Equity Investment Strategy

Channa Amaratunga
Boston Asset Management

2 March 2006 Boston Capital 1

 Reaping the Peace Dividend?

(ASI)

2300

1800

1300

800

300
02-Jan-91 22-Jan-93 17-Mar-95 05-May-97 22-Jun-99 01-Aug-01 06-Oct-03 07-Dec-05

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 Peace holds the key
z ASI up 272% since CFA signed on 22 Feb
2002; CAGR of approx. 39%
– Gains despite political uncertainty & natural
disaster; peace has boosted corporate earnings
and revived investor confidence
z ASI was however down 29% during 16 Nov
2005 – 18 Jan 2006 amidst fear of
breakdown of CFA
– Few shares retain their value in such a downturn

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 High Event Risk to Market
z Best Case Scenario : 10%
– Set up Joint Mechanism / Interim Administration
– 50% estimated upside to market
z Expected Scenario : 70%
– Slow progress on talks / Status quo maintained
– 20-30% p.a. estimated returns on equities
z Worst Case Scenario : 20%
– War (threat) / Interest rates rise / GDP slows
– > 50% estimated downside to market

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 Investors are Unique
z Investors cannot be generalised
z Different risk tolerance and constraints
z Appetite for risk will differ widely
⇒ Different strategies for different
investors
⇒ Know yourself / your client / limitations
z Invest funds that you will not need
urgently in equity
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 Debt vs Equity?
z Key asset allocation decision
z Equity : Higher risk, higher return
z Debt : Usually lower risk, lower return; unless
leveraged positions with mismatches
z Real estate and currency markets : Higher
investment value required
z Mix dependent on individual circumstances
z Unit Trusts are option for smaller investor

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 Equity – High Risk, High Return?
80 (%)

60

40

20

(20)

(40)

ASI - % Chg (Excl Dividends) Avg 12m Tbill

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Required Rate of Return on Equity

z Risk free rate is GoSL Treasuries

z Equity investing requires a premium to
compensate for uncertainty of returns
z Higher premiums required for more volatile,
more uncertain investments
z How much is market equity risk premium?
– Much debate; various methods of estimation
z Assuming 5% risk premium, current required
rate of return on equity is approx. 16% p.a.

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 Interest Rates near Historic Lows

(%)
24

21

18

15

12

6
Jan-93 Feb-95 Apr-97 Jun-99 Sep-01 Nov-03 Dec-05
12 mth Tbill Rate

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Lower Interest Rates boost Equities

z Lower interest rates attract increased

domestic funds to equity investment
– Reduces opportunity cost of investment
– Reduces required rate of return on equity
– Reduces attractiveness of debt alternatives
– Reduced cost of debt raises corporate profitability
z Domestic, retail participation rising since 2002
amidst negative real returns on fixed income
z Rising interest rates will have reverse effect

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Does the Market Really Matter?
z Stock selection remains the key – especially
in uncertain market conditions
z Investment style should deliver in all markets
z Pick the right stocks, back them for the long
run, and the market will take care of itself
z ‘As far as I’m concerned…the stock market
doesn’t exist’ - Warren Buffett
z High event risk will however impact returns

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 Common Sense Equity Investing Tips - 1

z Focus on investment, not speculation

– Tilt the odds of ‘gamble’ in our favour
z Adopt a strong defence; minimise mistakes
– Avoid big losses; the winners will naturally come
z Diversify risk in a focused & informed manner
– Avoid shot-gun approach; limit coverage
z Do your homework; ignorance is expensive
– Knowledge is power; seek undiscounted news

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 Common Sense Equity Investing Tips - 2

z Cash is king – Focus on dividend potential

– High dividend plays outperform in uncertainty
z Avoid trading on newspaper headlines
– Focus on future earnings; past is just a guide
z Undervalued asset plays require patience
– Likelihood of realisation or as a takeover target?
z Defensive sectors outperform in uncertainty
– Monopolistic, inelastic demand & strong brands

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 Common Sense Equity Investing Tips - 3

z Fundamentals do matter
– Diversions from value can only occur in short term
z Bonus prediction is a rewarding art
– Should be ‘unanticipated’ by market
z Avoid arbitrary & pre-defined sell/buy limits
– Always revisit investment rationale & take action
z Invest in what you know & stay focused
– Avoid unnecessary complexity; keep it simple

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 Qualities of a Successful Investor

z Patience
z Independent thinking – Ability to stand
by stocks if fundamentals are intact
z Disciplined investment style
z Enthusiasm and passion for finding out
information (intellectual curiosity)
z Common sense

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 The Art of Investing
z Investing is an art, not a science
z Cannot quantify everything; imperfect information
z Willingness to accept losses is essential
z Every investment will not be profitable; important
to learn from mistakes!
z Always ask yourself, what will drive the price up
from current levels?
z Recognise that a good company may not always
be a good investment!
z Enjoy yourself & have fun while investing!
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 Equity Investment Strategy

Thank You

Boston Asset Management

7A, Tower Building, Col - 4

Tel : 2507107
Email : channa@bostoncap.net

2 March 2006 Boston Capital 17

 Disclaimer
• This presentation is for information purposes only
• Descriptions of any company/security mentioned herein
are not intended to be complete
• This presentation is not, and should not be construed as,
an offer, or solicitation of an offer, to buy or sell any
securities
• Individual circumstances should always be taken into
account prior to investing
• Investment advice is time sensitive and may change
• Share prices may fluctuate drastically and prices can fall
as well as rise within short or long periods

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