Ravi Abeysuriya, CFA, Group Director / CEO of Candor said at the seminar on "Stock Market: Regulatory Framework and Investment Challenges" organized by The Ceylon Chamber of Commerce that “the Capital Market in Sri Lanka is under-owned versus its frontier market peers and as a result people miss out on a valuable opportunity to build long term savings for retirement”.

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CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of Candor is strictly prohibited
The Sri Lanka Capital Market:
Good Governance for New Opportunities
Ravi Abeysuriya, CFA
Group Director / CEO
Candor Group

2. Page 2
Domestic Investor Participation Rate in the Sri Lankan
Stock Market is One of the Lowest
Source: Investor Protection, Equity Returns, and Financial Globalization, JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS

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The Industry has lost Investor Trust

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We Must Restore “Trust” in our Capital Market

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Asset Management is Least Trusted

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Factors Contributing to Lack of Trust

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Ethical Issues Facing Global Markets

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The Cost of Failure of Trust - Miss out on the “The Power
of investing”

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Firm level Actions Most Needed to Improve Investor Trust

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Trust Attributes

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CFA Institute Code of Ethics & Standards of Professional
Conduct

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CFA Institute Asset Manager Code

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CFA Institute Integrity List

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CFA Institute Statement of Investor Rights

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Companies/Issuers
 Willing to disclose &
avert insider trading
 Corporate governance
 Financial transparency &
avoid accounting
manipulation
Investors
 Have trust & confidence in
the market
 Are financially literate
 Have a long term investing
perspective
 Have strong & professional
institutional investor base
Quality of governance, Pro Growth Policy
Reform
 Greater choice of instruments to manage risks
 Expansion of institutional investor base
 Encouragement for large companies and state
institutions to list
 Laws that safeguard property rights
Intermediaries
 Adopt a Code of Ethics
 Serve the best interest
of their clients
 “High quality” – value
reputation, ethics &
professionalism
Robust Regulation
 Market needs to be fair & orderly
 Enforcement and sanctions that
instill confidence in the market
 Benchmarked against global
standards
Integrity of the market & its participants and market liquidity
Key drivers required to foster growth of the stock market

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Reform Equals Opportunity for the Sri Lanka Capital Market
• Capital Market is under-owned by domestic investors versus its emerging
market peers
• Industry players willingness to act in a professional & ethical manner for the
long term future of the industry
• Governance reforms & improvement in capital market regulation,
demutualization of CSE, DVP & CCP, National Payment Gateway, e-KYC
• Pension reform will increase long term saving and “institution capital”
• Sri Lanka is the gateway to India – India will become world’s largest economy
and will have the largest population, Foreign investors will continue to surge to
India as reforms by Prime Minister Narendra Modi take hold and investors
search for growth (India stock up more than 20% last year)
• The magnitude of the impact depends on the commitment to reform by all
stake holders

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Opportunity to establish a facility to check out the
integrity of RIAs & Market Intermediaries

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Opportunity to increase the domestic stock market
participation rate
• Growing Body of empirical evidence showing that weak investor protection is
negatively related to stock returns
• Equity returns are lower in weak investor protection countries as stock prices
do not reflect the demand from foreign & local portfolio investors
• Wealthy investors have an incentive to become controlling shareholders as
firms cash flows accrue largely to controlling shareholders
• Price of weak corporate governance stocks is not low enough due to high
demand from controlling shareholders
• Foreign & local portfolio investors avoid investing in countries where the
domestic stock markets display weak governance

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Opportunity for inclusion in MSCI Emerging Market Index
• Being included in the MSCI EM Index has much larger implications for Sri Lanka
• Convincing evidence of positive price impact upon inclusion
• “Radar Screen Effect” – attract more distant investors and hence require lower
expected returns
• Stocks included in the MSCI EM get increasingly integrated with the world
markets which means there is increased risk sharing between local and foreign
investors
• Listing two large and profitable state institutions and establishing a public float
of over 20% could be a major catalyst to attract foreign investors to our capital
market
• USD 9.5 trillion of assets are benchmarked to MSCI indexes - When Sri Lanka is
in the index, MSCI Emerging Market Index tracker funds will be required to
invest in Sri Lanka as they need to replicate the index.
MSCI EM Index captures large and mid cap representation across 23 EM countries with 836 constituents, Index
covers approximately 85% of the free float adjusted market capitalization in each country
Countries include: Brazil, Chile, China, Columbia, Czech Republic, Egypt, Greece, Hungry, India, Indonesia, Korea,
Malaysia, Mexico, Peru, Philippines, Poland, Russia, Qatar, South Africa, Taiwan, Thailand, Turkey, UAE

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More opportunity for long-term saving and investment
propositions
• Sri Lanka has one of the fasted aging
populations
• Asia is replacing Europe as home to
the highest population of middle-
class people
• Global investable assets for the asset
management industry are expected
to increase to US $100 trillion by
2020 with an estimated compound
growth rate of over 6% per annum
higher than global GDP growth
• The need of the hour is fostering a
robust asset management and
pension fund industry

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CSE Returns & Volatility
INDEX 1 YR RETURN (%) 3 YR RETURN (%) 5 YR RETURN (%)
Period Annualized SD* Period Annualized SD Period Annualized SD
ASPI 14.6 16.0 3.5 48.6 14.5 15.4 69.4 11.3 14.8
S&P 20 17.3 19.0 3.8 44.2 13.3 13.5 67.8 11.1 17.6
MSCI Emerging 1.9 2.1 4.0 15.6 5.1 18.8 13.1 2.5 18.1
Hang Seng 21.8 24.1 5.0 51.0 15.2 20.1 42.3 7.4 20.2
S&P BSE 500 Index 16.2 17.8 5.2 70.3 20.1 26.2 57.7 9.7 32.4
FTSE Malaysia -2.4 -2.4 3.0 15.0 4.9 19.9 41.5 7.3 17.8
Jakarta Composite 3.9 4.2 3.2 32.7 10.2 23.0 81.9 12.9 25.1
Candor Recommendations* 13.1 220.5 1.7
*Candor’s recommended stocks are included for a holding period of 2 to 3 months & annualized return is an average
value of all the annualized returns of respective recommendations
* SD – Monthly range for 1 YR volatility & Yearly range for 3YR & 5YR Volatility
Source: Bloomberg, Candor

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ASPI vs. Other Regional Markets – 5 yr Return & Volatility
0
5
10
15
20
25
30
35
ASPI MSCI Emerging Hang Seng S&P BSE 500 Index FTSE Malaysia Jakarta Composite
5YR Annualized Return Standard Deviation
Source: Bloomberg
%

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How Investors miss out on the Power of Investing
Real Stock Market Returns vs. Real Savings Account Return
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
1985
1986
1987
1988
1989
1990
1990
1991
1992
1993
1994
1995
1995
1996
1997
1998
1999
2000
2000
2001
2002
2003
2004
2005
2005
2006
2007
2008
2009
2010
2010
2011
2012
2013
2014
2015
10,000
15,445
34,049
29,730
18,569
8,119
22,023
10,625
42,679
36,614
30,985
35,421
2,379
Real Stock Mkt. Return
Real Savings A/c Return

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Conclusion
Good Governance and Ethics is critical to market development and can
provide grater opportunities for investors and the society at large
Bad Governance Good Governance

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0%
50%
100%
150%
200%
250%
300%
350%
400% Jun-09
Aug-09
Oct-09
Dec-09
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
Feb-13
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
Feb-15
CSEALL vs. Global indices: June 2009 - March 2015
CSEALL
DJI
FTSE 100
Straits Times
MSCI Emerging
S&P 500
Hang Seng
MSCI World
Source: Bloomberg

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New rules would make advisers put investors first
http://www.usatoday.com/story/money/2015/02/23/new-rules-financial-advisers/23878905/