quantitative classification on the exam. Compare:

Residual non-equity holdings

An equity fund may hold cash, deposits, or short fixed income for liquidity, pending investment, or redemptions—but the policy and ongoing classification center on maintaining the ≥ 80% equity character. Incidental cash does not reclassify an equity UITF as a money market fund.

Worked classification check

Fund NAV = PHP 1,000,000,000

Trustees manage to Plan Rules so the fund remains inside its declared class; sales staff do not compute a private override.

Philippine product naming

Expect labels such as:

• Peso Equity UITF / Equity Fund
• Philippine Stock / PSEi-oriented / Index Equity UITF (where offered)
• Dividend equity or thematic equity UITFs
• Global / US / regional equity UITFs for foreign-market exposure (currency risk may apply)

Whatever the brand, the regulatory identity for this section is: equity class under the ≥ 80% NAV equities rule, unitized, marked to market, non-deposit.

Risk ladder and Module 1 connections

Typical core ladder:

Money market < fixed income / bond < multi-asset / balanced < equity

Equity funds are highest risk / highest long-run expected return potential among the four—not highest guaranteed return. Link Module 1 tools:

Drawdown language for the branch

When the Philippine equity market falls 15%, a diversified local equity UITF with beta near 1.0 can see a comparable order-of-magnitude NAVPU decline (fees, cash drag, and active bets create differences). Clients who cannot tolerate that path fail the suitability conversation for equity funds—even if they “want high returns.”

Full four-class comparison table (exam revision sheet)

If you can reproduce this table under timed conditions, you own the classification half of Module 2.

CSA mapping for equity UITFs

Equity funds generally fit clients who:

• Profile as aggressive or high growth capacity on CSA
• Have a long investment horizon (multi-year)
• Demonstrate willingness and ability to absorb large interim losses
• Understand RDS language: units can fall substantially; not a deposit

Poor fits:

• Tuition money needed next semester
• Clients who demand “no loss” language
• Conservative CSA without proper risk upgrade process
• Anyone sold equities solely because “last year the fund was #1” without risk capacity

Performance chasing without suitability is an ethics and sales-process failure, not a product feature.

What equity UITFs hold (conceptual)

Subject to Plan Rules:

• Listed Philippine equities
• Possibly foreign equities or equity funds/instruments if allowed for that product
• Limited cash/FI for liquidity

They are not required to concentrate in a single stock (single-exposure limits—commonly taught as 15% of NAV, with Philippine National Government debt often exempt in the bond context—still discipline portfolio construction). Equity diversification reduces unsystematic risk; systematic market risk remains the story clients feel in drawdowns.

NAVPU, fees, and client return experience

1. Equities mark to market → fund NAV moves → NAVPU moves, typically daily.
2. Dividends received by the fund (if any, depending on distributing vs accumulating features taught later) flow through fund economics per Plan Rules.
3. Trust fees reduce net assets over time.
4. Client “return” is change in unit value (and distributions if any), not a fixed coupon.

Illustration

• Client buys 50,000 units at NAVPU PHP 2.000000 → PHP 100,000 invested (ignore fees).
• Market rally → NAVPU PHP 2.300000 → market value PHP 115,000.
• Later drawdown → NAVPU PHP 1.850000 → market value PHP 92,500.

Same units; different market prices. That is equity fund reality.

Sales language that stays compliant

Acceptable framing:

• Higher long-term growth potential with higher volatility
• Suitable only if CSA and horizon support equity risk
• Past performance ≠ future results
• Not PDIC-insured; principal not guaranteed

Unacceptable framing:

• “Para ring high-interest deposit”
• “Principal safe after one year”
• “PSEi always goes up long term so you cannot lose” (directionally common belief, not a guarantee you may sell)
• “Equity UITF is insured because the bank is BSP supervised”

Exam traps for equity funds

1. Wrong threshold — it is ≥ 80% of NAV in equities, not 50%, not 90% feeder rule.
2. Confusing equity class with multi-asset — multi-asset is diversified mix without the equity-fund 80% definition.
3. Saying equity funds are PDIC-insured — never.
4. Claiming diversification removes all risk — removes much unsystematic risk, not market risk.
5. Placing equity below money market on the risk ladder — opposite of the standard teaching ladder.
6. Using money market maturity rules as the equity definition — different class, different test.

Chapter close—classification mastery checklist

Before you leave Chapter 7, confirm you can:

1. State all four Circular 1152 core definitions without notes.
2. Draw the risk ladder and map each class to typical CSA zones.
3. Recite non-deposit / non-PDIC / non-guaranteed for every class.
4. Distinguish WAL ≤ 1 year vs > 1 year (MM vs FI).
5. State the ≥ 80% NAV equities equity test.
6. Explain multi-asset as diversified FI + equities + other allowables.

Next chapter builds structures (feeder, fund-of-funds, multi-class, distributing) that can wrap these economic classes—do not confuse structure with the MM/bond/multi-asset/equity classification you just mastered.

One-liner to memorize

Equity UITF (Circular 1152) = at least 80% of NAV in equities; top of the core risk ladder; growth-oriented CSA only; unit NAVPU bears full market risk—not a deposit, not PDIC-insured, principal not guaranteed.