Aug 18, 2010 (LBO) - Sri Lanka's Central Bank said a pension fund it manages would increase exposure to equities as government paper, in which it has invested the bulk of money, become less attractive with falling interest rates.
The bank said the Employees’ Provident Fund, the biggest fund in the country, has authority to make investments in the share market, including the banking and financial sector.
It was responding to criticism over the EPF's recent forays in the share market and building up of stakes in listed companies including banks.
One of the criticisms was that there was a conflict of interest in the fund buying stakes in commercial banks as the EPF is managed by the central bank which is also the banking regulator.
The Central Bank said in a statement the claims were "misleading" and that the law allows it to make investments in shares including the banking and financial sectors.
The banking and financial sector is the largest sector in the Sri Lankan equity market with more 20 percent of the total market capitalization.
"This sector has always been performing exceptionally well and therefore, since 2005, the EPF had invested in the sector with the intention of creating more wealth for the millions of EPF members in the long-term.
"Presently, the EPF’s exposure to the banking sector is around one percent of its total portfolio," the statement said.
"In addition to the banking sector, the EPF has also invested in other sectors including construction and engineering, manufacturing, hotel and travel, telecommunication, and diversified holdings in the Colombo Stock Exchange"
The EPF has also invested in other instruments such as debentures, mortgage-backed securities and selected private equities, the statement said.
"Currently, more than 95 per cent of the EPF investments are in government paper and this trend is expected to continue over the next few years as well," the Central Bank said.
"However, if the government were to reduce its fiscal deficit, over the next few years (as they have announced), there is a strong possibility that the EPF investment options of investing in government paper could diminish to some extent in the medium to long term," the statement said.
"In that scenario, interest rates could decline further and hence the returns to the members could reduce proportionately, although such returns may be reasonably above the inflation rate.
"In that scenario, there is justification for a slight shift towards other instruments which provide higher yields, so that the returns of the EPF are maintained at reasonable levels in the medium to long term."
The statement noted that Sri Lanka’s stock exchange has been hailed as one of the best performing markets in the world following the peace dividend generated by the end of the island's 30-year ethnic war in May 2009.
source - www.lbo.lk
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