Sri Lanka fund manager to arbitrage risk anomaly

Feb 11, 2009 (LBO) – A fund management firm founded by senior Sri Lankan bankers say it can bridge the gap between low yielding bank deposits and risky high yield assets, by arbitraging an anomaly in the risk to reward structure in the island.

Chief executive of Wealth Trust, Dhammika Ranawana, who counts years of experience in bank treasuries as well as primary dealers says the firm will sign an investment policy with its high-net-worth customers and work under its guidelines.

Clients can set benchmark yields and share profits if they are exceeded.

The firm has a portfolio management system which tracks investments, sends monthly statements and also has a web interface.

The firm says it operates with a fund management license from the Securities and Exchange Commission. All funds will be invested directly in the name of the client and not through the balance sheet of the firm.

Boyagoda says Wealth Trust has plans to start a mutual fund and open branches.

Founders of Wealth Trust Corporation say more than 50 percent of the 1,300 billion rupees in financial savings in the country are in savings deposits of banks which yield as little as 6.0 percent, with inflation topping 25 percent in 2008.

Meanwhile government securities, which have no credit risk, touched almost 20 percent, last year.

Many people invested in very high risk assets such as unregulated financial firms which promised rates of around 20 to 30 percent, not taking into account the credit risk.

“These were not uneducated rural people, but educated people in Colombo,” says Ranjjith Fernando, chairman of Wealth Trust Corporation, who was former general manager of listed National Development Bank.

“Though we have a high literary rate, financial literacy is low,” adds Mangala Boyagoda, executive director of Wealth Trust Corporation who counts over 30 years in banking, most of it in treasury management.

“Today Treasury bills pay higher than banks, so there is an opportunity to increase yields without increasing risks because of an anomaly in the risk-reward structure.”

Due to the anomaly in the risk-reward structure, Boyagoda says there are opportunities to increase yields without taking on very much higher risks.