Unit trusts make steady progress as tax scare fizzles out

Sri Lanka’s unit trust industry, which once was at the receiving end of losing protectionist-type tax exemptions and lower tax rates, made some steady progress since the new taxes came into effect with the five largest funds making gains in their assets under management (AUM). 

The performance summery of all unit trust funds published monthly by the Unit Trust Association of Sri Lanka showed that the AUM of the five largest unit trust funds have gained steadily since March 2017 when the industry faced an outflow of funds ahead of the uncertainty over the tax revision from April 1. 

According to the latest data compiled by the apex representative body, the industry’s five largest funds have gained up to Rs.71.9 billion in AUM by end-October from Rs.27.6 billion in March and Rs.53.2 billion by December in 2016. 

By end-September, the five largest funds had a total AUM of Rs.69.7 billion. 

The Assetline Income Fund, the largest fund by AUM, managed by Assetline Capital Private Limited, however saw some outflows to end with Rs.19.9 billion from Rs.22.9 billion in September. 

This fund still remains below the December 2016 high of Rs.27.6 billion in AUM after it shrank to just Rs.7.7 billion in March. 

The Rs.100 billion industry in AUM was in panic mode leading up to April 1, 2017, when the budget 2017 proposed to take away the withholding tax exemption on the dividends received by a corporate unit holder and making the profits of the unit trust management company liable for a 14 percent income tax as opposed to the 10 percent tax. 

The budget also proposed to make the redemption of units liable for tax. 

At the time the fund managers feared significant drop in AUM in the funds and one prominent CEO of a fund management company forecast the total AUM to shrink to below Rs.20 billion and said the unit trust industry was going to become an unviable business should the new taxes started hitting the industry.   Sri Lanka’s unit trust industry has roughly about Rs.100 billion AUM but 80 percent of such funds are owned by corporate and institutional investors.

Although Sri Lanka has many mutual funds managed by different fund management companies, most of them have under 1,000 unit holders.    The rest of the top five unit trust funds include NDB Wealth Money Plus with Rs.17.2 billion AUM, CAL Investment Grade Fund with Rs.15.7 billion AUM, J.B. Vantage Money Market Fund with Rs.11.4 billion AUM and NAMAL High Yield Fund with Rs.7.7 billion AUM.  Given the very few unit holders in each of these funds, Sri Lanka remains far behind broad basing the ownership of investments in the capital market, one of the key objectives of introducing unit trusts in Sri Lanka in early 1990s.