Investment Done Correctly

Interviewee : Tushan Wickramasinghe; Interviewer : Dilusha Gamage;
Date of Interview : 24/07/2021

List of Acronyms : TW = Tushan Wickramasinghe, IN = Interviewer

Today, we have Mr. Tushan Wickramasinghe, the Managing Director of Capital Trust Securities with Market Insight.

IN:

To start off the conversation, we heard that your stock broking firm is ranked number one in terms of turnover during the first quarter of the current financial year. Enlighten us on the owners of the Capital Trust Group and how it all began?

TW:

This all began in 2003 when Ishara Nanayakara and I bought the smallest stock broking firm at that time, First Capital Securities. Within six months, we were ranked number one in terms of turnover and thereafter just after the war they (previous owners) sold off the company. Mr. Rusi Captain and Mr. Raj Rajaratnam each bought 20% graciously and after some time Mr. Raja Rajratnam sold off and thereafter I own 80% and Mr. Rusi Captain owns 20%. They inspired me on how to invest long term in the market and take quick decisions and be very ethical.

IN:

Most importantly, what I see is that Capital Trust is owned privately and it doesn’t have the backing of a larger institution similar to most other stock broking companies. So, what inspired you to come into this business and grow it to this level.

TW:

Well, firstly you must understand that the owners I have had are owners of larger strategic institutions so I had something more than the backing of larger institutions but mostly they gave me a free hand to run the company the way I wanted and they never interfered. I, in turn, never went to them asking for additional capital and if there was such a requirement, I would personally put it. For example, there was an instance to a sustain a large scale portfolio which I did by myself and it went well. I want to also thank my employees for their hard work, support, and for appreciating my vision throughout. Our firm has absolutely no internal politics and everything is democratically decided and transparent. Although, we started as a stock broking firm, we have created a holding company that has 34 subsidiaries.

IN:

What areas do these 34 subsidiaries cover other than stock broking?

TW:

Actually, it all started in 2015 where I had to diversify into other areas as I realized with the coalition government there will be many kingdoms, policy making differences, and I also thought there will be higher taxation (and I was correct), higher interest rates, and in dollar terms if we stuck to stock broking and investment in shares, we would have lost more than half of our capital. Hence, we drastically reduced our exposure in capital markets and we went into other areas like Capital Trust Properties which is a property broking company with Colliers Nightfrangs CBRE and other foreign tie-ups. Then, we have Capital Trust Residencies which went into property development where we completed 3 apartment complexes and have bought land for 5 more. We also have a variety of Capital Trust Properties Group companies that have bought about 40 lands. We also have Capital Trust Technologies which focuses on technology companies. We also have ALFT Packaging which is the largest packaging company in the country. I almost forgot, from 2010 onwards we had a variety of financial sector companies like Capital Trust Credit, Margin Trading, Capital Trust Wealth Management which is a licensed wealth management company, Capital Trust Partners which is a corporate finance company, and Capital Trust Global Market which provides a platform to trade in 37 exchanges.

IN:

Tushan we noticed that you had not been focusing on the stock market from the period of 2015 to 2020 and then you re-emerged at the end of 2020. What were you doing during this period?

TW:

I must say that on record while all other stock broking firms continued in stock broking, we drastically reduced our exposure after being one of the leading stock broking firms. We reduced our exposure in capital markets and we went into property broking where we are now one of the largest property broking company’s in Sri Lanka. We also had a large property broking portfolio (which we still have) and we started trading wherever possible. And mainly thanks to us, a massive valley in property was created in Colombo pertaining to large lands where property value rose by more than 200% during the period of 2015-2017. We also created a big wave in apartment building where many people followed us into doing the same. But we completed the 3 we started and then in 2018-2019, we paused and did not follow through with the other 5 projects. Many competitors who followed through, got into difficulty subsequently. What everyone must realize is that capital markets are not always good, it has its good and bad periods. So, we have a separate sector where the property markets move up when the stock market slows down. And also if we both are stuck and slow moving, then we have a platform that trades with 37 markets. But the investors will have to have their own foreign exchange to invest.

IN:

What are the changes you see in the CSE since its digitalization a while back?

TW:

Honestly, this digitalization should have happened in 1998 but it happened 25 years later. I have been lobbying the stock exchange for a simple practice such as for stock broking firms to send an email with the contract notes and in turn the investor should provide an email address. That is how it was shown to us when we went to India in 2008. There were small internet kiosks outside stock broking firms where the potential investor can open an internet account and then it goes to the broking firm which allows them to open an internet trading account. However, there were political reasons for why digitalization did not happen (in Sri Lanka). But this time the SEC commissioners decided to not open the stock market as most local individuals could not trade without contract notes being digitalized, and without broking firms not being ready to transfer funds. They set up a joint committee with the SEC and the CSE which speedily and correctly took the necessary steps. Now if you see the advantages as opposed to earlier when the clients have to wait for the contract note to come by post or delivered and the broking firm was hampered as the client could always claim they never received the contract note and delay the payment. And when a particular government arrived, they went to the extent of looking at transactions spanning 6 years before and the client says that they did not receive the contract notes. So, how do you prove that the contract note was sent? Then a rule was established requiring the documents to be sent to an email address but then again a loop hole was exploited by not providing an email address. This set of commissioners firstly asserted that an email is mandatory so that broking firms can send the contract notes and in turn the CDS can send the CDS statement. Secondly, the client is supposed to provide a mobile number through Form 28 or E-connect which guarantees an SMS securing the client’s knowledge on the CDS account and as well as the broking firms knowledge on the CDS account. The next point is that life goes on regardless of a lockdown and the SEC requires a bank account number to be provided to the CDS in order for dividends to be distributed thereby maintaining accurate accounts. This also reduces time for the broking firm to send and receive funds to and from clients guaranteeing efficiency. Also more than 90% of the accounts are being created from the CSE app and the next phase is where the foreign diaspora can open accounts through the app and facilitate local companies in creating accounts. A new feature is due to be released called E-Connect where clients can change their details via the app as and when they want. These are simple things that have not been implemented for 25 years and immediately you can see now that the market is spreading to the provinces transforming itself into a “proper market” A proper market according to the economic text books is a market where there is proper price discovery discouraging price manipulation. And that is where we are heading. Earlier, we did not have a market instead we had a set of people playing passing the parcel.

IN:

What would change for investors with the introduction of the Delivery Vs Payment (DVP)? Also do you think that Sri Lankan market is mature enough to accept concepts such as Short-Selling?

TW:

Well, if you continuously say that a baby is not mature enough and keep it at home, the baby would not mature. In same way, if we say that the market is not mature because of the risks involved, the market is never going to be matured. You need to quickly bring in the necessary products and then the market will mature. The DVP has been a requirement for the last 25 years again for various foreign funds. We have not been able to move from been a frontier market to an emerging market because DVP and central counter party feature were not available. So, for the last 3 years there was planning going about, then last year there was meticulous planning and finally, we were able to implement it.

So there is some undue excitement between investment advisors and investors and it was I at a CEOs meeting that explained that there will be no change at all. Basically, as far as investors are concerned they can continue to delay payments if they were habitually doing it. They can get official broker credit, they can get margin trading, they can pay and receive funds in the traditional way, they can buy and sell many times on the same day thereby everything is the same for the investor. This is something that the investor need not know and be concerned only by the stock broking firms accounting division and the CDS. When we took my stock broking firm’s figures to see how much more liquidity we need, I was surprised to find out that we needed less liquidity than earlier with the CSE. So, there is no liquidity problems for the stock broking firms. Therefore, this is a more riskless system for stock broking firms as earlier whether a stock broking firm is paid or not they must settle the outstanding with the CDS by T+3 9am. Now, what is going to happen is at T+3 9am when the stock broking firm pays then they get shares from the other stock broking firm so as far as the client is concerned there is no change. It’s just that the risk for the stock broking firm is non-existent. I have observed that in some WhatsApp messages going around that they are talking about a buyer and seller and I have to stress that it is not the buyer and seller but rather the buying broking firm and the selling broking firm. So, we are very happy that after 25 years this is happening and has no impact on individual investors.

IN:

Capital Trust was the first stock broking company to introduce technical analysis in Sri Lanka and Mr. Sarath Rajapaksha, one of the former directors of Capital Trust, is considered the father of technical analysis. What are your thoughts on the widespread use of technical analysis in the current context?

TW:

Firstly, Mr. Sarath Rajapaksha is my father-in-law and he has a passion for collecting Master’s degrees and finally he started a PHD in a foreign university on technical analysis hence his knowledge on authentic technical analysis. Now that I am learning of what happened during the 2010-2011 period, I am first getting the fundamental analysis division of Capital Trust Securities which comprises of 8 analysts to pick out the fundamentally sound stocks which has a PE-ratio of less than 7, price to book value of less than 1.2, and stocks which can withstand the depreciation of the rupee. Then I plan on providing that basket of shares to the technical division headed by Mr. Sarath Rajapaksha which do daily and hourly charts and see how the 7 technical tools change. Then at the proper time they will signal us to buy. Further, I must say that we daily analyze about 30 stocks and if the signals are not good, we keep them on the side because I noticed that if we come out with many sell recommendations those that own that stock don’t like it. I must also say that we do not do technical analysis on fundamentally weak shares because this is about finding fundamentally strong shares and timing the proper buying time and exit.

IN:

Do you think that the new generation of technically savvy and social media connected investors are a welcoming trend or detrimental to the fundamentally driven stock market?

TW:

Historically, 1985-1991 period people used to bring share certificates (to the stock broker) then people started phoning stock brokers but now everything is done digitally which is going to help propagate stock broking rapidly. Therefore, it is welcoming that social media is available to propagate the stock market but remember that (social) media is still media and it can be used for bad purposes. So, the public should be mature enough to grasp what is been told, see what happens by following somebody, and then decide what to follow and what not to. Overall, social media is a good concept and should not be killed but I appeal to the upcoming investors to go to licensed stock broking firms, social media/webinar channels, and even Capital Trust Research’s Youtube channel whose content is very educational. If you go to a regulated stock broking firm and something goes wrong, you could always complain to the SEC. But in a WhatsApp group there is a possibility there are individuals who want to sell stocks therefore are promoting it and other who have already sold shares who tend to have a negative attitude towards the shares they sold. Hence, the investing public should be mature enough to be able to gauge social media stock advice accurately.

IN:

What are your thoughts on the new property product introduced by CSE titled REITs (Real Estate Investment Trust)? And how would Capital Trust be benefited by REITs?

TW:

I would say that Capital Trust Properties is qualified to launch REITs because we have been painstakingly developing a large property clientele with 5300 properties for sale. We, ourselves, are also investing so we understand the reality as opposed to what is said in books and also Capital Trust Properties have tie-ups with Colliers, NightFranks, CBRE and some others. Regarding REITs (Real Estate Investment Trust), I must once again commend the SEC for rapidly doing what is necessary such as establishing the rules and pushing the reduction of the 4% stamp duty to 0.75% via the budget. But I’m not sure if it’s gazette or not. There are a few unfortunate practical issues, for instance the law is written such that you need to have completed partly residing properties with income streams. Now, the problem is that if you take our stock market’s property sector which trades at a price to book value of 0.7. There is a well-known shopping mall and towers which are trading at 0.5 times the price to book value and then even if you set up a REIT will there be a demand at the one time price to book value. This is an issue. So, to answer your question Capital Trust Properties is conversant in setting up a REIT and it is also a correct step in launching this product but we need enough time for it to be lucrative.

IN:

We have noticed that Captial Trust isn’t keen on expanding their existing branch network. Do you have other mechanisms to reach potential investors out of Colombo?

TW:

For the last 15 years, we have maintained branches in Kandy, Matara, Kurunegala, and Negombo. One reason is that we could not find graduates who are conversant with stock broking firms and have a background in stock broking that we can trust. That was a limiting factor. But with the widespread use of technology, we have found that it is easier to use the head office to put out the proper research and the proper messages via WhatsApp because we want to be responsible for what we are saying and what the customer is doing. Personally, I do not want the customer to rely on the stock broker instead the customer should be independent and empowered into learning to read a P&L balance sheet and what each ratio is about. Weekly, Capital Trust Securities provides the main ratios of 160 companies with by recommendation of a few solid companies. Monthly, we release a few company reports and reports for suitable sectors (export sector, tile sector etc.). Basically, we guide our investors in what to do thereby reducing the reliance on rumors via social media. Then the next issue is the timing, for which we send out the technical analysis updates that cannot be manipulated by anyone as they are the output of a Reuters Metastock system. What we prefer is for our head office’s research division to empower our investors to make their own decisions to maintain transparency. To be honest COVID has been supportive as digitalization was fast tracked due to this. When somebody said that they do not understand how the internet works, a prominent person in the SEC said to sideline that 2% and go on with the digitalization to benefit the other 98%.

IN:

In today’s context, can we go forward without local and foreign institutions investing in our CSE?

TW:

The general belief is for the CSE to have foreign and local institutional buying. But if you really take the facts from January 2020 to date, there has been more than 75 billion foreign sales which is massive. If you take the last 10 years also, there has been net foreign sales. Then if you take the local institutions after 12th May, 2020 for unit trusts the funds are static and there is no net buying or selling. If you take the local institutions except SLIC, for others there is a net outflow from the equity markets. So, what I feel is that if local institutions are not sure what to do its best that they do not do anything rather than being net sellers in a very lucrative time. And foreign and local institutions not being is not a problem as there a 7000 billion fixed deposits and every day is a “maturity proceeds” day which is where finance companies and banks have funds going out like a stock broking settlement day. The stock broking firms just need a tiny little bit to sustain an upward value and with this government’s policy of keeping low interest rates that will happen. You may also say that when the rupee depreciates the interest rates will go up but in the immediate present even if interest rates are increased foreign funds will not want to invest. Therefore, I believe that interest levels will be at the present levels until March 2022 and with the maturity proceeds of fixed deposits the market will have a substantial rally and we have to keep local and foreign institutions on the side.

IN:

Why has the stock market infrastructure and products not grown for the last 25 years?

TW:

When I started my career in 1991, they were in the process of launching the Central Depository System (CDS) and that was big break as previously people were running around with share certificates from company secretary to company secretary. There was also a problematic practice of putting a quotation in the board (open cry system). But by 1997, we finally had the automated stock trading system. So, from 1997 to 2021 nothing significant really happened. But when I think back there was the launch of a debt trading system where 5 licenses were given to primary dealers to trade via the debt trading system. Then, there was the McKenzie report everybody was running around with which several hundred million rupees was spent on but I barely saw anyone use it.

It’s probably because of the capacities certain officials had and there political agendas have led to our stock market to be what it is but again in 2014 a 10 point plan was been implemented but after the government change till mid last year nothing really happened. But since mid-last year things are catching on and everything is going well.

IN:

With your 30 years of stock market experience, looking back what are the challenges you faced?

TW:

When I was told in 2011 that the local individual and company turnover level has gone up to 89% and majority in the SEC secretariat field say it’s far too high and has to be brought down. Although, I gave my comments I was not listened to and then there was a SEC directive to sell all debtors positions within 6 months which created a forced selling situation in the market. Those with debtor’s portfolio had to sell, if you did not have any debit balance you had to sell, and broking firms such as ours with our own funds we did a capital reduction but was not able to pass the funds on to the retail clients. There was an artificial crash created of 33% starting 2011 March which was the first hurdle. Our broking firm lost a lot in terms of bad debts via capital trust securities and capital trust credit. Then, in 2014 we had a good year but in 2015 with the government change, a regulator said to us that they only plan on doing market regulation and not market development. But if you read the objectives of the SEC in other words they say that the one of SEC’s objective should also to develop the market.

Selling out large stock positions and telling investors to reduce exposure to shares was also a challenge. Then, COVID arrived in 2020 and the majority was predicting gloom and doom and the index will come to 3800, GDP growth will be minus 5 and worse. We had to have our own webinars and say that the market will go up to 5000 immediately. So at end of the day the market had gone up by 107% by January from 12th May 2020 to date, the market has increased by 85%, and we were correct. There have been many instances where we were a minority predicting the positive outcome correctly. Even now, majority of the fund managers & research units are requesting investors buy certain banks and conglomerates. But if you compare prices from 1st January, 2021 to date some share have gone negative whereas other have increased 50-200%. In other words, we have provided a doctrine with adequate research and proof and some don’t want to understand because they have bought the wrong shares and others don’t want to understand period. For example, when the rupee depreciate you need dollarized assets and income.

IN:

Most of our rural areas are dominated by Fixed Deposits (FD) and Savings culture. Why does the general public still prefer traditional Fixed Deposits with minimum interest?

TW:

Certain governments had policies to have high interest rates to give older folks a good return. Before 2010, the interest rates were high due to the war. Then when you take Novemeber of 2018, prime lending rates were about 11.8% and deposit rates in all finance companies were double digits. It was very convenient to save the money, do nothing, and receive a fixed income. There are 7000 billion regulated FDs in banks/finance companies and another 3000 billion unregulated FDs and little do these people know that the rate of inflation is at 5.2% which gives a negative real return and after tax it will give a higher negative real return.

To answer your question, why hasn’t the stock market propagated much more? Maybe because certain stock broking firms are owned by banks and are working towards a different strategy. Banks, finance companies, and insurance companies have higher marketing budgets and sales forces than stock broking companies. Although, at present in the stock market, the all share index has gone up 85% from the day the market opened after the lockdown in May 2020. The proper shares, we have been recommending have gone up 50-200%. The stock market has to propagate much more because the owning companies of the stock broking firms are not aggressively marketing the stock market. But as time passes, the stock market will naturally market itself.

IN:

Now that the all-share index has gone up by 85%, is too late to invest in the market right now?

TW:

We had a webinar on market outlook which can be seen on our Capital Research YouTube channel. The summary of it is, if you look at the market PE ratio, we are at an all-time low market PE ratio within Sri Lanka. In 2010, the market PE ration rose to an expensive level of 29 but now the market PE ratio is 9. Then, you take the price to book value for the last four years and it is at an approximate value of 1 which is in turn the lowest. Then people might say that Sri Lanka has all these problems and that is why they are cheap. So, when you take countries in our region with similar markets, Sri Lanka once again has the lowest price to book and PE ratio in the region.

Why am I saying it’s not too late is because when the last quarter ended in June 2021, the quarterly earnings of all quoted companies was 111 billion. If you take the total comprehensive income taking into account re-evaluations and exchange fluctuation gains then it was 135 billion. Those two figures are at an all-time high therefore comparatively you need to continue to buy.

Then the question comes where do you see the market by the end of the year? This is a question I get annoyed by because you cannot simply look at the all share index and decide to invest. The market is made up of 218 companies of which some of them are going the wrong way. So, look at the relevant companies that we have recommended and invest in those and see how those groups of shares are doing over the next 2-3 years.

IN:

What is the main objective of Capital Trusts’ YouTube channel?

TW:

Our clients were restless during the lockdown so we thought of having a few webinars to educate everyone. Our first webinar was an update on the tile sector, and the summary was that it was benefiting from the import restrictions and then the misconception arose as to what happens when the import restrictions are removed. Firstly, with the reserves being in a particular position, the import restrictions are going to be there for at least 2 years. Then there is a concern that in the unlikely event that the restrictions are curbed within the next 2 years what would happen. That too has been addressed by gazetting the new duty rate, the CESS rate, with further depreciation of the rupee, and the requirement of credit terms. Because of those four factors, the importers will not be able to compete with the local produce. Local tile production has also developed and are beyond Italian and Chinese brands. So, in the next 2 years the same profitability will continue which means the PE ratios are less than 7. Thereafter, when the restrictions are taken out, thanks to the gazetting, the 2 major tile producers will continue on with expansion of producing 95% of the tiles. Even if the construction sector has slowed down, when the requirement for tiles kick in, the local companies will be able to supply 95% as opposed to the 50% they used to supply thanks to the expansion. So their earning are always going to be really good.

I shall skip to the forth webinar which was on export sector picks which are basically dollarized income stocks. These are stocks that bring in income in dollars with normal growth and due to the depreciation of the rupee you can guarantee a good return.

We had another session on the stock market outlook where we look at the stocks benefitted by the depreciation of the rupee. There was one stock in the last six months which appreciated by 200% due to continuing with their normal operations and the rupee depreciating immensely. Another thing connected to the depreciation of the rupee is when a foreigner arrives with a certain amount of money they will find that when they convert dollars into rupees they get more rupees. Therefore, companies that have large amount of real estate because of the depreciation of the rupee they will have to re-evaluate the land guaranteeing a higher price. We further explained that you have to take the other comprehensive income figure because that includes the normal earnings plus exchange fluctuation gains and the re-evaluation. So as far as we (investors) are concerned we should look at the starting date till the ending date, the difference between the NAVs (Net Asset Value), and we don’t care if its earnings, re-evaluations, or exchange gains, we should look at our final net worth.

I would prefer if high net worth individuals have share portfolios to buy & sell and not have to pay capital gains or any other tax, or buy & sell companies rather than having a massive operation with a larger employee base and pay high taxes for those companies. So I would say that our philosophies are a bit different.

IN:

What is the final piece of advice you would like to give our audience who are planning to invest in the stock market?

TW:

Firstly, I would tell investors to thoroughly understand the basic ratios such as PE ratios, price to book values, and look at charts of past ratios and thereby look at the future forecasted ratios. They themselves should be able to identify which share is cheap and which isn’t. Then you must understand that we will be living with high inflation and therefore you must put your money in real-estate or shares with real-estate if not your money is going to lose value if it’s held in the form of cash and FDs (as FDs gives negative real returns). Because of COVID certain stocks of companies that do exports such as glove/mask manufacturers and logistic companies related to COVID will be making profits even after COVID. You need to buy companies with dollar assets who have in the last 7-8 years have accumulated a lot of dollars. If you have stocks with dollar exposure, you can sleep well because the rupee will continue to depreciate against the dollar.

What I am about to say now won’t be accepted by the majority but I will say it regardless. Majority of the investors feel that borrowing is dangerous but I will say that not borrowing is dangerous because if you borrow now as a 10 year loan, the first five years of the home loan interest is 7% and thereafter PLR +1 then in 10 years you will be giving the bank only 40% of the purchasing power. You gain and the bank loses. In same way, if you borrow and perform perpetual margin trading and invest in the previously mentioned stock categories (export and tile) then after 10 years what you have gained more than what the bank has gained. The secret to not losing money in margin trading is to buy only 35% even though the bank or broking firm has given you 50%.

Remember, there will be irrational moves by investors along with natural disasters, and political turmoil that will depress stock prices but you need to be able to withstand and power through these bumps. So basically, you must borrow but only buy up to 35% and you can maximize your wealth.