Sri Lanka is looking at constructing indices to measure performance of the island’s fixed income or bond market with the help of Indian based ratings agency CRISIL, a subsidiary of Standard and Poor’s.
‘Sri Lanka has not had a high quality benchmark done by a credible party with the expertise,’ said Prabodha Samarasekera, chief of NDB AVIVA Wealth Management, the largest non-state investment fund in the island.
‘Companies like our company where people come and give us money, they really need to see whether we have done a good job for them,’ he said.
The fund manager is spearheading the initiative with the assistance of CRISIL, an Indian based ratings and research agency which is also a 53 percent owned subsidiary of global ratings agency Standard and Poor’s.
Samarasekare estimates Sri Lanka’s fixed income market which comprises Treasury Bills, Treasury Bonds and Corporate Bonds at around 2.5 trillion rupees. Although equity or stock market commands more attention the bond market is almost equal in size and very liquid that could easily trade up to 5 years of bonds.
As an investment instrument the fixed income market is vital for the private and public sector but Sri Lanka currently has no measures to track its performance. The fixed income market in developed countries is a sought after investment vehicle by fund managers.
Samarasekare said experts from CRISIL have already CRSISIL met primary dealers, fund managers, bank treasuries and various market participants and analyzed data from Sri Lanka’s government security market.
‘It helps the investors measure the performance of the investment they have made. What is the point of managing an investment if you can’t measure it,’ said Mukesh Agrawal, senior director at CRISIL who was in the island recently.
‘A lot of foreign investors are looking at investing in the Sri Lankan bond markets. So if you are to attract the foreign investors it is very important that you have independent benchmarks so the foreign investors can compare the performance off their investments with the other markets,’ Agrawal added.
CRISIL is already working in Sri Lanka and has developed internal rating models for sanctioning loans for Hatton National Bank and Nations Trust Bank developing risk assessment models.
Agrawal said Government securities bonds account for almost 70 pct of India’s total bond market, similar to Sri Lanka. Its private sector corporate bond market is about 6-7 trillion Indian rupees.
Corporate bonds, also a vital part of the fixed income market are rated for risks, hence give fund managers a taste of the risks they are comfortable to stomach.
CRISIL proposes the structuring of four indices covering Treasury Bills and Bonds.
‘For the T Bills markets we propose on the run indices and for the run indices and for the T Bonds market we propose composite indices,’ said Aman Signhania, an official from CRISIL.
‘It is a total return index which captures both the sources of income for a bond. So it will capture the accruals of the coupons and also over and above the market movements in the portfolio of the bond due to changes in the market.’
Sri Lanka holds weekly primary market Treasury bill auction where bills with maturity bans of three months, one year and five years are traded.
‘On the run indices’ would track the performance of most recently issued T Bills of the relevant tenure.
For example a 3 month On The Run T Bill index will track the performance of the most recently issued 3 month T Bills.
CRISIL proposes two On the Run indices – one for the 3 month T Bill market and the other for 1 year market.
‘On The run Indices roll over to the newly auctioned T Bills as and when auctions happen, so if in Sri Lanka auctions happen on a weekly basis your On The Run index will track the performance of mostly issued T Bill for a week and next week it will over to the new T Bill which is auctioned,’ explained Singhania.
‘Composite indices’ proposed for three year and five year bonds will track the performance of portfolio containing treasury bonds of relevant maturity band. CRISIL says it is a total return index and the portfolio can be re-balanced on a monthly or a quarterly basis.
‘Composite indices which we propose for the three year and five year market treasury bonds track the performance of portfolio containing treasury bonds of relevant maturity band, again it is a total return index and the portfolio can be re-balanced on a monthly or a quarterly basis,’ Singhani elaborated.
He said the security will be valued on an ongoing basis.
Sri Lanka currently uses Bloomberg for valuations, which CRISIL thinks is highly volatile and not representative of the respective market.
Samarasekera says the indices should be maintained by an independent party, preferably the banking regulator and added that discussions are still open.
‘The Central bank can be the independent party,’ he said.
‘Because a fund manager cannot go and manage the index which he/she will use to measure client performance against the benchmark that will not look credible.’
He says despite liquidity Sri Lanka’s bond market is not sufficiently transparent due to the lack of a trading platform. Bond markets are usually far less transparent than stock markets because big institutional investors, who dominate them, don’t need the same hand holding type protection that equity investors do.
Currently the central bank maintains a central depository where investors have lodged their bond certificates etc in electronic form.
‘Every morning like you trade in the stock market people should be able to look at buyers prices, sellers prices, quantities that are for sale, quantities that are there for purchase and conduct transactions. And the rest of the world should be able to see what those prices are,’ said Samarasekera.
‘If indices come it will compliment that transparency, specially transparency and price discovery.’