A major player in the Colombo stock market believes that although the Colombo share market has picked up on the war news, the full benefits are yet to be seen.

"Although the market picked up some momentum following the success of the military action in the North East, we believe it would reach its full potential only when the economic benefits of the newly opened up markets cascade down to the corporates, and the negative impacts of the global crisis subside," Mr. Israel Paulraj, Chairman of Watapotha Investments PLC, an investment fund under the Carsons umbrella said in the company’s just released annual report.

Watapotha had done well during the year ended March 31, 2009 posting a profit after-tax of Rs.46.6 million, up from a loss of Rs.7.8 million the previous year despite the Colombo stock market dipping two years in a row.

Paulraj said that equity investments became unviable in the short-term during the year under review with investors exiting from equities in response to higher interest rates, inflation and the resulting impact on corporate earnings.

Watapotha had responded to the market changes by moving out of equities and converting assets in fixed income investments carrying stable returns and ensuring capital preservation.

"Amongst our divestment decisions was a long standing holding the portfolio had in Selinsing PLC, a Malaysian oil palm company that was sold to its major shareholder within the Carson Cumberbatch group at a capital gain," he said.

Sharing these divestments a cash surplus of Rs.78.46 million had accumulated within the company and had been invested in the fixed income market yielding an average annual return in the range of 12% to 16%.

"Given the unexpected volatility of the equity markets, we believe our decisions to exit equities was opportune due to the steadier returns and stability of fixed income investments in the current context," he said.

Paulraj noted that the company’s Rs.99 million portfolio "commands only low bargaining power in the investment business." This limited their ability to participate in significant trades on the bourse.

He announced that during the current financial year, the board would review options available to best address this issue in a manner that would optimize the benefits to shareholders in the future.

"The current process of realizing the investments within the portfolio would facilitate the decisions of how best to pass on the value created by the company over the years, to our shareholders," he said.

The profit posted for the year was after providing for the diminution in the market value of its trading portfolio of Rs.6.2 million. Their short-term portfolio depreciated by 16.8% against the CSE’s depreciation of 35.9% demonstrating better performance than the benchmark of All Share Index even though the results were negative.

Paulraj said that the company’s net worth in its balance sheet stood at Rs.98.5 million at the end of March 2009, up from Rs.62 million a year earlier and attributed this increase to realization of value on long-term investments.

He said that while the net asset value per share of the company stood at Rs.146.80, the last traded share price of Watapotha was far above underlying net assets of the company.

This highlighted the illiquidity of the stock given low volumes trading on the floor.

The directors have recommended the payment of a final dividend of Rs.17.50 per share against the previous year’s Rs.15 per share reflecting the company’s ability to maintain its returns to shareholders even at times of uncertainty.

Watapotha is managed by Guardian Fund Management Limited, the fund management company within the Carsons group which also manages Ceylon Guardian Investment Trust PLC and its subsidiaries, the country’s largest quoted investment trust.

The managers said that the sale of Selingsing yielded Rs.59.7 million cash and a second sale brought in Rs.12 million with the sales booking a capital gain of Rs.49.7 million.

The managers said that the portfolio was now almost totally held in the form of fixed income investments with the only share in the short-term trading portfolio being Distilleries.

Guardian Fund Management said that the Watapotha board will evaluate the options available to enhance its fund size or alternately return the net worth generated to shareholders enabling them to cash out on their investments at a capital gain.

Watapotha which is 86.73% owned by Carsons has a stated capital of Rs.10.44, a general reserve of Rs.5.9 million and retained profits of Rs.82.2 million in its books.