The concept of unit trusts in Sri Lanka

The concept of unit trusts in Sri Lanka is still relatively new for the larger segment of Sri Lanka's population although it is understood among Colombo's investing community. In this question and answer session, S. Jeyawarman, president of the Unit Trust Association in Sri Lanka responds to some of the frequently asked questions on unit trusts and their performance.

Q. There is a feeling among the people that unit trusts in Sri Lanka are not performing well. What are your views on this?

A. First of all I would like to point out that the unit trust is not a product similar to a share of a company or a debenture or a specific instrument, but it is an investment vehicle to facilitate people to reach a market, market segments, or a combination of all. This for example would be share, bond and money markets, where unit trusts can offer access to a single market or combination of markets. When markets decline the value of investments in those markets generally decline. It is, however, necessary to realise that the characteristics of markets are different. When one market is not performing the other markets may offer attractive opportunities to investors. In recent years the share market has come down and the unit value derived from this market has also declined. However, more recently the interest rates have moved up and the fixed income market has started to show better value for investors in income funds.

I feel investors should look at income funds more closely to take immediate advantage while holding stock funds for their longer term needs.

Q. One would argue that investing money in a saving or fixed deposit is safe. Therefore why should one go to a unit trust to save money?

A. Well, saving money in a saving or fixed deposit account that you mentioned is one way to earn a return. But one should be aware of the difference between a fixed return from a saving and variable and market originated return from an investment vehicle such as a unit trust.

To illustrate this point, look back at the year 2000 where interest rates almost shot up from 10% at the beginning of the year to 20% by the end of the year. If people fixed their money for example at 10% in a one-year deposit at the beginning of the year their return would have been 10% only. Whereas some would have fixed in short term deposits (say 3 months) and received 10%, and 14%, 16%, 18% with their renewals and would have earned a higher return for the year, on a compounding basis. These decisions can overall be taken for one's advantage with more detailed knowledge of how market functions.

An income-based unit trust which invests in government bills and other forms of interest -based instruments would have pursued an investment strategy to maximise the return to the unit holder.

Unit trusts generally enable the investor to get the market return as guided by the managers who conducts research, to pick the right investment for the fund within a changing market environment. Therefore the unit trust can offer a process of maximising return from market opportunities.

Q. Can you explain, how safe these unit trusts are. Some people think public money is given to the managers of these trusts and they can do anything with these monies?

A. Unit trusts have operated in this country for almost a decade. We do not have any instance where managers have mishandled those funds. It is because there are many safeguards in the unit trust.

First and foremost the investor's money is held in a trust separated from the managers and held under the custodianship of the trustee. Generally trustees in Sri Lanka are reputed banks.

Secondly, the trustee has the duty to supervise and ensure the fund is administered according to the trust deed which is a legally binding document. In an extreme situation if the manager is incompetent the trustee has the power to dismiss the manager.

Thirdly, the unit trust is licensed by the Securities and Exchange Commission of Sri Lanka which ensures the trust is operated within the SEC law and unit trust code.

All these safeguards provide safety to investors' money in the trust and is free from any fraud, misappropriation or default.

Q. The unit trusts came to the market in the early 90's and later on mostly invested in the stock market. Their net asset value has gone down with the downtrend in the stock market. Is it the reason people are concerned about unit trust investments?

A. What you say is perfectly correct. If any investor holds shares in the stock market directly on his own, he would have faced similar risks by holding this over the years.

As a pooled fund, unit trusts have resisted well, which we call the portfolio effect of combining securities. All equity funds have performed better than the stock market overall.

To further mitigate this problem the Unit Trust Association has requested the authorities to permit, at least to a limited extent, investment in foreign equities. In this manner unit trust funds can further reduce the risk while increasing the return.

Furthermore, as unit trusts are "marked to market" in its valuation, if an investor wants exposure to a managed portfolio of shares at any suitable time the unit trust provides that opportunity instantly.

As share investments are long term in nature, the market sentiment today reflects lower value for businesses with good prospects listed in the stock market. However, the intrinsic value of these companies remain good. We believe the market sentiment will change and move closer to the intrinsic value soon rather than later.

Q. What suggestion do you have for equity fund investors who are worried about returns?

A. I am confident the unit holders in equity funds share views similar to mine in share investment. They are also hopeful the share market would bounce back to the correct value of business and unit values will improve with the market.

Q. Since interest rates have gone up in the economy how would one take advantage of this in the unit trust market?

A. Some of our member companies offer pure income and gilt-edged returns. Investors can take advantage of the interest rates by selecting those funds suitable for their needs.

Q. Do you think different types of unit trusts can be floated in the market to widen the scope to investors?

A. In advanced markets fund management companies from time to time float new trusts to meet the changing needs of investors.

Presently, we have growth, balanced income and index type of funds in Sri Lanka.

We have also approached authorities to allow a limited form of tax advantage to investors to provide retirement saving schemes where investors shall commit themselves to hold their money for a period of ten years at least. This fund would address two main issues this country faces:

1) Increased capital formation to the capital markets.

2) Facilitate retirement savings thus reducing social implications from the rising cost of living when people retire from their employment.

Q. In Sri Lanka the unit trust concept has not picked up well among the people. Where do you see the future of unit trusts?

A. Investors need to be active in investing their money as the money value tends to fall faster with inflation. 

I am confident people will increasingly go for investments where markets offer better returns. People should change their style of investments from traditional passive forms of savings where the returns are lower to a more active and market oriented investment.

We are offering effective market access through the unit trust vehicle and it is up to the people to make use of it.

Vying to be credit card king

By Chanakya Dissanayake

SCGB is currently number two in the 220,000-card Sri Lankan market, having a market share of 22 percent while HSBC enjoys the market leadership with its 88,000 card portfolio.

Industry sources said the market for credit cards has been growing at about 60,000 cards per annum for the past few years.

SCGB's quest to be No.1 derives from its South Asian strategy, where it has recognised credit cards as a core business. "With the East Asian crisis, corporate markets in the region became stagnant. The growth is in personal banking," said Dayan de Silva, Manager - Credit Cards, SCGB.

"HSBC is totally dependent on their advertising to woo customers. They do not have a dedicated sales team like us," Mr. de Silva said.

Sampath Bank was the first to introduce international credit cards to Sri Lanka in the late 1980's. The two state banks soon followed Sampath Bank but they subsequently lost their share of the market to their more aggressive foreign counterparts. Industry sources claim there is still a large untapped market outside Colombo.

"Only the merchants in large cities have accepted credit cards as a mode of payment. If the market is to grow we'll have to broadbase its acceptance," Mr. de Silva said.

Reacting to growing competitive trends, HSBC said they would not embark on aggressive card expansion due to the prevailing macro economic situation in the country.

"We will maintain our competitive edge through value added services and discount offers of major retailers," said Priyan Attygalle, Manager–Credit Cards, HSBC.

HSBC is also planning to develop new markets in the state sector and among the elderly population. "These segments are currently not serviced. We see a huge potential for growth in these sectors," Mr. Attygalle added.

"Just like the cellular phone, cards will become a necessity soon in Sri Lanka," he added.

HSBC is also the only bank to use computerised credit scoring and collection systems, which enables them to maintain a low default rate of 2%-3%. "There is a misconception that we have a high default rate because we manage a 88,000-card portfolio. In fact our default rate is the lowest in the market," Mr. Attygalle said.

SL-Malaysian investment fair this week

Officials of the council, which functions under the aegis of the Ceylon Chamber of Commerce, said 20 Malaysian and 10 Sri Lankan companies are taking part in the fair to be held at the Trans Asia hotel. In addition to this, a 20-member group from the Associated Chambers of Commerce and Industry of Malaysia would be visiting Colombo during this period for prospective investment talks with local counterparts.

A Malaysian cultural dance troupe from the state of Perak will also be in Colombo during these events and present a series of performances in Colombo and the outstations, while a Malaysian food festival will be held at the Trans Asia hotel during the week. The Malay community in Sri Lanka is also involved in some of the events, officials said.

Sanstha awards : Focus on national development

The Bridges Division of the Road Construction and Development Company (Pvt) Ltd., (RCDC) was awarded the prestigious 'Best Project Award' for its contribution to the development of the infrastructure of Sri Lanka and its creditable record of completing projects on time and within budget limits. Mr. E.A.U. Hemachandra, Head of Bridges Division of the RCDC received the award on behalf of the company, a PCCL group statement said.

The Matara Bus Terminal and Shopping Complex won the 'Merit Award for Outstanding Design & Construction of Facilities' for the benefit of the community. Architect Rukshan Widyalankara won the award for its distinct design while Mr. Joel Selvanayagam collected the award on behalf of Hovael Construction (Pvt) Ltd, for construction of this project. 

The 'Merit Award for the Construction Industry' was awarded to the National Construction Contractors' Association of Sri Lanka. This award was in recognition of their involvement in the development of the Sri Lankan construction industry and for conducting a forum for construction contractors to air their views, further their interests and to redress their grievances. The President of the Association, Mr. D.D. Wijemanne received the award.

The 'Merit Award for Research' was awarded to the Department of Civil Engineering of the University of Moratuwa and was received by Dr. Anura Nanayakkara.

Fifty-five distributors were also awarded official PCCL Group Distributor Partner Certificates in recognition of their commitment to 'Sanstha'.

SLIM, Rowland conduct PR seminars

The course presenters from Australia are Beverly Pinder, CEO of Rowland, Melbourne who has been 21 years in the business, and Maurice Perera, a veteran Sri Lankan journalist with international experience spanning 40 years with a reputation for being one of Australia's best journalism trainers. They will be joined by Rowland Sri Lanka's CEO, Nimal Gunawardena and Head of Consulting, Dr. Asoka Jinadasa.

The seminars aim to address a dire need in Sri Lanka for trained PR professionals who can write good PR stories and face the cameras, a Rowlands statement said.

Many companies and NGOs have recently employed PR managers for corporate communications work. 

The seminars will address training needs of this segment and of press and PR officers in the government sector who want to update their skills.

One of the seminars will provide training in facing the media and press/media release writing for hands-on PR practitioners and corporate spokespeople. The other is directed at an audience of CEOs, marketing managers and communications managers on understanding how PR techniques and practices could be harnessed and best used to promote their institutions and products.

Correction

DFCC's solution for urban housing problem

By Murali Jayadeva

In Colombo slums and shanties occupy 400 hectares of prime land and we often witness the most unedifying spectacle of elegant high rise buildings standing side by side to these slums and shanties. The problem is really grave. The need for more middle income housing schemes in and around the city assumes greater importance and urgency in the present scenario. We took time to meet with L. G. Perera, Executive Vice President (Lending) of the DFCC Bank to learn what strategies the Bank is formulating to meet with this challenge. Discussing their action plan Mr. Perera informed us that the DFCC Bank has set in motion a pragmatic plan to assist the critical areas of Urban Housing. This plan.according to Perera, will go beyond the conventional state funded housing schemes of the past. When we asked him to expand, he said "The State sector housing programmes have been struggling to keep up with the speed required by the escalating demands for housing. In the year 2000 the main concern of the Government was to complete a large number of low-end housing schemes on which work had commenced in the previous year. And getting on to explain their breakthrough plan the Sustainable Townships Programme in collaboration with the Ministry of Urban Development, Housing and Construction, Perera went into details in explaining this programme. He said "The Sustainable Townships Programme is a way forward to solve the critical areas of Urban Housing. Touching on the significant features of this programme Perera outlined the following: This programme is financially viable, socially acceptable and environmentally friendly. The main objective of this programme is to release prime land in the city illegally occupied by squatters and shanty dwellers.

Then we raised the question, whether the people so evicted from their present locations wouldn't create any problems for the State. If so what safeguards this programme will have to overcome such situations? Yes of-course we will have problems, Perera quipped. But authorities must take necessary safeguards by making arrangements to rehouse the 66,000 makeshift households in suitable alternative locations and that the slum and shanty dwellers on these properties will have to be resettled in fully developed modern compact townships which will enable them to own a permanent home with title worth over a million rupees in the open market today. How will the private sector be involved in this programme, we asked. He said "Sustainable Townships Programme will provide opportunities for the private sector to develop the lands so released." He added that during the past five years, such private sector participation has shown favourable results with the launch of several projects targeting middle income housing needs. Has there been any change in the demand pattern? We asked. He said "Yes, the demand pattern for middle income housing in Colombo and the periphery has undergone specific changes. The changes are reflected in their changing attitude towards housing. As a house owning democracy, most people in Sri Lanka prefer to live in individual houses even in a small plot of land. This concept is fast changing in view of the high cost of land. There is now a definite shift from their preference to live in individual housing units to condominium apartments. 

Furthermore, the present day house seekers give high priority to the utility value of the property rather than the value appreciation of property over a period of time. 

We asked him for details of DFCC funding for initiatives in Urban Housing. Describing the role played by DFCC in this area, Perera said DFCC had played a very vital role in three recent projects which amounted to a funding of 500 million rupees. Citing an example, he said DFCC Bank was directly involved in backing a private sector housing venture in Athurugiriya. This project named Millennium City drew enormous response from the public and when completed will offer 1400 houses and related facilities to the middle income house seekers.

Sampath Bank makes it a reality

Opening the gambit Shanthi Gooneratne focused on the mission of Sampath Bank. She said its mission is the most innovative, trusted and best process quality provider of financial services in the region. Taking off from this concept, Gooneratne said "Sampath Bank has a thorough understanding of the needs of the people and the drive to serve its customers better. It has inspired the creation of many new products and services. It is constantly setting precedence with many firsts and it has acquired a prestigious position among the forerunners of banking in Sri Lanka." 

We asked her to name the firsts achieved by Sampath Bank. She went onto describe it thus: 

* Sampath Bank is the first local bank to have been fully computerized

* It's the first bank in South Asia to introduce the Debit Card

* It's the first local bank to introduce telebanking

* It's the first local bank to introduce a network of ATM facilities in English and Sinhala 

* It's the first bank to create awareness of environmental issues. 

Switching on from the record book to customer service orientation, Shanthi Gooneratne explained in detail how Sampath Bank gears itself to be more efficient in order to cater to the needs of the customer by satisfying their convenience. She said in the changing world today customers do not have the time to call at banks in person to put through their transactions. 

Most customers are familiar with new technologies and have Internet and telephone facilities at home. They prefer to transact their business with the bank from home itself. She says "We have a number of products to help the customer to operate from home. One such product is Telephone Banking. Telephone banking enables you to dial a common number and obtain information relating to interest rate, exchange rate and other relevant information. If you want to access your account you are given a special PIN No. though which you can access your account, check on your balance, check on your transactions, transfer from one account to the other, order your cheque book etc. By resorting to telebanking you could attend to a variety of transactions from any telephone number from any part of the world." 

We asked her to explain how the customers are benefitted by Internet banking. 

She said "Sampath Bank has forty branches all over the country. All these branches are linked with the Head Office. Also all the forty branches are on line. If and when you open an account with Sampath Bank it enables you to transact business with any one of the forty branches located in different regions in the country. A Colombo account holder could operate his account from Matara, Anuradhapura or Moneragala or any other stations in the island. This facility is known as Uni Bank - a one bank concept. 

As regards ATM facilities we asked her to give us the low down on this activity. 

She said through the network of 55 ATMs located throughout the country, you can withdraw sums up to Rs. 20,000/- at a time depending on your cash balance. You could also withdraw money by tendering your personal cheques at any of our branches. If you own a personal account you will be entitled to hold a set card which could be used to withdraw money from any of our 45 ATMs. Our facilities are made so flexible that even if you hand over a Colombo branch cheque at Matara, you could withdraw the money you require provided your account is in funds. This facility does not apply only to your personal cheque. Even a Sampath Bank cheque received from another person having an account in some other region, it could be deposited to your account from any location in the island. Sampath Bank is able to provide this service through the On Line facility. 

As regards the possibility of using the SET Card internationally, Ms. Gooneratne said SET Card is tied up with CIRRUS INTERNATIONAL Network. You can insert your Set Card in any of the ATMs the world over where the CIRRUS logo is displayed and withdraw a reasonable amount of local currency of the country where you are stationed at that time. She says the Set Card also serves as a Debit Card. You go to any Super Market in the country where you are a visitor you could purchase goods to the value of your cash balance of your account in your home country. If after making the purchase you still require an amount of cash for other purposes, you could obtain such cash from the Super Market up to a limit of 5000/- provided you have sufficient cash balance in your account. 

This facility is certainly a blessing in disguise when you are abroad. Because this will save you from unnecessary travel to the Bank or ATM location which might be far away from the Super Market. When you obtain such additional cash from the Super Market your account gets debited immediately by that amount. To conduct this operation there should be a Point of Sale Machine. 

The Point of Sale Machine is operated through telephone network connected to the Sampath Bank network. Speaking about another product called Call Bank, she said this is a Mobile Bank. You can access the Call Bank through your mobile phone. With the press of a button on your Mobile you could arrange all types of transactions, fund transfers from one account to the other, verifying whether the cheques deposited have been realised, the amount payable on credit card settlement etc. Once the amount is known you access your account and instruct the bank to settle the credit card bills and debit your account. You can do this on the move wherever you are even if you are abroad. It is a very simple procedure. The Telebanking No. is 303030. You can access this number from anywhere in the world." 

At this point Ms. Gooneratne said that so far we have been talking about the Telebanking. Let us now switch over to the banking facility called Sampath Net. This is not merely for personal accounts only. This also caters to the corporate clientele. If you have a PC or a Lap Top and also have Internet facility, you could access the Sampath Net which is actually the Internet banking of Sampath Bank, which is our latest financial service via internet. To operate this facility also you are given a PIN No. By using the PIN No. you can obtain all information about your account. She was particular in saying that this facility is more useful to Corporate clients. Corporate clients normally maintain more than one account. Say if they have two to three accounts, at the end of the day you will find one account in credit and the other in debit. 

Though this facility it will be possible to transfer funds from your credit account to your debit account and bring the financial situation under control. Even if the bank is closed you can still do the transactions. Though Sampath Net you will be able to establish letters of credit without personally calling at the bank with the documents. Furthermore this process facilitates speedy establishment of letters of credit and quick import or export of goods. Furthermore the format of the L.C. is already fed into the Sampath Net as such only a few modifications have to be incorporated and make the LC a complete document. It is a case of filling in the blanks and a very simple process at that. She added that another advantage of this facility is that even if your account is in Colombo but your factory is in Anuradhapura, you don't have to come rushing to Colombo to establish the LC., it could be done from Anuradhapura itself. Using the Internet facility, she emphasized you could open an LC from wherever you are. Say you are marketing for essential items for your industry while you are in Europe and you decide to open an LC for essential goods. You don't have to come to Sri Lanka to open the LC. From Europe itself, through the Internet you could establish the LC. There will be no cost involved. It would be like using a local call. This facility is a great boon to all businessmen the world over.- MJ 

More Business

Return to Business Contents