TREASURY and securities) to match the short term as well as long

MIDTERMS
MANAGEMENT term goals of the fund. Asset allocation is closely related
to diversification. While diversification focuses on
reducing the risk involved in investments; asset allocation
focuses on maximizing the benefits earned from the
FUND MANAGEMENT
investments.
Management of funds refers to the process of dealing with
an institution's or an individual's fund inflow and
outflow. It is a crucial aspect of financial management, Confirming to the Regulatory Guidelines
and it aims to maximize profits from any investment. So,
what is the importance of it in mutual funds or why does The Securities and Exchange Commission is the
it need a fund manager? Read on to find out more details regulatory body that governs the mutual fund industry. A
on the same. fund manager ensures the investment decisions are
within the regulatory guidelines. Non-compliance of
When you invest your funds in a mutual fund, a instructions can lead to hefty penalties for the fund
professional manager invests this pool of funds into house, which can impact the investors.
various securities, debts, and related instruments as per
set goals of the fund to reach the desired goal for the
investor.

What is Fund Management?

Performance Tracking
Fund management is the act of taking the collected pool
of funds and taking the necessary decisions regarding the Fund managers are responsible for tracking of a fund's
same. The decisions are usually related to investing in performance and ensuring the investment strategies are
new securities and selling off securities that are adjusted to meet the goals the fund intends to achieve.
depreciating. This requires: They use various metrics to analyze a fund's performance
carefully.
● Exhaustive knowledge of the market and the
current trends in financial affairs

● A clear understanding of fund flows (both inflow Emotion-Free Investing

and outflow)
Fund managers keep emotions out while making
● Capability to analyze complex financial investment decisions. These decisions, rather than being
information and draw statistical conclusions governed by sentiments, are backed by careful
analyzation of data that helps them understand the best
value of security they invest in. This helps them decrease
or increase the weightage of security without attaching
Fund Manager sentiments and emotions into it.

A Fund Manager is a professional with appropriate

qualifications that must have the above capabilities. Fund
managers are entrusted with the funds of a mutual fund Strategy Based Investing
and help with the growth of the capital while making sure
they remain safe from risks of losing the capital amount. There are various styles of fund management that these
professionals adhere to while making investment-related
decisions.

Importance of Fund Management For instance, a fund manager may choose top-down
investing where they look for best investment
Diversification opportunities based on how good or bad the economy is
performing. Or they could use a technical analysis
Diversification is a key aspect of managing mutual funds. strategy where past trading patterns of a stock govern the
It is the process of allocating funds across asset class to investment decision.
make it as risk-free as possible while maintaining the
desired return potential. Based on the expectations of This strategy-based investing ensures that the fund
investors, there is a distribution of funds in assets and remains true to its goal for the investors.
securities that match the risk tolerance of investors.
Choosing a Reliable Fund Manager
Asset Allocation
Fund Management is a complex process involving a lot of
Management of funds ensures proper asset allocation (or financial knowledge and research. This is why you should
in other words, proper allocation of funds in varied assets choose a reliable and experienced fund manager while

TREASURY MANAGEMENT | 1
selecting a mutual fund. Some factor to look into while On the basis of investment types, fund management can
looking at a fund manager are: be divided into the following 4 types:

● Experience in the industry Mutual Fund: It is a type of open-ended fund that pools
investments from multiple investors to purchase
● Rankings of the managers by credible bodies securities.
● Past track-records of the funds they are actively Pension Fund: This type of fund is built to generate
managing income for the investors after their retirement.
You should perform a thorough background check on the Trust Fund: It is a type of estate planning tool that
fund manager and mainly check their track record, before maintains the investment assets under a trust that is
selecting a mutual fund. Also, make sure you’re very clear managed by a neutral third party.
on the terms and conditions of the investments and the
risks involved with the same. Hedge Fund: This type of investment fund use complex
trading and risk management techniques to trade in
relatively liquid assets.
Objectives of Fund Management

The primary objective of fund management is to manage Mutual Fund

investments on behalf of investors. Besides, some of the
other objectives are as follows:

● Ensure the highest level of safety and stability What is a mutual fund in the Philippines?
for the investors by focusing on investment
opportunities that offer the right mix of risk and Mutual funds are professionally managed bonds, stocks,
return. and other investment products. It is made up of a pool of
money collected from various investors. The money is
● Guarantee capital appreciation of the then used to invest in different assets. A fund manager
investments in the long term. manages mutual funds for investors

● Besides long-term capital appreciation, generate

regular cash flow through interest and dividend
income on the investments. When to Start a Retirement Fund?

The long and short answer is NOW. Ideally, you should

start your retirement fund in your 20s or when you get
your first job. The sooner you start saving, the more time
your fund can grow. However, it’s never too late to start
your retirement fund later in life, you just have to save
more than you would if you started early.
How do Fund Managers Work?

The primary responsibilities of the fund manager include

the selection of appropriate investment strategies for the Pension Plans
investors and the management of their portfolio.
A pension plan is a retirement plan that requires the
Fund management may comprise of one manager, two employer to pay contributions to a pool of funds set aside
persons as co-managers, or a team of three or more co- for the employee’s future benefit. The pool of funds is
managers based on the size of the assets under typically invested on behalf of the employee. You will then
management. get your earnings back during retirement either as a
monthly payment or lump sum, amounting to the total of
A fund manager needs to monitor the market, ongoing
your contribution.
economic trends, and available investment opportunities
in order to make informed investment decisions.

A fund manager always seeks to stay ahead of the peers

and beat the competition by picking the right securities GSIS Pension Plan
and
This retirement plan is exclusive for government
implementing the appropriate investment strategy. employees. You can either get a five-year lump sum or
cash payment with an instant pension. You can also get a
refund of your GSIS contribution upon retirement from
Types of Fund Management employers.

TREASURY MANAGEMENT | 2
 business, or a combination of many different types of
properties or assets.

PAG-IBIG Pension Plan

What is the purpose of a trust fund?
Also known as the PAG-IBIG Regular Savings Program,
this retirement plan lets you withdraw your PAG-IBIG Trust funds are designed to allow a person's money to
contribution after 20 years of contribution or during your continue to be useful well after they pass away. You can
retirement at age 60 or 65. place cash, stock, real estate, or other valuable assets in
your trust.

SSS Pension Plan

What is a Trust Fund and How Does it Work?
This is a lifetime benefit to SSS members who have made
at least 120 months of contribution prior to the semester A Trust Fund is a legal entity that contains assets or
of retirement. The monthly compensation for an SSS property on behalf of a person or organization. Trust
pension plan depends on your contribution, credited Funds are managed by a Trustee, who is named when the
years of service, and the number of dependents. Trust is created. Trust Funds can contain money, bank
accounts, property, stocks, businesses, heirlooms, and
any other investment types. These assets remain in the
Trust until certain circumstances are met, at which point
they will be distributed to the beneficiaries.
PERA Investment
The creator of a Trust, who is referred to as the Grantor,
Launched by the Bangko Sentral ng Pilipinas (BSP), the will determine how and when assets will be distributed.
Personal Equity and Retirement Account (PERA) Typically, these requirements are related to age, or place
investment aims to help Filipinos, 18 years old and above, in life. For example, a Trust Fund could be granted to a
to save money for retirement. You can contribute PHP beneficiary when they turn 21 or graduate college. If you
100,00 annually or up to PHP 200,000 if you are an want to learn more about how Trusts work, or when you
OFW. should create one be sure to read our guide.

PERA is a voluntary retirement account with the purpose

of investing money in PERA products in the Philippines.
What is the Benefit of a Trust Fund?
You get a 5% tax credit with this type of retirement fund.
The earnings on investment are tax-free as well. The benefits of a Trust Fund are numerous, but perhaps
the biggest perk is the control it provides over the
Your PERA contribution can be invested in the following:
management of your assets. Trust Funds can guarantee
● Annuity contracts that your assets are properly taken care of until your
beneficiaries come of age, while also allowing them to
● Exchange-traded bonds avoid probate/ validation. In some cases, Trust Funds can
even be used to designate funds for certain purposes,
● Insurance products such as healthcare or educational costs.
● Locally traded stocks and other securities If you are the beneficiary of a Trust Fund, the biggest
benefit is likely the financial support you will receive.
● Mutual funds While it can be difficult to think about inheriting anything
from a loved one, a Trust Fund can greatly help your
● Pre-need pension plan
financial situation. Trust Funds can also help save you the
● Unit investment trust fund (UITF) time and emotional labor involved with lengthy probate /
validation court proceedings.

At the moment, only BDO and BPI are the only financial
institutions accredited as PERA administrators. Hedge Fund

A hedge fund is an investment vehicle that caters to high-

net-worth individuals, institutional investors, and other
Trust Fund accredited investors. The term “hedge” is used because
these funds historically focused on hedging risk by
A trust fund is an estate planning tool that establishes a simultaneously buying and shorting assets in a long-short
legal entity to hold property or assets for a person or equity strategy.
organization. ... Trust funds can hold a variety of assets,
such as money, real property, stocks and bonds, a

TREASURY MANAGEMENT | 3
What is a hedge fund in simple terms?

A hedge fund is a type of actively managed fund that

focuses on high-risk high return investments. Hedge
funds invest very aggressively using leverage and shorting
to try and increase their returns.

WORKING CAPITAL MANAGEMENT

Current Assets - Current Liabilities

Being the lifeblood of an organization, needs to be

efficiently and effectively managed so that the
organization may optimize its operations, minimize its
growth potential, and attain its desired financial position Analysis of Working Capital

What is Working Capital Management? Appropriate Level of W.C

Refers to the efficient and effective utilization of working working capital at which it should be maintained depends
capital to attain pre- determined objectives of an on factors:
organization relative to profitability of operations,
● Nature of Operations
liquidity of financial resources and minimization of risk
and company cost. It may also been defined as the ● Length of period required to Mfg.
administration and control of current assets and current
liabilities to maximize a firms value by achieving a ● Inventory and receivable turn over
balance between profit and risk
● Competitive conditions

● Dividends Policies
Trade-off between Profitability and Risk
● Taxation
In managing working capital, there is trade-off between
the firm's profitability and risk. ● Seasonal variations

Too much working capital can reduce the firms ● Price fluctuations
profitability because of financing charges. ● Expansion Programs
And the opportunity cost of capital tied up in the firm's
Inadequate WC contributes to business failures- inability
assets.
to pursue company objectives, inability to exploit
Inadequate working capital exposes the firm to the risk of business opportunities, reduced sales, loss of customer.
not being able to pay its bills as they fall due.
Too much WC may result to inefficient use thereof-
encourages speculation and unnecessary expansion

Relevance of Working Capital

A business uses working capital in conducting operations, Structural Health of Working Capital
that is in making goods and services available to customer
How much is in cash, receivables, inventories etc. ability
and clients. And in paying for operating expenses
of the business org. to meet financial requirements.
(salaries, advertising, rental etc.)
Circulation of Working Capital- refers to the flow thereof
Working capital is made to revolve from Cash to
from one current assets item to another in the process of
inventories and services and then to receivables or
conducting operations and the rate of such flow.
directly to cash. (lifeblood of an organization)
How long does it take to convert cash into cash…
PPE provide the structure:

TREASURY MANAGEMENT | 4
Inventory to A/R to cash Operations are conducted on a minimum amount of
working capital. Permanent capital requirements is
financed by using long- term sources of funds with
seasonal requirements financed by short-term sources.
Liquidity of Working Capital

Refers to the relative composition thereof with emphasis

on cash and marketable securities and how soon the Aggressive Financing Strategy expose the firm to the
noncash items among the current assets be converted to risk arising from a low working capital position.
cash.

Acid test ratio, Aging of A/R, Analysis of the movement of

the diff. Inventory items. Analysis of sales into cash sales Too much pressure on the firms short term borrowings
and charge of installment sales. capacity so that it may have difficulty in satisfying
unexpected needs for funds.

Short-term refinancing can result in significantly higher

Financing Requirements of A Firm borrowing cost arising from changing interest rates and
service charges
Permanent financing requirements refers to what should
stay with the firm throughout the budget year.

Seasonal financing requirement refers to additional

requirements arising from fluctuation in the volume of
activity ( production & sales ) arising from seasonal
changes in the level of demand for products during the
year.

Total Financing Requirements = Permanent

Requirements + Temporary Requirements

Example:
Conservative Financing Strategy
The permanent financing requirements of CCC Corp. is
80,000 consisting of fixed assets (50,000) and current Provides a long term fund based on the minimum
assets (30,000). Because of seasonal changes in the requirements with expected needs financed by ST
demand for its products, the total current assets for the sources.
first, second, third and fourth quarters of 2011 have been
estimated at 38,000, 45,000, 30,000 and 42,000 This strategy generally results in more financing charges.
respectively. (Cost of LT funds is higher than ST funds)

Opportunity cost of too much capital tied up in current

assets.
In the given example, the total financing requirements of
the firm for each quarter is analyzed:

Throughout the year the total financing requirement is Applying this strategy, the maximum capital
80,000 with additional financing requirements of 8,000, requirements P 95,000 would be made available
15,000 and 12,000 for the 1st and 2nd and 4th qtrs. throughout the year, financed by LT funds.

WC would be P 45,000 and during the first, third and

fourth Qtrs. There would be excess funds.
Aggressive and Conservative Financing Strategies

Aggressive
Semi- Aggressive (semi conservative)

TREASURY MANAGEMENT | 5
Trade-off between the aggressive and conservative. The
semi aggressive strategy may be adopted. Part of the
seasonal financing requirements is funded using LT Cash is the most liquid of all current assets items and is
sources. Thus, LT funds may be equal to the average used to meet financial requirements so that its flow must
between the highest and the lowest total requirements be carefully planned and controlled.

P 87,000 or (95,000+ 80,000)/2) Cash Management Questions That Must Be

Answered

How long is the cash cycle?

How much should be its minimum balance? Cash

requirements per day and availability of sources.

How long does it take the company to convert inventory

to A/R or to Cash? Is there an effective control system
within the company?

What cost cutting measures may be adopted to minimize

cash requirements? In terms of idle funds, what kind of
investment may they be placed?

In how many days does the company collect its

receivables? Are collections made promptly? Are discount
Working capital averages P 37,500. during the 3rd qtr. granted to customers for prompt payment?
Excess funds of P 7,500 may be expected.

Number of Days in Cash Cycle and Cash Cycle in

One Year
Season Variation in Working Capital The number of days in cash cycle refers to the length of
Requirements time that elapses from the point cash payment is made for
purchases to the point of collection from customers/
Seasonal fluctuation in the activities of a firm results
client to whom the goods/ services have been sold.
in additional financing requirements in the form of
temporary current assets.

Current asset requirements can be financed by ST

borrowings or by trade creditors. It does not bring an
increase in working capital requirement.

If cannot finance by creating current liabilities. It gives

rise to additional WC requirements in as much as it must
finance by LT equity.

Fluctuations in production and sales and the

consequent fluctuations in current assets and working
capital requirements can be anticipated in the process of Cash Float
budgeting.
Refers to temporarily unclaimed funds because of time
lag between issuance and subsequent clearing of checks.

Working Capital and Cash Provided by Upon issuance of checks, the amount thereof is
Operations subtracted from the cash account balance per book of the
company, but it is only upon clearance with the
Instead of immediately looking for additional sources of depository bank that the amount is deducted by the bank
funds from outside a firm it would be worthwhile to from the account of the issuing company.
determine how much working capital and cash can be
provided by operations.

Cash Management

Refers to efficient and effective utilization of cash to

attain company's objectives.

TREASURY MANAGEMENT | 6
Cash Management Strategies Turnover rate of 14x means that on the average,
receivables of P 75,000 are collected 14.4 times. On the
1. Collect receivables as quickly as possible without average receivables collected after 25 days. If the
resorting to high pressure collection techniques. company practice grant credit only for 20 days, it may be
concluded that receivables are 5 days overdue on the
2. Stretch account payables. Pay bills as late as
average.
possible without adversely affecting credit
rating.

3. Turn over inventory as quickly as possible. Inventory Management

(Upon manufacture or purchase, they are
automatically sold.) Refers to the formulation and administration of plans and
policies to efficiently and satisfactorily meet
manufacturing and merchandising requirements and
minimize cost relative to inventories.
Collection Techniques

Direct Send - checks received as part of collection are

sent directly to the bank on which they are drawn by Objectives of Inventory Management
customer.
Is to maintain inventory at a level that best reconciles
Concentration Banking - Bank accounts are turnover and profit consideration and consequently,
maintained for provincial sales outlets so that they may maximize return on investment.
collect from customers and deposit their collection with
the local bank.

Lockbox System - Customers are instructed to send The size of inventory is related to the size and
remittances to a Post Office Box which is serviced by the frequency of purchase orders. When purchases are made
company's banks. less often but in bigger volumes. Inventory must be
higher level so that less ordering costs but more handling
Direct Payment to Depository Bank - Special cost are incurred.
arrangements are made with banks to accept payments
from customer/ clients with collection directly credited to
the collecting company's bank account.

Direct Deposit to Company's Bank Account with

computerization system in banking (online) customer
may be allowed to make deposits to the main office bank
account through the banks provincial branches.

Accelerating Inventory Turnover

Another way of minimizing operating cash requirements

is by accelerating inventory turnover. This may be
affected by reducing inventory level in proportion to sales
volume.

= Sales / Average Inventory

Aids In Analyzing Receivables

TREASURY MANAGEMENT | 7
 Relevant Costs in Inventory Management

The relevant cost in inventory management are those that

vary with inventory levels, frequency of orders and order
sizes

Ordering Costs - are those incurred every time as order

is placed.

Set-up costs are incurred instead of ordering costs and

these are in the form of all cost incurred in preparing
machinery and equipment every time there is a change in
the products to be processed
Inventory Control System
Carrying Costs - are the cost of maintaining
Two-bin system - for each inventory item, two bins or inventories. (Warehousing, storage costs, property taxes,
containers are provided. One contains enough stocks to insurance on inventory, cost of capital tied up
cover requirements for the time an order is placed until
goods are received. in inventory)

The other bin contains the expected requirements before Stockout costs - refers to the total effect of a company's
orders are placed. As soon as the second container failures to service customers or fill their orders or conduct
becomes empty, the order for replenishment is placed. operations smoothly arising from stockouts.

Min Max system - Minimum and maximum inventory

levels are established for each item in inventory. The
minimum balance is expected to take care of the Economic Order Quantity
requirements for the period from the time an order is
With the trade-off between ordering costs and carrying
placed up to the receipt of the goods.
costs, an organization must make its purchases order
ABC system (Usage Value Analysis Technique) - based on the point at which these two kinds of costs can
Items in the inventory are classified into three classes, A, be minimized.
B, C. Based on their usage value, varying degrees of
The order size at this point is called EOQ (the quantity to
control are adopted with the strictest control adopted for
order in order to minimize relevant cost)
the class A items.
For a manufacturing firm it is called the OPTIMUM
Order Cycling System - Inventory items are reviewed
PRODUCTION RUN (economic lot size) and the
one at the time at periodic intervals to determine when
relevant cost are set up cost and carrying costs.
replacement should be made

Budgetary Control System - Actual usage and

inventory levels to ensure their conformity with what
have been budgeted.

Explosion Method - Inventory requirements are

determined in advance based on planned production
volume and purchases are made in advance to meet
production schedules

Perpetual Inventory Control System - Perpetual

records are maintained to facilitate inventory
management. Information on these records includes
pending orders, reserves quantities, MinMax balance.

Turnover Rates - This system is adopted to ensure that Example:

actual flow and levels of inventory are kept within limits
of the predetermined standard turnover rates. Annual Usage is 10,600 units, ordering cost per order is P
15.90. Carrying cost is 10% and unit cost is P 3.00 The
Statistical Inventory Control System - Statistical or EOQ and optimum number of orders:
mathematical models such as Economic Order Quantity
and re-order point

TREASURY MANAGEMENT | 8
The total relevant cost based on 12,10,8 orders are
computed:

Frequency Distribution Method of Determining

Safety Stock Level

Under this method, the safety stock level is determined

based on the desired safety percentage from stock outs
considering the frequency distribution from usages
during lead time.

TREASURY MANAGEMENT | 9