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Ceylon Guardian Investment Trust PLC, the biggest quoted portfolio investor listed on the Colombo Stock Exchange, has told shareholders that it was adopting "an innovative growth strategy to create outstanding shareholder value."
The Guardian group, with assets totaling over Rs.13.84 billion against liabilities of just Rs.191.5, million has posted a consolidated profit after-tax of nearly Rs.2.1 billion in the half year ended September 30, 2011, down 10% from the Rs.2.3 billion earned in the comparative period the previous year when the stock market performed exceptionally.
Guardian has said that the profit included a share of Rs.502 million of associate company profits representing the group’s holding in Bukit Darah PLC.
"The after tax profits recorded from investment related operations, therefore amounts to Rs.1.59 billion, a drop of 25% from the comparable period of last year," the interim report said.
Guardian Fund Management Ltd., the managers of the Fund, said they saw opportunity in picking under-valued stocks taking a three to five-year investment horizon particularly in view of unexplored opportunities available to all Lankan corporates.
They expected the CSE to attract foreign inflows in the medium term "given the preference for investing for growth in Asia in comparison to the relatively low performing Western markets."
The total value of the Guardian group’s portfolio as at September 30, 2011 stood at Rs.33.2 billion, down 8% from Rs.36.3 billion a year earlier against a 6.1% depreciation of the All Share Index during this period when equity markets, both local and global, had been very volatile, the report said.
"Hence in the back drop of challenging market conditions, Ceylon Guardian group booked exceptional capital gains of Rs.1.7 billion by taking an aggressive sell position and generating cash for the company."
The group’s portfolio is segmented thus – Rs.1.1 billion in short-term equities, Rs.9.2 billion in long-term equities and Rs.21.4 billion in strategic holdings.
The group’s investment managers noted that the Colombo bourse was now in negative territory after a two-year run as one of the world’s best performing markets in 2009 and 2010.
"However, it yet continues to be one of the best performing markets in the world for year 2011 it noted," the managers said on Nov. 8, 2011.
They noted an anomaly in the market where the Milanka Index which better represents blue chips "lagging behind the All Share Index for the first time in the history of the CSE."
"This is attributable to heightened speculative trading in second tier stocks in recent times, the report said.
"During the period of review much interest was evident in illiquid stocks which were trading with huge price fluctuations drawing retail interest to second tier stocks. Market turnover in the quarter under review has been driven to a great extent by these trades."
The managers reported that the Guardian group had made Rs.1.5 billion new investments during the first half of the current financial year and divested Rs.2.9 billion worth of shares making the group a net seller in the market.
Their focus continued on banking and financial services and diversified holdings, also concentrating on sectors such as manufacturing, beverages, food and tobacco, healthcare and oil palms "which looks strong on long-term fundamentals."
The managers admitted that both the group’s long-term portfolio and trading portfolio had under-performed during the first half of the current
financial year mainly due to concentration of the portfolio on blue chips which lagged during this period.
This was clearly evident from the lower depreciation of the All Share Index by a mere 6.1% vis-à-vis the comparatively higher depreciation of 12.1% on the Milanka.
However, Guardian had continued its style of managing the fund despite the short-term under-performance "as we believe that market anomalies will smoothen in the long-term."
When selecting stocks, Guardian followed a bottom-up approach taking financials, industry presence and management expertise into account.
"Such companies were built into the long term portfolio taking a medium term view of the companies’ earnings and business growth," the report said.
"On the short end, the trading portfolio built positions to enhance shareholder returns in the short term, and bought faster moving stocks substantiated with fundamentals."
The group acquired Guardian Capital Partners PLC (previously Watapota) to consolidate portfolio activity in private equities "profiting from the higher risk/return profile of this business segment."
"Currently the group’s private equity portfolio amounts to Rs.488 million at cost and Rs.731 million at market value," the report said.
During the current year two of their private investments were encashed through IPOs giving the group an average internal return of 85% on those projects.
"Decisions on exit at the time of IPO depends on our assessment of the then prevailing market conditions and the long term value of the stock given the IPO pricing," the manager said.
"Given the immediate over heating of the listed market, we are confident that good quality private placements will give us an edge in maintaining premium returns to our shareholders into the future," they added.
Guardian has continued leveraging their in-house management capabilities by entering a joint venture with Acuity Partners (Pvt) Limited, the investment banking arm of HNB and DFCC banks during the period under review to manage and market unit trusts using Acuity’s distribution and network capabilities.
The SEC has approved the equity and fixed income funds of this joint venture which will be launched this year as what the managers called "a series of innovative investor centric savings plans."
"The drop in interest rates is also likely to see domestic funds shifting from fixed income to equity investments," the managers said.
"Taking into account all these developments, we remain confident of investing for the long term, while we would use the strength of our short term portfolio to ride out the market cycles on a yearly basis."
Guardian had a stated capital of Rs.953.2 million, capital reserves of Rs.517.3 million and revenue reserves of Rs.10.16 billion in its books as at September 30, 2011.
The Guardian share had a net asset value of Rs.132.42 with the company capitalizing reserves and sub-dividing its shares in 2010.
Carsons with 67.15% and Thurston Investments with 6.43% were the two largest shareholders with public shareholding standing at 32.84%.
The directors of the company are: Messrs. I. Paulraj (Chairman), D.C.R. Gunawardena, A. de Z. Gunasekera, V.M. Fernando, K. Selvanathan, C.W. Knight and Mrs. M.A.R.C. Cooray.
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