2007 Annual Report - Sun Life Financial

Reaching Greater Heights
Management Review and Outlook
Sun Life Of Canada
Prosperity Philippine Equity Fund, Inc.
2007 PERFORMANCE REVIEW. The Fund closely shadowed the benchmark return
performance for the year, despite the low average investment levels, structural
impediments and low volatility. The Fund ended the year with a 20.6% return
compared to the benchmark PSEi of 21.4%. Total fund collections for 2007
amounted to Php 2.47billion, as against redemptions of Php 914 million.
FINANCIAL MARKEt REVIEW
It was supposed to be another-record breaking
year for the Philippines, wherein the convergence
of sound macro-economic fundamentals, a benign
U.S. Federal Reserve policy and the fulfillment
of earnings targets should have resulted in lower
market volatility and a more consistent growth
trend.
However, two completely unexpected events
shocked the financial markets just as it was headed
for a new all time high. The first event occurred in
the first quarter, wherein the Chinese government’s
efforts to tame runaway inflation and market
speculation resulted in an unprecedented one-day
drop of 8% in the PSEi. While the drop had no local
fundamental basis, the emergence of China as a new
global market factor meant that there was a new
source of external shocks, which has to be considered
when making investments. When the risks from
China became clearer and quantifiable, investors
were able to regain their lost footing. The PSEi
slowly recovered and went on to post a new all-timehigh,
closing at 3,786, translating to a YTD return of
27%.
Just as the market reached another milestone, the
second unexpected external event occurred in the
form of the U.S. sub-prime mortgage crisis. This
event, together with the U.S. Federal Reserve’s
reluctance to proactively manage the looming crisis,
caused the PSEi to drop by 24% in one month and
set the stage for a massive global liquidity crisis.
The crisis finally forced the U.S. Federal Reserve
10 Prosperity Funds
to hastily loosen monetary policy and resulted in a
9.8%, single-day recovery in the PSEi, which went
on to another milestone closing level of 3,873, early
in the fourth quarter, for a YTD return of 30%.
However, unlike the earlier crisis precipitated by
China, this would have no quick resolution.
This massive increase in volatility brought about
by external factors which could not be quantified,
resulted in a negative return for nearly every
local IPO and follow-on offering. While the
external backdrop continued to deteriorate, local
fundamentals allowed the PSEi to close the year with
a respectable 21.4% return with the following sector
performances.
Property + 16.56%
Holding Firms + 17.60%
Financials + 5.05%
Industrials +12.23%
Mining + 84.98%
ALL SHARES + 19.16%
INVEStMENt APPROACh
Early in the year, it became increasingly apparent
that the increased impact of unexpected external
factors would be a substantial challenge. What was
supposed to be a continuation of the 2006 growth
strategy was quickly re-focused to risk management
- focused on providing returns, at the lowest possible
volatility. This became the underlying driver for
most investment decisions and proved successful
when the market collapsed by 24% mid-year.