ANNUAL REPORT 2010/2011. National Equity Fund

Transcription

1 /2011

2 Contents About NAMAL 1 Performance Highlights 3 Chairman's Review 5 Board of Directors 8 Management Team 12 NAMAL Funds 15 Fund Managers Review Fund Review Financial Statements Corporate Information

3 About 1

4 About NAMAL National Asset Management Limited (NAMAL) is the pioneer Unit Trust management company in Sri Lanka established in With19 years of experience and a successful track record of investing in equity and fixed income markets, NAMAL launched the first Unit Trust to be licensed in Sri Lanka () and the first listed Unit Trust (NAMAL Acuity Value Fund). We operate seven Unit Trusts and offer private portfolio management services as well. A subsidiary of Union Bank of Colombo PLC, our shareholders include DFCC Bank and Ennid Capital (Pvt) Limited. We have a highly experienced and professional management team with widespread experience in domestic and international capital markets. Our Investment Philosophy Value Investing is an in-grained investment philosophy at NAMAL. It is a rigorous and disciplined investment management process involving Fundamental Research and Valuations, Asset Allocation, Portfolio Implementation, Monitoring and Reallocation Strategies. The core investment team is guided by the Investment Committee which includes eminent independent investment professionals. Our Unit Trusts Unit Trusts enable individual investors to benefit from professional fund management, investment performance, portfolio diversification, additional investment alternatives and risk management for a low minimum investment. In addition, investors have the ability to redeem their investments on a daily basis in the event of an emergency. Investing in Unit Trusts allows you to plan and invest for your future financial wealth, significant life milestones and your prosperous retirement while enjoying peace of mind. All NAMAL Unit Trusts are licensed and regulated by the Securities and Exchange Commission of Sri Lanka. 2

5 Performance Highlights 3

6 Performance Highlights Fund Performance: 61.5% growth YoY Fund Size : Rs 2.1Bn Dividend per share : Rs 2.50 Return since inception for the unit holder: 16.9%* Rs100,000 invested is worth Rs 1.9Mn today* *assuming re-investment of dividends since 1991 and returns are annualized 4

7 Chairman s Review 5

8 Chairman s Review Dear Investors, It is my pleasure to send this report and accounts of the fund to the investors for the year ended 31st March Although this is the 19th Annual Report for the it is the first opportunity that I have to address you. In February 2011 Union Bank of Colombo PLC acquired the majority shareholding in National Asset Management Limited. (NAMAL). DFCC Bank retains its shareholding and we are joined by Ennid Capital (Pvt) Ltd, an investment arm of BP De Silva Holdings of Singapore. I want to assure our investors that the style of investment management will remain the same following the change in ownership. Our objective is to deliver long term capital appreciation and income to our investors by 6

9 adopting conservative, fundamental based investment management. NAMAL is the first company to launch a listed unit trust and a shariah-compliant unit trust and will continue to remain at the forefront of providing innovative investment products. We expect to have new investment products available for you soon and will implement measures to better serve our investors. The economy benefited from the peace dividend with strong GDP growth following the ending of the Northern conflict. The Colombo Stock Exchange was one of the best performing markets during the year and impressive corporate results were posted. We are optimistic about the future growth trajectory of the economy and the capital markets but remain aware of the importance of making the right investment choices. NAMAL, with the backing of two strong and respected financial institutions, is now uniquely positioned to identify the best investment opportunities and to distribute the investment products to our existing and future clients. I wish to thank our staff, Securities and Exchange Commission, the Trustees and our market counterparties for their contribution. Most importantly I wish to extend my sincere appreciation to our loyal investors, many of whom have remained with NAMAL since inception, for the trust they have placed in us. I am confident NAMAL will repay your trust by continuing to deliver excellent returns in the future. Ajita de Zoysa Chairman 7

10 Board of Directors 8

11 Board of Directors Mr. Ajita de Zoysa Chairman Mr. Alexis Lovell - Deputy Chairman Mr. Anil Amarasuriya Mr. Yiu Joe Toh Mr. A N Fonseka Ms. Khoo Siew Bee Not in picture: Mr. Jitendrakumar Warnakulasuriya Mr. T W De Silva Mr. Avancka Herat 9

12 Profiles of the Board of Directors Mr. A De Zoysa, Chairman Mr. Ajita De Zoysa is the Chairman of Union Bank of Colombo Ltd. He has over 40 years of experience in diverse industries including manufacturing, trading, leisure and insurance. He is the Chairman of Associated Electrical Corporation Limited, ADZ Insurance Brokers (Pvt) Limited, AEC Properties (Pvt) Limited and a host of other related companies. He is also a Non-Executive Director of Trelleborg Lanka (Pvt) Limited and Royal Palms Beach Hotels Limited. He has held many leadership roles in both the government and private sectors. He was also the past Chairman of Associated Motorways Limited and was responsible in increasing its market capitalization by 500 times during his tenure. Mr. A I Lovell, Deputy Chairman Mr. Alexis Lovell is the Deputy Chairman of Union Bank of Colombo Ltd. He counts over thirty years of experience in Finance and Investment Banking. Mr. Lovell is a Chartered Management Accountant, UK and holds a post graduate degree in Business Administration. He was awarded the MBE (Most Distinguished Order of the British Empire) by Her Majesty the Queen of England for services to Investment Banking. Mr. A S Amarasuriya Mr. Amarasuriya is the Director / Chief Executive Officer of Union Bank of Colombo PLC (UBC). A veteran banker and former Managing Director / Chief Executive Officer of Sampath Bank. His association with UBC dates back to 2003 when he spearheaded its restructure, when Sampath Bank and a group of investors infused capital to the Bank. He has been instrumental in the Bank's business re-engineering process through a new strategic direction to reposition UBC as the preferred Bank for the SME and Retail Banking Sectors. He is a Fellow of the Institute of Chartered Accountants, Sri Lanka and the Chartered Institute of Management Accountants, UK and an Honorary Fellow of the Institute of Bankers, Sri Lanka. He was a member of the Sri Lanka Accounting and Auditing Standards Monitoring Board. Mr. Amarasuriya is a former chairman of the Sri Lanka Banks' Association and Financial Ombudsman Sri Lanka Guarantee Limited. He also served as a Director of Sampath Surakum Ltd, SC Securities Ltd, Sampath Trade Services (HK) Ltd and Lanka Bangla Finance Ltd. Mr. Yiu Joe Toh Mr. Toh is a Director of Union Bank of Colombo Ltd. He is an Executive Vice President of Genting Hong Kong Limited and has over 25 years' experience in the financial services sector in the areas of international private banking and investment management. Prior to joining Genting Hong Kong Limited, he was a senior banker in Bank Pictet & Cie (Asia) and spent over 20 years in the fund management industry in private equity and venture capital. Mr. Toh is a member of the Institute of Chartered Accountants of Australia. Mr. D A J Warnakulasuriya Mr. Warnakulasuriya is the Chairman of Just in Time Group and counts many years experience in management and over 25 years experience in the field of IT. Mr. Warnakulasuriya is a Fellow member of the Institute of Certified Professional Mangers, Chartered Institute of Marketing and is currently reading for an MBA at the University of Wales validated Centre in Sri Lanka. 10

13 Ms. Khoo Siew Bee Ms. Siew Bee has extensive experience in all aspects of corporate finance work in Asia, the US and Europe. Her previous positions include Director & Country Manager of Schroders Taiwan, Director of Schroders Hong Kong, Director of Schroders Singapore and Mergers & Acquisitions Director (Asia Pacific) of Monsanto Singapore Pte. Ltd. Ms. Siew Bee is a Director of BP De Silva Holdings Pte Ltd., and a number of its subsidiary and associate companies. Mr. A N Fonseka Mr. Nihal Fonseka is the Chief Executive Officer of DFCC Bank since He is the Chairman of the Colombo Stock Exchange and a Vice Chairman of the Association of Development Financing Institutions in Asia and the Pacific (ADFIAP). Mr. Fonseka is a member of the Governing Board of the National Institute of Business Management (NIBM) and serves as a member of the Advisory Committee on Finance and Banking of the Ceylon Chamber of Commerce, the Financial Sector and Tax Clusters of the National Council for Economic Development (NCED). He is also a member of the National Payments Council and Inter-Regulatory Institutions Council. He is a Graduate of the University of Ceylon, Colombo, and a Fellow of the Chartered Institute of Bankers, UK. Mr. T W De Silva Mr. Tyrone De Silva is a Senior Vice President and Head of the Corporate Banking and Investment Banking Departments at DFCC Bank. He joined the Bank in 1989 and has been involved throughout in the Bank's Corporate Finance and Capital Markets business. He serves as a member of Bank's Credit, Investment and Asset Liability Committees and as nominee Director on the Boards of some of the Bank's other subsidiary and associate companies. Mr. De Silva holds a Master's Degree in Business Administration from the University of Warwick, UK. He is also a Graduate Member of the Institute of Mechanical Engineers, UK. Mr. H A Herat Mr. Avancka Herat is the Executive Director at NAMAL. (Please refer management team profile.) 11

14 Management Team 12

15 Profiles of the Management Team Mr. Avancka Herat, Executive Director/Chief Investment Officer * Mr Herat has over 15 years in experience in the financial services sector in the areas of Investments Banking, Investment Management and Corporate Finance. He has extensive regional working experience having worked for investments banks and MNC's including Jardine Fleming, JP Morgan and Caltex. He has worked in Singapore, Hong Kong and Thailand specializing in key sectors such as Petroleum, Telecoms, Power and Energy, Cement, MNC's and Small Caps. Prior to joining NAMAL, Mr. Herat was the Chief Investment Officer/Director of Aegis Fund Management (Pvt) Ltd, which managed funds of DCSL Group, including Sri Lanka Insurance Corporation Ltd. Mr Herat holds a BSc (Hon) Degree in Business Management from University of Swansea, Wales and MSc in Business Finance from University of London, Uxbridge. st *From 1 March 2011 Mr. S Jeyavarman, Chief Executive Officer Mr Jeyavarman is a Fellow Member of the Institute of Chartered Accountants of Sri Lanka, with twenty-two years of post qualifying experience. He joined NAMAL at the inception of the Company, and presently holds the position of Chief Executive Officer (CEO). He functioned as a Fund Manager for a period of six years and later as the Deputy General Manager prior to becoming the CEO. He also serves as the President of the Unit Trust Association of Sri Lanka. Prior to joining NAMAL, he worked with Forbes and Walker Group for a period of ten years and held the post of Head of the Money Broking and Financial Services subsidiaries of the Group. He has received extensive training overseas particularly with DBS Asset Management Limited in Singapore, Capital International in Singapore and USA. He has also attended many workshops locally and overseas in the areas of Fund Management and Unit Trust. Mr. Charana Jayasuriya, Head Sales & Structuring* Mr. Jayasuriya has ten years experience in the capital markets of Sri Lanka and United Kingdom in asset management, investment banking and financial regulation. Prior to joining NAMAL, Mr. Jayasuriya was a Fund Manager for Aegis Fund Management (Pvt) Ltd managing the portfolio of Sri Lanka Insurance Corporation Ltd specialising in fixed income and foreign currency. He holds a LLB (Hons) Law and LLM in Banking & Financial Law from University College, University of London. st *From 1 March 2011 Mr. Pushpaka Ranasinghe, Head - Planning & Operations Is a holder of a B.Com (Special) Hons from the University of Colombo and a Certified Member of the Institute of Cost & Management Accountants of Australia. Prior to joining NAMAL he was a Senior Hedge Fund Accountant at Citigroup in Bermuda & New York. Ms. Dulmini Ponnamperuma, Compliance Officer Ms Ponnamperuma is a member of the Institute of Chartered Accountants of Sri Lanka and has a BSc Degree in Accountancy and Financial Management (Special) (Hons) from the University of Sri Jayewardenepura. She has over five and half years Accounting and Auditing experience at Ernst & Young Sri Lanka and PricewaterhouseCoopers Botswana and worked in Colombo Stock Exchange for one and half years. 13

16 Hemanthi Bulathwatte, Registrar Ms Bulathwatte is an Attorney-at-law and currently reading for a BSc in Business Administration at the University of Sri Jayewardenepura. She is a registered Company Secretary with the Registrar of Companies in Sri Lanka. She counts over six years experience in the fields of company secretarial and litigation. Mr. Rajith Perera, Chief Accountant Mr Perera is a member of the Institute of Chartered Accountants of Sri Lanka and Certified Institute of Management Accountants of Sri Lanka. He has a B.Sc. Degree in Accountancy & Financial Management (Special) from the University of Sri Jayewardenepura. He has eight year experience in Accounting, Auditing and Advisory Services at KPMG Ford, Rhodes, Thornton & Co and two years experience at Unilever Sri Lanka Limited as an Accountant. 14

17 Funds 15

18 NAMAL Funds Name of Fund NAMAL Growth Fund Fund Type Balanced Growth Objective Invest in Time frame of investment Risk - Return Dividends Minimum Investment Income and Long Term Growth Listed Equity & Fixed Income Securities Medium to Long Term High to Moderate Risk / Return Annual Rs.1,000 Long Term Capital Growth Listed Equity Medium to Long Term High Risk - High Return No set pattern Rs.5,000 Fees: Front end fee 2.00% 2.00% Management Fee 1.50% 1.50% Exit Fee No No Registrar Fee 0.25% 0.25% Trustee Fee Advantages 0.20% *Provides current income and long term growth capital *Flexibility to invest upto 80% in the stock market *Minimum investment is low 0.25% *Invest in high quality handpicked stocks *Flexibility to invest upto 90% in the stock market *Ability to participate in a diversified portfolio of listed shares 16

19 Name of Fund NAMAL Income Fund NAMAL Money Market Fund NAMAL Acuity Value Fund Fund Type Income Money Market Growth Objective Income Cash Management Long Term Capital Growth Invest in Fixed Income Securities Fixed Income Securities of less than 12 months Listed Equity & Fixed Income Securities Time frame of investment Medium to Long Term Short Term Medium to Long Term Risk - Return Medium to Long Term Low Risk / Return High Risk / High Return Dividends Semi Annual Quaterly No set pattern Minimum Investment Rs.10,000 Rs.1,000,000 Purchase via Colombo Stock Exchange Fees: Front end fee No No Management Fee 1.25% 0.25% 1.00% Exit Fee 1.00% (If withdrawn prior to 1 year) No No Registrar Fee 0.25% 0.05% Included in the Management Fee Trustee Fee Rs.200,000 per annum 0.15% 0.20% Advantages Lower level of risk than Equity Funds Provides current income at minimum risk Provides long term growth and above average return Invest in high quality income producing instruments Receive regular dividend income Dividends paid quarterly Dividends asset allocation strategy -Flexibility to invest in equity or fixed income securities Purchase and redeem shares through the stock market 17

20 Highlights of NAMAL Funds NAMAL Growth Fund NAMAL Acuity Value Fund Fund performance (YOY growth) 61.5% 64.31% % Fund Size Rs. 2.1Bn 321.8Mn 1.1Bn Dividend (Rs. Per share) 2.50 No dividends paid in line with fund objectives 5.00 Return per unit holder (since inception) 16.9%* Rs100,000 invested is worth Rs 1.9Mn today 20.6% ** Rs100,000 invested is worth Rs 1.3Mn today 71.06% (returns are annualized since 2009) * assuming re-investment of dividends since 1991 and returns are annualized. **assuming re-investment of dividends since 1997 and returns are annualized. NAMAL Amana Equity Fund NAMAL Income Fund NAMAL Gilt Edge Fund NAMAL Money Market Fund Fund performance (YOY growth) 57.57% 9.11% 10.48% 7.89% Fund Size (Rs.) 73Mn 301.8Mn 1.2Bn 620.4Mn Dividend (Rs. Per share) Tax Equivalent Yield %* 16.12%* 12.14%* * for institutional investors who pay 35% corporate tax 18

21 Fund Managers Review 19

22 Fund Managers Review Economic Outlook Highest GDP growth recorded in 30 Years Sri Lanka registered a GDP growth rate of 8% in FY2010, the highest level recorded in 30 years. This was possible due to the peace dividend that started to filter in, following the end of the Northern Conflict. Growth was driven by a combination of factors including reconstruction & development efforts and improved business confidence backed by a stable macroeconomic environment that prevailed during this period. Growth was also aided by a gradual improvement in the global economy & trade. The Agriculture sector rose by 7% YoY, owing to higher commodity prices and pro-agricultural policies adopted by the Government of Sri Lanka (GoSL). Greater access to cultivable land in the North & East also contributed to the growth. The Industrial Sector recorded growth of 8.4% YoY, driven by increased investments in industry, rural electrification and construction. This is despite facing numerous challenges including the expiry of European Union GSP facility and rising energy costs. The Service Sector that accounted for 57.8% of the GDP showed a growth of 8% YoY, backed by strong recovery in tourism related industries, wholesale & retail business and financial services. Sri Lanka's GDP per capita now accounts for US$2399 and has been categorized as a middle income country by the International Monetary Fund (IMF), and a Frontier Market by the International Finance Corporation (IFC). Both categories reflect the tremendous opportunity to capture faster economic growth in the ensuing years. This is justified as 30% of the country's land mass and 40% of total coastline opened up for massive development after 30 years of conflict. The GoSL faces many challenges in the near term, such as integrating the ethnic minorities to mainstream politics, and keeping the cost of living at manageable levels. However, we are firm believers that Sri Lanka could deliver over 8% GDP growth per annum in the next 5 years, given its stable political environment and the Government's pro-activeness towards directing the growth process. We expect 8.3% GDP growth in FY 2011, driven mainly by growth in credit and investment, together with buoyancy in household spending. Fig 1: All key sectors posted a recovery in FY2010 Fig2: GDP growth up sharply to 8% in FY2010 % Agriculture Industry Services % Source: Central Bank Annual Report & Website Source: Central Bank Annual Report & Website 20

23 Soft monetary policy to accommodate growth Tighter monetary policy together with lower domestic consumption paved the way to single digit inflation during the first 10 months of post conflict period. Annual average inflation (CCPI) declined from 21% in early 2009 to 3.4% by late FY2010. With the improved inflation outlook, Central Bank of Sri Lanka (CBSL) adopted a softer monetary policy during FY2010 to stimulate the aggregate demand for credit, and to stimulate overall economic activities. As a result, policy rates were adjusted downward, while increasing the broader money supply. CBSL also enforced an interest rate cap of 14% on home loans and 24% per annum on credit card advances, thus forcing banks to reduce lending rates by a further 2% during the year. This resulted in declining Treasury Bill and Lending rates which stimulated a significant growth in credit, thus giving a tremendous boost to domestic economic activities. The broader monetary aggregates (M2b) showed growth of 15.8% YoY while credit growth in the private sector recorded an impressive growth of 25.1% YoY in FY2010. Inflation started to pick up in the latter part of FY2010 and early FY2011 due to higher global commodity prices and a sharp rise in domestic food prices due to floods in North & East. However with the recent political unrest in the Middle East and crude oil remaining well above US$100/bbl, we don't expect inflation to fall significantly in 2H of FY2011. We anticipate a further tightening of policy rates in 2H of FY2011 to keep inflation under check. We expect credit growth to continue well over 15% in FY2011 while Broad Money and Reserve money to grow at the same pace as last year. Fig 3: Real rates ease as inflation picks up Fig 4: Lower policy rates to accommodate softer monetary policy % 1 Yr TB Rate Inflation (Point to Point) Real Rate % /01/ /01/ /01/ /01/ /01/ /01/2010 Repurchase rate Reverse Repurchase SRR (%) Source: Central Bank Annual Report & Website Source: Central Bank Annual Report & Website Fig5: Commercial Banks credit growth up by 25% in FY2010 Rs Bn % Source: Central Bank Annual Report & Website 21

24 External Sector shows resilience Sri Lanka's export trade continued to show resilience as a result of global economic recovery and higher commodity prices. Export earnings grew 17.3% YoY to US$8.3Bn while imports recorded 32.4% growth YoY to 13.5Bn during FY Monthly exports crossed the US$ 1Bn mark for the first time ever in December Tea and Garments continues to account for more than 59% of the total exports, with 61% of the total exports going to the US & Europe. Exports to faster growing economies such as India & China currently account for less than 5%, showing significant growth opportunities. Petroleum bill accounted for 21% of total imports while consumer goods accounted for less than 15%. Balance of Trade showed a deficit of US$5.2Bn which is 10.4% of GDP. Workers' remittances (currently at US$ 4.1Bn) which grew by 23.6% YoY, aided in reducing the current account deficit to US$1.1B (2.1% of GDP). Worker remittances are now the highest foreign exchange earner, accounting for 27% of all foreign exchange earnings in FY2010. With strong domestic demand and higher crude oil prices, we expect the import bill to remain firm in FY2011. We are of the view that Sri Lanka's trade deficit will remain above U$5.5bn, accounting for over 3% of GDP in the next 5 years. Fig 6: Trade deficit 10.4% of GDP US$ Mn 1, Source: Central Bank Annual Report & Website Exports Imports Trade Deficit Rupee remains stable Rupee remained largely stable, appreciating by 3.2% against a weaker US$ in FY2010. CBSL has maintained its gross official reserves at 5 Months of imports, thus giving much stability to the Rupee. We expect the Rupee to remain stable in FY2011, while anticipating a marginal appreciation of 2%-3% YoY to Rs 108 by the end of FY2011. Fig 7: Rupee appreciated by 3.2% in FY2010 Rupee 140 % Source: Central Bank Annual Report & Website 22

25 Budget deficit on the decline. The Fiscal situation improved significantly as the government managed to reduce its budget deficit to 7.9% of GDP (From 9.9% in FY2009) in line with targets under the IMF standby loan agreement. Revenue collection increased 14.9% YoY benefiting from the expansion in domestic activities and international trade. Government expenditure and net lending witnessed a slight reduction, and is currently at 22.9% YoY growth, the bulk of the reduction has been witnessed through curbing capital expenditure. The GoSL needs to reduce the budget deficit to 6.8% in FY2011 under the IMF standby loan program. We believe that government expenditure would be curtailed to some extent with recent fuel and electricity tariff revisions. The program to cut down losses in state owned enterprises (SOE's) with private sector participation will also benefit. Revenue collection would be much easier due to increased domestic activities, but reduction in corporate taxes in the 2011 budget would put near term pressure. Fig 8: Budget Deficit improved to 7.9% in FY % 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Market Outlook Source: Central Bank Annual Report & Website ASPI gains 82% YoY Equity markets reacted sharply to the underlying growth story, with ASPI showing another year of stellar performance, gaining 82% year on year and outperforming the rest of the world. This was supported by listed corporate results (including non recurring items) that came in at a growth of 166% YoY, while local retail investors and high net worth individuals supported the momentum. Average daily volumes stood at Rs2.4bn per day in FY2010 compared to Rs 1.1bn per day in FY2009. Foreign funds continued to be net sellers accounting for 19% of the turnover (30% in FY2009) as they continued to book profits from their holdings. st st ASPI showed further gains in the 1 quarter of 2011, and the market capitalization stood at US$ 22Bn as at 31 March 2011, accounting for 35% of Sri Lanka's GDP. In terms of valuations, ASPI stood at around 20X on trailing multiples, well above its regional peers at the same time. With market consensus of over 25% earnings growth in FY2011 for listed companies, we believe that the market has already priced in an appropriate amount for economic growth and risk. ASPI is thus fairly valued in line with its regional peers both in terms of FY11 and FY12 earnings multiples. The pipe line of new IPO's (estimated over IPO's in the next 12 months), together with many large rights issues by listed firms will put a dampener on the overall liquidity condition of the market in the near term. We believe that a review of policy rates by CBSL impacting on the risk free rate could trigger a short term correction. Hence, we believe that ASPI could face 23

26 some near term volatility in 1H of FY2011, having posted significant gains over the years. We believe that the breadth of the market will continue to expand rapidly, with more companies being listed, thus increasing the market capitalization of the ASPI in the medium term. However we are bullish on the long term prospects for Sri Lankan equities. Fig 9: Comparative equity market performance from 2005 to 2011 Fig10: Yield gap narrows Post Tax TB Yield Aug-05 Oct-05 Dec-05 Feb-06 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb Post Tax Dividend Yield Sensex Straits Times Hang Seng S&P 500 ASPI Source: Central Bank Annual Report & Website Source: Central Bank Annual Report & Website Money markets have remained subdued The policy rates were further reduced during the period under review to accommodate expansionary monetary policy. Repurchase rates were further reduced by 50 basis points to 7% while reverse repurchase rates were reduced by 125 basis points during FY2010. The Bank Statutory Reserve Ratio (SRR) kept steady at 7% to encourage further lending. As a result, benchmark 12 month Treasury bill yields came down further by 200 st basis points to 7.3% by 31 March Key 5 year bond yields fell by 300 basis points to 9% in the period under review. It was another successful year for debt traders with leverage positions to capitalize on falling yields. Demand for Corporate Debentures, Commercial Paper and Asset Backed Securities started picking up in the second half of FY2010. We expect the CBSL monetary policy to tighten in 2H FY2011 by 50 basis points in line with other regional emerging economies to keep inflation under check, while fostering economic growth. While this would have an impact on the benchmark short term rates, we don't expect any major deviations in the long term yield curve. Fig11 : Downward sloping yield curve % Yr 4 Yr 5 Yr Mar Mar Mar Mar Mar-10 Source : Bloomberg 24

27 Future Market Outlook Sri Lanka has been successful in weathering the global economic slowdown, which was benefited by the end of the conflict that led to strong domestic consumption and government expenditure in infrastructure. The Service sector too gained impetus with the revival of tourism and related industries, while robust macroeconomic data and fiscal indicators have lent support to equity valuations. Having gained almost 225% from extremely low valuations since end of the war, Sri Lanka, like most other global equity markets will experience a correction along the way. This short term volatility may provide us with appealing entry points, if valuations drop to attractive levels for the equity prices to reflect underlying economic growth potential, in line with our expectations as discussed above. Foreign institutional investors have been net sellers over the last two years and we believe they too would return, once the valuation signals improve. We are also of the same view of the bond market. We believe that the demand for Long Term treasury securities would pick up in the latter part of the year and the yield curve would invert. As value investors, we believe that the market has already priced in an appropriate amount of economic growth and risk at current levels, having risen sharply since Thus we continue to focus on identifying investments that are attractively valued, on an individual basis, which could outperform market returns in the long run. We also look at opportunities to exit from counters that are expensive relative to their underlying value. Going forward, we are bullish on the long term prospectus in Sri Lanka. We see future potential in sectors such as Agriculture, Health Care, Retail Foods, Financial and Infrastructure Services. Fig 12 : ASPI trading at over 15X forward multiples 4.3 Log scale x 10x 5x 2x Jan Jul-08 2-Jan Jul Jan Aug Feb Sep-99 1-Apr Oct-96 4-May-95 9-Nov-93 3-Jun-92 6-Dec Jun Dec Jun-86 2-Jan-85 Source: CSE Data & Namal 25

28 Fund Review 26

29 Fund Review Investment Strategy The (NEF) is a balanced fund which aims to provide capital appreciation and current income for investors. The Fund allocates a maximum of 80% to equity with the balance invested in fixed income securities. We adopt an investment strategy that is market neutral and use fundamental research to identify stocks that are trading at below intrinsic value. In line with our philosophy, the Fund has invested in fundamentally strong companies that are exposed to the key sectors of the economy rather than attempt to track the index. These investments will enable the Fund to perform strongly notwithstanding any short-term market volatility. The NEF does not aim to track an index but rather to deliver consistent returns to the investors in the long run. Asset Allocation The Fund was exposed to 71.94% in equities while the balance was invested in fixed income securities by March NEF has invested around 26.5% of the equity portfolio in the Diversified sector with 14.6% in the Banking sector. Performance Review The All Share Price Index appreciated by 94.1% for the year ending 31st March 2011 while the 3 month Treasury bill yields and overnight Repo rates declined as much as basis points during the same period. As a result, NEF has underperformed the benchmark due to its higher exposure (30% of the fund) to debt market. Despite that, the fund showed a commendable performance of 61.5% YoY, thanks to higher returns in its equity portfolio. For the year ended March 2011, NEF accumulated further Rs 849Mn in value which accounts for Rs 449Mn in realised and Rs 400.5Mn in unrealized gains. The fund value stood at Rs 2.1Bn up from Rs1.4Bn year ago. Return to Investors The NEF paid a tax free dividend of Rs 2.50 per unit for FY2010, bringing the total dividends paid by the fund, since inception, to Rs (Fig 4). Investors have received an annualized return of 16.9% since the inception of the Fund in An investment of Rs.100,000 at inception would be worth Rs.1.9M today (assuming reinvestment of dividends). Investment Management Team, National Asset Management Ltd 27

30 Fig 1: Fund Performance Fig 2: Top Five Equity Holdings st Fund Performance and market returns as at 31 March months 61.5% ASPI Return 3 Month TB Return Benchmark The Company No Shares Value (Rs) 24 months 36 months 229.4% 135.1% 94.1% 341.2% 183.2% 7.5% 8.7% 11.5% 76.7% 274.6% 148.9% *Note 1) Performance up to 31st March 2011 as published by the Unit Trust Association of Sri Lanka 2) Benchmark consists of 80% return of ASPI and 20% return of 3M TB rate. 3) All returns are adjusted for dividends 4) Returns are not annualized 5) Past performance should not be taken as a guide to the future % of NAV CT Holdings PLC 1,734, ,900,000 16% Aitken Spence Co. PLC 1,450, ,335,000 11% Ceylon Tobacco Company PLC 379, ,861,000 6% Central Finance PLC 100, ,370,000 5% Aitken Spence Hotel Holdings PLC 1,050, ,900,000 5% Fig 3: Sector Allocation SECTOR Power and Energy Plantation Che. & Phar. 0.40% 0.95% 1.06% Manufacturing Health Care Hotels & Travels Bev./ Food & Tob. Banks, Fin.& Ins. Diversified 5.15% 5.73% 7.00% 10.86% 14.26% 26.52% 0% 5% 10% 15% 20% 25% 30% Fig 4: Holding Period Return VALUE OF INVESTMENTS 2,500,000 2,000,000 1,500,000 1,000, ,000 - RATE OF RETURN 45.00% 35.00% 25.00% 15.00% 5.00% -5.00% %

31 Financial Statements 29

32 30

33 Statement of Total Return Year ended 31 March 2011 Notes Rs. Rs. Gross Income 3 78,195,047 66,904,027 Expenses 4 (41,622,255) (27,390,819) Net Income before Taxation 36,572,792 39,513,208 Taxation 5 (856,971) (1,178,856) Net Income after Taxation 35,715,821 38,334,352 Net Realised Gains 6 449,082, ,605,547 Net Unrealised Appreciation on Valuation of Investments at Market Value 400,479, ,470,643 Net Gains on Investments 849,562, ,076,190 Total Earnings 885,277, ,410,542 Equalisation Received on Units Created 99,260,332 66,064,379 Deducted on Units Redeemed (75,776,643) (106,395,441) Net Equalisation 23,483,689 (40,331,062) Total Return 908,761, ,079,480 The Accounting Policies and Notes on pages 38 to 44 form an integral part of these Financial Statements 31

34 Statement of Movement in Unitholders' Fund Year ended 31 March Rs. Rs. Net Assets as at 01 April 1,445,695, ,762,383 Movement due to Sales and Purchases of Units Received on Creation of Units Paid on Cancellation of Units 47,395,671 61,671,667 (35,628,252) (128,107,538) 11,767,419 (66,435,871) Income Distribution (171,177,852) (168,710,304) Net Increase in Unitholders' Funds Due to Investment Activities 908,761, ,079,480 Net Assets as at 31 March 2,195,046,875 1,445,695,688 The Accounting Policies and Notes on pages 38 to 44 form an integral part of these Financial Statements 32

35 Balance Sheet As at 31 March 2011 Notes Rs. Rs. NET ASSETS Investments Equity Investments - Quoted 8(a) 1,579,143,520 1,179,419,025 Fixed Income Investments 8(b) 2,624,863 91,722,532 1,581,768,383 1,271,141,557 Current Assets Fixed Income Investments 8(c) 30,000,000 - Treasury Bill Repurchase Agreements 467,584, ,061,821 Accrued Income and Receivables 9 4,700,529 7,104,085 Income Tax Recoverable 16,702,205 10,859,284 Cash at Bank 105,692, , ,679, ,474,649 Current Liabilities Accrued Expenses 10 11,401,053 7,920,518 11,401,053 7,920,518 Net Current Assets 613,278, ,554,131 Net Assets 2,195,046,875 1,445,695,688 Capital Account Unit Capital 704,428, ,661,039 Net Realised Gains 557,217, ,092,431 Net Unrealised Appreciation 849,057, ,322,327 2,110,703,327 1,399,075,797 Income Account 84,343,548 46,619,891 Capital and Undistributed Income 2,195,046,875 1,445,695,688 These Financial Statements was approved by the Management Company and adopted by the Trustee... Director of Management Company Authorised Signatories Trustee 23 May 2011 Colombo The Accounting Policies and Notes on pages 38 to 44 form an integral part of these Financial Statements 33

36 Cash Flow Statement Year ended 31 March Rs. Rs. Cash Flows from Operating Activities Dividend Received 29,269,763 25,329,493 Interest Received 47,274,819 56,723,058 Management Fees and Trustee Fees Paid (35,529,383) (21,391,487) Other Expenses Paid (2,271,708) (2,916,237) Tax Paid (ESC,SRL & WHT) (2,772,640) (5,567,199) Operating Income before changes in Operating Assets and Liabilities 35,970,851 52,177,628 (Increase)\Decrease in Operating Assets Amount Receivable on Creation - 9,802 Sales awaiting Settlement - 11,709,026 Increase\(Decrease) in Operating Liabilities Amount Payable on redemption (340,629) 418,485 Purchase awaiting Settlement - (4,132,052) Net Cash Generated From Operating Activities 35,630,222 60,182,889 Cash Flows from Investing Activities Cost of Investments Purchased Equity (319,804,955) (1,130,247,935) Net proceeds on Investments Sold Equity 772,367,009 1,368,117,771 Trust Certificates 56,500,000 46,651,694 Net Cash generated from Investing Activities 509,062, ,521,530 Cash Flows from Financing Activities Cash Received on Creation of Units 146,656, ,736,046 Cash Paid on Cancellation of Units (111,404,895) (234,502,980) Dividend paid (171,177,852) (168,710,304) Net Cash used in Financing Activities (135,926,745) (275,477,238) Net Increase in Cash and Cash Equivalents 408,765,531 69,227,181 Cash and Cash Equivalents at the beginning of the year 164,511,280 95,284,099 Cash and Cash Equivalents at the end of the year 573,276, ,511,280 Cash and Cash Equivalents at the end of the year comprises of Cash at Bank 105,692, ,459 Treasury Bills Under Repurchase Agreements 467,584, ,061, ,276, ,511,280 The Accounting Policies and Notes on pages 38 to 44 form an integral part of these Financial Statements 34

37 Statement of Changes in Net Assets Year ended 31 March Rs. Rs. Net Income 35,715,821 38,334,352 Net Realised Gains 449,082, ,605,547 Net Equalisation 23,483,689 (40,331,062) 508,282, ,608,837 Income Distribution (171,177,852) (168,710,304) Increase in Net Assets resulting from Operations 337,104, ,898,533 Capital Received on Creation of Units 47,395,671 61,671,667 Capital Paid on Redemption of Units (35,628,252) (128,107,538) Increase due to Creation and Redemption of Units 11,767,419 (66,435,871) Net Unrealised Appreciation on Valuation of Investments at Market Value 400,479, ,470,643 Increase in Net Assets 749,351, ,933,305 Net Assets As at the beginning of the Year 1,445,695, ,762,383 As at the end of the Year 2,195,046,875 1,445,695,688 Increase in Net Assets 749,351, ,933,305 The Accounting Policies and Notes on pages 38 to 44 form an integral part of these Financial Statements 35

38 Distribution Table Year ended 31 March 2011 Net Realised Net Unrealised Gains / Appreciation / Net Notes Unit Capital (Losses) (Depreciation) Income Total Rs. Rs. Rs. Rs. Rs. As at 01 April ,096,910 22,402,945 44,105,521 10,157, ,762,383 Movement due to Unit Transactions - Capital (66,435,871) (66,435,871) - Capital Adjustment - - (20,253,837) - (20,253,837) - Capital loss - (18,205,757) - - (18,205,757) - Income Equalisation (1,871,468) (1,871,468) Net Income earned during the year ,334,352 38,334,352 Gains during the year - 433,605, ,605,547 Appreciation during the year ,470, ,470,643 Income Distribution - (168,710,304) - - (168,710,304) As at 31 March ,661, ,092, ,322,327 46,619,891 1,445,695,688 Movement due to Unit Transactions - Capital 11,767, ,767,419 - Capital Adjustment ,255,561-11,255,561 - Capital Gain - 10,220, ,220,292 - Income Equalisation ,007,836 2,007,836 Net Income earned during the year ,715,821 35,715,821 Gains during the year - 449,082, ,082,623 Appreciation during the year ,479, ,479,487 Income Distribution 7 - (171,177,852) - - (171,177,852) As at 31 March ,428, ,217, ,057,375 84,343,548 2,195,046,875 The Accounting Policies and Notes on pages 38 to 44 form an integral part of these Financial Statements 36

39 Movement in Capital Account, Realised Gains, Unrealised Appreciation and Income Account Year ended 31 March 2011 CAPITAL ACCOUNT Rs. Rs. Movement in Unit Capital Balance as at 01 April 692,661, ,096,910 Movement due to - Creation of Units 47,395,671 61,671,667 - Redemption of Units (35,628,252) (128,107,538) Balance as at 31 March 704,428, ,661,039 REALISED GAIN Movement in Realised Gains Balance as at 01 April 269,092,431 22,402,945 Gains during the year 449,082, ,605,547 Movement in Capital Gains Equalisation 10,220,292 (18,205,757) Amount Utilised for Income Distribution (171,177,852) (168,710,304) Balance as at 31 March 557,217, ,092,431 UNREALISED APPRECIATION Movement in Unrealised Appreciation Balance as at 01 April 437,322,327 44,105,521 Appreciation during the Year 400,479, ,470,643 Movement in Capital Adjustment Equalisation 11,255,561 (20,253,837) Balance as at 31 March 849,057, ,322,327 Income Account Balance as at 01 April 46,619,891 10,157,007 Net Income earned during the Year 35,715,821 38,334,352 Net Income Equalisation during the Year 2,007,836 (1,871,468) Balance as at 31 March 84,343,548 46,619,891 The Accounting Policies and Notes on pages 38 to 44 form an integral part of these Financial Statements 37

40 Notes to the Financial Statements Year ended 31 March GENERAL ACCOUNTING POLICIES The Financial Statements are prepared in accordance with and comply with the relevant Sri Lanka Accounting Standards and Recommended Accounting Practice for Unit Trusts issued by the Institute of Chartered Accountants of Sri Lanka and adopted as directed by the Securities and Exchange Commission of Sri Lanka. The Financial Statements are prepared under the historical cost convention whereby transactions are recorded at the values prevailing on dates when the assets were acquired, the liabilities incurred, or the unit capital obtained except for the valuation of quoted investments and unquoted debt instruments more than twelve months which are stated at market value in the Financial Statements. 1.1 Comparative Information Where necessary comparative figures have been adjusted to conform with changes in presentation in the current year. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2.1 Revenue recognition Income is the gross inflow of economic benefits during the year arising in the course of the ordinary activities of an enterprise when those inflows result in increase in equity, other than increases relating to contribution from equity participants. Equalisation Equalisation on creation and redemption of units comprising of income, realized gains/(losses) and unrealized gains/(losses) after the initial offer price have been disclosed in the accounts. Equalization and the rest of the aggregate balances are separately shown in the Statement of Total Return under Equalisation and Statement of Movement in Unit Holders' Fund respectively Dividend Dividend on equities are recognised when the quoted equity investments are quoted ex-dividend. Interest Income Interest income is recognised on an accrual basis. 2.2 Management Participation Fee Management participation fees is paid at the rate of 1.95% per annum on the net asset value of the fund. 38

41 Notes to the Financial Statements Year ended 31 March Investments Quoted Equity Investments are valued at the volume based weighted average closing price published by Colombo Stock Exchange and any surplus or deficit on revaluation are taken directly to the statement of total return. Treasury Bill Reverse-repurchase Agreements (TB Repo) are valued at cost plus accrued interest up to the date of valuation. Investments in unquoted debt instruments more than twelve months are valued on yield to maturity basis using a uniform weekly yield curve prepared based on the weekly data published by the Central Bank of Sri Lanka. Government and Corporate Securities with a maturity period of less than twelve months from the date of investment are valued at cost plus interest. The rights are taken to the net asset valuation on the ex-right date. The rights from the ex-rights date to the renunciation date are valued at the market value of rights and in the absence of a traded price of rights at ex-rights market price of the ordinary share minus right price. The aggregate holding including the rights entitlement are valued at volume based weighted average closing price published by Colombo Stock Exchange from the renunciation date onwards. 2.4 Receivables Receivables are reflected at their realisable values. 2.5 Taxation The Trust is liable to pay Income Tax at the rate of 10% in accordance with the Inland Revenue Act No.10 of

42 Notes to the Financial Statements Year ended 31 March GROSS INCOME Rs. Rs. Dividends 30,137,563 27,347,871 Interest on Trust Certificates 8,784,978 25,839,608 Treasury Bill Repurchase Agreements (3.1) 39,272,506 13,716,548 78,195,047 66,904, Interest on Treasury Bill Repurchase Agreementshas been recognised gross of National tax Credit. 4. EXPENSES Management Fees 35,119,413 21,601,042 Trustee Fees 4,235,270 2,690,070 Audit Fee and Expenses 215, ,608 Bank Charges 36,289 30,000 Other Expenses (a) 1,802,418 2,598,503 Debit Tax 213, ,596 41,622,255 27,390,819 (a) Other expenses consist of Professional Charges, DistributionExpenses and Publication Related Expenses. 5. TAXATION Tax Expense for the Year 844,306 1,132,792 Social Responsibility Levy 12,665 46, ,971 1,178, NET REALISED GAIN ON SALE OF INVESTMENTS Proceeds on Sale of Equity Shares 772,367,009 1,368,117,771 Average Cost of Equity Shares Sold (323,284,386) (934,512,224) 449,082, ,605, DISTRIBUTION The Fund announced and paid the following Dividends during the year. Dividend per Unit Number of Units in Date of declaration Amount Paid Issue (Rs.) ,471, March ,177,

43 Notes to the Financial Statements Year ended 31 March (a) EQUITY INVESTMENTS Rs. Rs. Cost as at 31 March 702,398, ,877,595 Provision for Appreciation of Marketable Securities 876,745, ,541,430 Market Value as at 31 March 1,579,143,520 1,179,419, Company Number of Market Holdings Number of Market Holdings Shares Value as a % of Shares Value as a % of Net Asset Net Asset Value Value Banks, Finance and Insurance Rs. Rs. Central Finance PLC 100, ,370,000 5% 100,000 39,000,000 3% Commercial Bank of Ceylon PLC - Non Voting 506,000 83,793,600 4% 500,300 72,918,725 5% Hatton National Bank PLC - Non Voting 400,000 85,320,000 4% 550,000 77,000,000 5% National Development Bank 48,100 16,373,240 1% 100,000 21,000,000 1% Union Bank of Colombo Limited 4, ,680 0% ,021,520 14% 209,918,725 14% Beverages, Food and Tobacco Ceylon Tobacco Company PLC 379, ,861,000 6% 500, ,000,000 9% Distilleries Company of Sri Lanka PLC 570, ,600,000 5% Cargills (Ceylon) PLC ,000 35,250,000 2% 238,461,000 11% 160,250,000 11% Chemicals and Pharmaceuticals Chemanex PLC ,000 39,075,000 3% CIC Holdings PLC 150,000 23,250,000 1% ,250,000 1% 39,075,000 3% Diversified Holdings Aitken Spence Co. PLC 1,450, ,335,000 11% 110, ,112,500 10% CT Holdings PLC (Previously named as Ceylon Theaters PLC) 1,734, ,900,000 16% 2,500, ,000,000 9% 582,235,000 27% 286,112,500 19% Health Care Ceylon Hospitals PLC (Durdans) 968,900 96,890,000 5% 1,075, ,072,000 9% Ceylon Hospital PLC (Durdans)-Non voting 360,000 28,836,000 1% 250,600 17,040,800 1% 125,726,000 6% 146,112,800 10% Hotel and Travels Aitken Spence Hotel Holdings PLC 1,050, ,900,000 5% 100,000 38,500,000 3% Aitken Spence Hotel Holdings PLC-Rights ,000 3,125,000 0% Confifi Hotel PLC , ,800,000 9% Renuka City Hotels PLC ,000 24,100,000 2% Riverina Hotels PLC ,000 65,250,000 5% Hotel Services (Ceylon) PLC 2,200,000 50,820,000 2% ,720,000 7% 267,775,000 18% Manufacturing ACL Cables PLC 750,000 70,500,000 3% 325,000 24,375,000 2% Kelani Cables PLC ,000 45,800,000 3% ACME Printing & Packaging PLC 2,000,000 42,600,000 2% ,100,000 5% 70,175,000 5% Plantation Kegalle Plantation PLC 100,000 20,750,000 1% Power and Energy Laugfs Gas Limited 200,000 8,880,000 0% Total value of Equity Investments in Quoted Shares (At Market Value) 1,579,143,520 72% 1,179,419,025 81% 41