guardian acuity asset management limited unit trust … · selected branches of hatton national...

GUARDIAN ACUITY ASSET MANAGEMENT LIMITED

Unit Trust Funds

Annual Report

2019

Guardian Acuity Equity Fund

Guardian Acuity Money Market Fund

Fund Objective To achieve medium to long term capital appreciation

To provide an annual income for a low level of risk

Fund Strategy The Fund will invest in a diversified portfolio of stocks on the Colombo Stock Exchange with an exposure to growth sectors of the economy

The fund will strategically invest in a portfolio of money market securities in order to maximize the fund yield for a low level of risk

Fund Fee Structure Front End Fee Management Fee Trustee Fee Exit Fee

Nil 2.25% p.a 0.25%p.a+Rs.15,000 p.m 2% p.a in 1st Year, 0% thereafter

Nil 0.60%p.a 0.15% p.a Nil

Fund Structure Minimum Subscription

Rs.1,000/- Rs.1,000/-

Fund Structure Open Ended Open Ended

Switching

Allowed

Allowed

Dividend

-

Annual

Initial Offer Price

Rs.10/-

Rs.10/-

Inception date

27 Feb 2012

27 Feb 2012

Liquidity Redemption period Within T+3 days Within T+3 days

Fund Information

Service Providers

Fund Manager

Guardian Acuity Asset Management Ltd

No.61, Janadhipath Mawatha

Colombo 01.

Trustee and Custodian

Deutsche Bank AG, Filiale Colombo

86, Galle Road

Colombo 03

Promoters

Acuity Partners (Pvt) Ltd

53, Dharmapala Mawatha

Colombo 03

Banker

Deutsche Bank AG, Filiale Colombo

86, Galle Road

Colombo 03

Ceylon Guardian Investment Trust PLC


Colombo 01.

Auditors

Messrs. Ernst and Young

201, De Saram Place, Colombo 10

Registrar



Colombo 01.

Distributors

Selected Branches of Hatton National Bank

479, T.B Jayah Mawatha, Colombo 10

Bartleet Religare Securities (Pvt) Ltd

Accede Capital (Pvt) Ltd

Alliance Finance Co. PLC

Table of Contents

Chairman’s Statement Page 2

Directors’ Profiles Page 3

Management Team Profiles Page 6

Fund Managers’ Review Page 8

Governance Framework Page 22

Risk Management Page 31


Independent Auditors’ Report Page 36

Statement of Profit or Loss and Other Comprehensive Income 7

Statement of Financial Position Page 48

Statement of Movement in Unit Holders’ Funds Page 49

Statement of Cash Flows Page 50

Notes to the Financial Statements Page 51



Statement of Profit or Loss and Other Comprehensive Income Page 68





Guardian Acuity Money Market Gilt Fund


Statement of Profit or Loss and Other Comprehensive Income Page 87





Declaration by Trustee and the Management Company Page 92

2

CHAIRMAN’S MESSAGE

Dear Valued Unitholders,

On behalf of the board of directors, it gives me great pleasure to present the eighth annual report of

Guardian Acuity Asset Management Ltd. The unit trust funds under management continue to perform

well compared to competitive funds and their respective benchmarks.

Amidst persistently challenging macroeconomic environment the company continued its focus on

transitioning the business model by broad basing the target clientele via product innovation, digitalization

and integrated marketing strategy.

The company re-iterated its position as the Sri Lanka’s leading Unit Trust Management Company by

winning the Gold award for the Best Unit Trust Fund at the CFA Sri Lanka Capital Market Awards 2019 for

the 2nd consecutive year. The selection criteria included risk adjusted return, client first attitude, risk

management, transparency and disclosures, mirroring the highest standard of your company among the

industry competitors.

On behalf of the board of directors, I take this opportunity to thank the unitholders for the continued

confidence and trust you have placed with the company. I also extend my gratitude to the GAAM team,

our trustees and my colleagues on the Board for their much valued contributions.

Sgd.

Don Chandima Rajakaruna Gunawardena

Chairman

February 26, 2020

3

DIRECTORS PROFILES Mr. D.C.R. Gunawardena Director / Chairman Chandima Gunawardena serves as a Non-Independent, Non-Executive Director of most of the Carsons Group Companies in Sri Lanka and overseas. He is also a Director of Bukit Darah PLC. Since assuming Non- Executive status in the Group, he serves as an advisor to the Group's Strategic Planning and Management forums in Sri Lanka and serves on Board Committees, including the Audit Committees of the Group in Sri Lanka and overseas covering all operating sectors of the Group. Mr. Gunawardena has over four decades of experience in varied fields of business and commercial activities and has held senior positions in Corporate, Mercantile and State Institutions. He was appointed to the Carsons Group Directorate in 1990. He has served in the Management Committee of The Ceylon Chamber of Commerce for over 10 years and was a Founder Council member of the Sri Lanka Institute of Directors (SLID) and continued to serve in the council for over 10 years. He is a Fellow of the Chartered Institute of Management Accountants, UK. Mr. D.P.N. Rodrigo Director

Chief Operating Officer of Hatton National Bank PLC and Director of Acuity Securities Ltd, Acuity Partners

(Pvt) Ltd, HNB Assurance PLC, Credit Information Bureau of Sri Lanka, Sithma Development (Pvt) Ltd and

HNB General Insurance Ltd. A Senior Banker with extensive experience in Retail Banking, Finance,

Institutional Banking and Risk Management in leading local and foreign commercial Banks operating in Sri

Lanka. Elected Chairman for a two year period of the Asian Banker’s Policy Advocacy Committee, a forum

for advancing the cause of banking and finance in the region and promoting regional co-operation. Served

as a Lecturer and Examiner for Strategic Management for the University of Wales affiliated MBA Program

in Sri Lanka, Guest Lecturer at Postgraduate Institute of Management and Director Certification Program

at Sri Lanka Institute of Directors. Has presented technical papers in various forums locally and overseas

on Strategy, Business Transformation and Risk Management. A former President of ACCA Sri Lanka

Division.

Dilshan holds a MBA from Cranfield University, UK and is a fellow of CIMA and ACCA UK Accounting bodies. Mr. M.R. Abeywardena Director Mr. Ray Abeywardena is the Managing Director of Acuity Partners (Pvt) Ltd. He has been associated with Sri Lanka’s capital markets for over 33 years, primarily as a Stockbroker and since 2009 as an Investment Banker. Prior to being appointed as Managing Director/CEO of Acuity Partners (Pvt) Ltd he served as the Managing Director/CEO of Acuity Stockbrokers (Pvt) Ltd from 2001 to end 2008.

4

Mr. Abeywardena is the Chairman of Acuity Stockbrokers (Pvt) Ltd, Acuity Securities Ltd, the Colombo Stock Exchange and the Central Depository Systems (Pvt) Ltd, and is a Director of Soft Logic Insurance PLC, Lanka Ventures PLC and LVL Energy Fund PLC. Mr. Abeywardena is a past Chairman of the Colombo Stockbrokers Association, is a member of the Chartered Institute of Marketing (UK) and holds a master’s degree in business administration from the University of Wales. Mr. K. Selvanathan Director Director, Carsons Management Services (Pvt) Ltd, is the CEO of Guardian Fund Management Limited and serves as a board member of other investment sector companies within the Ceylon Guardian group. He also serves as a Director of Lion Brewery (Ceylon) PLC and Pegasus Hotels of Ceylon PLC. He holds a BA Degree in Accounting & Finance and Business Administration from the University of Kent, U.K. Mr. S.M. Perera Director Head of Portfolio Management, Guardian Fund Management Ltd. Has over 11 years’ experience in the field of Asset Management working as a Fund Manager for CAAM Saudi Fransi LLC (Kingdom of Saudi Arabia), Investment Analyst for Eagle NDB Fund Management (Sri Lanka) and as a Financial Analyst for John Keells Stockbrokers. He holds a BSc (Hons) in Economics and Business Finance from Brunel University, UK and is an Associate Member of the Chartered Institute of Management Accountants. Mr. T.W. De Silva (Resigned w.e.f. 29.01.2020) Director

Mr. Tyrone de Silva is the former Executive Vice President for Strategic Planning & Subsidiaries at DFCC Bank. He is a Director on the Boards of DFCC Group Companies and other companies in which the Bank has a significant interest. In this role, he is also involved in the strategic planning and performance monitoring of some of these companies.

Mr. de Silva joined DFCC in 1989 and has been involved throughout in the Bank’s Corporate Finance and Capital Markets businesses. He has participated in DFCC’s corporate structuring transactions including the set up or acquisition of subsidiaries and associates of the DFCC Group. In the latter part of his career, Mr. de Silva was placed in charge of Corporate Banking at DFCC and was subsequently appointed as the Head of the Bank’s Lending Business in the capacity of Executive Vice President. He also oversaw the Investment Banking business of the Bank, which is carried out through Acuity Partners (Pvt) Ltd., an equally owned joint venture between DFCC and Hatton National Bank. He was Chairman of DFCC’s Credit Committees and a member of management committees dealing with Assets & Liabilities, Investments and Information Technology. He also participated in various Board Sub-Committees. In October 2015, he took on DFCC’s

5

strategy and group responsibilities. In December 2019, after a thirty year career, he left the Bank’s services.

Prior to his appointment at DFCC, Mr. de Silva was employed as a foreign exchange and money broker for a period of seven years. Here he gained in-depth exposure to foreign exchange and fixed income trading, structuring of swap deals and other hybrid transactions.

6

Management Team

Ray Abeywardena

Ray’s profile is given on page 3

Krishna Selvanathan

Krishna’s Profile is given on page 4

Sumith Perera

Sumith’s Profile is given on page 4

Tharinda Jayawardena

Tharinda is the Head of Research and counts for over 12 years of experience in the field of investment analysis and research. He began his career as a Research Analyst at JB Securities (Pvt) Ltd. A CFA charter holder, Tharinda holds BSc degree in Finance from the University of Sri Jayewardenepura specializing in finance and is also an associate member of CIMA (UK).

Asanka Jayasekera

Asanka is the Senior Fund manager for Guardian Acuity Equity funds. He began his career at JB securities as a Research analyst and holds over 13 years of experience in the fields of asset management and investment research. Asanka was a former visiting faculty member at the department of Finance, University of Sri Jayewardenepura. He is a CFA Charter holder and holds a BSc degree in Finance from the University of Sri Jayewardenepura. Asanka is also an associate member of CIMA (UK). Mohandas V Thangarajah General Manager of Guardian Acuity Asset Management Limited. Over 20 years of financial industry experience having worked as an inter-bank money broker, a bond trader and a stock broker. Has also worked as a financial journalist, and, was sent to Mumbai as a Rotary Group Study Exchange scholar where he received wide exposure to the capital markets of India.

7

Crishani Perera (B.Sc. Finance (Special), ACMA) Assistant Fund Manager, Guardian Fund Management Limited. She currently manages the Money Market funds of Guardian Acuity Asset Management. She began her career at Asia securities as a financial analyst and holds over 8 years of experience in the fields of asset management and investment research. Crishani holds a BSc degree in Finance from the University of Sri Jayewardenepura and is also an Associate member of CIMA (UK).

Roshan Fernando (Dip M(UK), ACIM, MBA-Cardiff)

Senior Manager – Business Development, Guardian Acuity Asset Management Ltd. Has over 15 years’ experience in investment advisory, business development & strategy implementation. He has also operated in the capacity of providing advisory services to reputed government & corporate funds.

Dinupa Peiris (ACMA (UK), LL.B (Col), MBA (PIM-USJ), MSC (UK), Attorney-at-Law) Head of Marketing, Guardian Fund Management Limited. A multi-disciplinary professional qualified in management accounting, law and business management with over 10 years of experience in corporate finance, marketing & business development, strategy and business analytics having served for two leading hospitals in Sri Lanka namely Lanka Hospitals Corporation PLC and Hemas Hospitals Pvt Ltd holding managerial positions. She holds a LL.B from Faculty of Law, University of Colombo, MBA (Merit) from Postgraduate Institute of Management, University of Sri Jayewardenepura and a MSC in Business Analytics from Robert Gordon University Scotland. She is an Attorney-at-Law and also an Associate Member of the Chartered Institute of Management Accountants (UK).

Prabath Ekanayake (BBA (Sp), FCA)

Finance Manager, Guardian Fund Management Limited, Commenced career at KPMG Sri Lanka and then worked at Ernst & Young and Qatar Alpha Beton Ready-mix Company in State of Qatar. Prior to joining Carsons Group, possesses over 12 years of overseas and local experience in the fields of accounting and auditing. He is a fellow member of the Institute of Chartered Accountants of Sri Lanka and holds a Bachelor’s degree specialized in Business Administration from the University of Colombo, Sri Lanka.

8

FUND MANAGERS’ REVIEW

MACRO ECONOMIC UPDATE

The year 2019 could be categorized as a highly challenging year in economic terms where an already

fragile economy was further challenged by the Easter bomb attack in April 2019. The economic growth

indicated some recovery during 1Q19 recording 3.7%, having been severely affected by the constitutional

crisis the previous quarter. Nevertheless, the Easter attacks damaged sentiment across key economic

sectors driving growth back down.

Table 01: Sri Lanka GDP growth

Credit to private sector slowed substantially since the beginning of 2019 with credit extended on absolute

terms recording a decline for the first time since 2014. Private sector credit remained broadly flat on a

MoM basis till September 2019 after which a gradual recovery is seen. For the full year credit only grew

by 4.5% demonstrating the underlying economic weakness that prevailed. But the silver lining is the

measured recovery that is evident from September 2019 onwards.

Central Bank has been persistently directing market interest rates on a downward trajectory aiming to

stimulate the economy. Accordingly, two 50 bps policy rate cuts were implemented during May & August

2019. Furthermore, commercial Banks were asked to reduce their lending rates across segments by a

minimum of 250 bps by end of the year. Despite initial resistance by the banking sector which is still

grappling with a high NPL burden we experienced both deposit and lending rates adjusting downwards by

year end. The lending rates continued this downward trend for the start of 2020. This coupled with the

hefty tax cuts recently introduced by the government is expected to revive credit demand in the quarters

ahead.

8.4%9.1%

3.4%

5.0% 5.0%4.5%

3.4% 3.2%2.6%

3.7%

2011 2012 2013 2014 2015 2016 2017 2018 2019 E 2020 F

GD

P G

row

th

9

Table 02: Private sector credit growth & AWLR Vs 1 Year Treasury bill rate

The government implemented a series of tax changes YTD 2020 including reduction of VAT, removal of

PAYE and reduction in corporate tax rates. As per IMF estimates the budget deficit is expected to widen

by a further 1.7% of GDP during 2020. As per Finance Ministry estimates budget deficit is estimated at 7%

of GDP during 2019 driven by weaker than forecasted revenue collection and increased spending. The

government’s fiscal policy following general elections due in April 2020 would be critical in determining

local & foreign investor confidence in the economy.

The policy measures taken by the government to curtail vehicle & other non-essential imports such as

gold during latter half of 2018 led to progressive development in terms of the country’s trade balance

during 2019. Accordingly imports recorded a 10.3% decline whilst exports recorded a marginal 0.4%

growth. Subsequently the trade deficit contracted by USD2.3 bn during the year. However, both tourism

earnings and worker remittances recorded declines with tourist income taking a deeper hit following the

Easter attack. Weak sentiments continued in terms of foreign investor interest in both debt & equity

markets while FDIs also showed a decline. Eventually the ‘Balance of Payments’ was cushioned by

increased value of Sovereign Bond issuances during 2019. Moving into 2020 we are yet to witness a

change in the foreign investor sentiment for the better which is crucial in reviving markets as well as the

broader economy.

Table 03: Contribution to Monthly Imports

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%Private Sector Credit Growth YoY % (Left) AWLR 364 Day T.bill

-30.0%

-10.0%

10.0%

-120%

-20%

80%

Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19Vehicles FuelGold Textile and textile articlesMachinery and equipment Building materials

10

Sri Lanka managed to smoothly settle its high USD debt obligations during the year whilst having raised

funding necessary to manage repayments due for the initial quarter of 2020 as well. The government

concluded two successful sovereign bond issuances totalling USD4.4 bn which attracted healthy demand

supported by the confidence brought in by the restoration of the IMF program. Sri Lanka is yet to unveil

its debt repayment plan for 2020 and as per CBSL data majority of the USD obligations are skewed towards

2H2020.

Inflation continued to remain within the CBSL desired 4-6% range on average during the year. Headline

Inflation, as measured by the YoY change in the Colombo Consumer Price Index (CCPI) (2013=100),

recorded 4.8% in December 2019. The 12 month moving average inflation recorded 4.3% as of end 2019

broadly unchanged from average as of end 2018. Food inflation recorded a sharp movement upwards

during 4Q19 driven by adverse weather impacting supplies. Non – food inflation which was seen trending

up from the start of the year was seen gradually settling down towards 2H19. We do not foresee any

inflationary pressures in the short term while weather driven food inflation is expected to settle gradually.

Demand side pressure on inflation is also unlikely in the short term as economic growth is slow to recover.

Table 04: CCPI Inflation

Globally majority of the developed and emerging economies went on a monetary easing path during 2019.

This is expected to extend to 2020 as well with new coronavirus outbreak in China having implications

across the globe. The declining global interest rates assisted Sri Lanka in securing financing during 2019

without added pressure on premiums from external developments. This could be expected to continue to

2020 with weakened global growth outlook, however if domestic economic risks increase it could exert

pressure on Sri Lanka’s ability to successfully raise funding in global markets.

-4%

-2%

0%

2%

4%

6%

8%

10%

Jan

Feb

Mar

Ap

r

May Jun

Jul

Au

g

Sep

Oct

No

v

Dec Jan

Feb

Mar

Ap

r

May Jun

Jul

Au

g

Sep

Oct

No

v

Dec

2018 2019

CCPI YoY Food and Non-Alcoholic Beverages Non Food

11

INTEREST RATES

CBSL continued on an accommodative monetary policy path during 2019 which is extended to 2020 as

well. The year 2019 started off with a reduction in Commercial Banks’ Statutory Reserve Ratio (SRR) which

gradually eased up the tight liquidity that prevailed. The CBSL went on to introduce 2 policy rate cuts

during 2019 with first been implemented in May following April attack which crippled the economy

further. The said monetary policy stimulus coupled with the confidence brought in by the two successful

ISB issuances led the rates on government securities gliding down. Accordingly, the one year Treasury bill

rate dropped by 255 bps YoY to 8.45% as of end 2019. However, since the tax cuts were introduced

beginning 2020 and Sri Lanka’s rating outlook was revised down to “negative” by both S&P and Fitch, we

have seen some volatility in g-sec rates with one year Treasury bill standing at 8.6% (as at 18.02.2020).

Market deposit & lending rates were slow to adjust which triggered CBSL to introduce both deposit and

lending rate caps for banks. Consequently, bank prime lending rate dropped to currently 9.59% (as at

20.02.2020) from 12.09% as of end 2019. Furthermore, NBFI sector deposit and debt instrument interest

rates continued to be regulated.

In the recent policy reviews, recovery in economic growth has been echoed as the foremost priority by

the Central Bank, thus monetary policy would be accommodative during 1H and likely to continue to

2H2020 as well. Based on our observations a noticeable shift in the business & economic activity is yet to

occur. While private sector credit has been increasing moderately MOM, still demand seems largely

confined. It is important to keep a tab on government plans on financing the revenue gaps created from

recent tax cuts and managing debt repayments which can affect interest rates going forward.

Table 05: Sri Lanka Policy rates Vs. Overnight Liquidity

(175.00)

(125.00)

(75.00)

(25.00)

25.00

75.00

125.00

4.50

5.25

6.00

6.75

7.50

8.25

9.00

1/6

/20

17

2/6

/20

173

/6/2

017

4/6

/20

17

5/6

/20

17

6/6

/20

17

7/6

/20

17

8/6

/20

17

9/6

/20

17

10

/6/2

017

11

/6/2

017

12

/6/2

017

1/6

/20

18

2/6

/20

183

/6/2

018

4/6

/20

18

5/6

/20

18

6/6

/20

18

7/6

/20

18

8/6

/20

18

9/6

/20

18

10

/6/2

018

11

/6/2

018

12

/6/2

018

1/6

/20

19

2/6

/20

193

/6/2

019

4/6

/20

19

5/6

/20

19

6/6

/20

19

7/6

/20

19

8/6

/20

19

9/6

/20

19

10

/6/2

019

11

/6/2

019

12

/6/2

019

1/6

/20

20

2/6

/20

20

SRR SDFR SLFR Market Liquidity (LKR Bn)

12

Equity Market Review

Table 6: Annual Returns of Key Stock Markets – CY 2019

Source: Bloomberg, GFM Research

2019 was a good year for both developed and emerging equity markets. All the main developed equity

markets delivered strong return during the year, led by the US (up 22%-DJ Index), the UK (up 12.1% -

FTSE100), Japan (up 18%- Nikkei 225) and Europe (up 27% - MSCI EU ex-UK). The markets were supported

by additional monetary accommodation by central banks, despite volatility prevailing throughout the

period due to the US-China trade war rhetoric and subdued prospect of global economic growth. Emerging

markets and frontier markets followed the same and returned a 15% (MSCI EM) and a 14% (MSCI FI)

respectively for the year. Emerging market securities were supported by strong portfolio inflows during

the year which stood at USD 310bn compared to USD 194 bn in previous year. The year ended with a

positive note as the worst case scenario had been avoided with the US-China phase one trade deal, and

the positive business survey data released by the US and Europe.

15.4%13.5%

7.7%

1.0%

-6.0%

1.7%

22.3%

18.2%

12.1%

22.3%

1.3%3.5%

5.0%

14.4%

9.1%

MSC

I EM

Ind

ex

MSC

I Fro

nti

er In

dex

Vie

tnam

Thai

lan

d

Mal

aysi

a

Jaka

rta

Shan

ghai

Toky

o

Lon

do

n

New

Yo

rk

Co

lom

bo

Pak

ista

n

Sin

gap

ore

Bo

mb

ay

Ho

ng

Ko

ng

13

Table 7: Movement in All Share Price Index and S&P 20 Index – CY 2019

Source: CSE, GFM Research

The Colombo bourse diverged from the rest of the world during the first half of the year recording a 11.2%

decline of All Share Price Index (ASPI). Elevated lending rates, rising costs and muted consumer demand

dampened profits of many manufacturing and retail companies in the first quarter. Banks and Finance

companies’ earnings were affected mostly by rising non-performing loans due to the sluggish economic

growth. In April, Sri Lanka faced a tragedy on Easter Sunday since the three decade long war ended in

2019. The deadly blasts killed more than 250 people and left hundreds more injured. Many aspects of the

economy were affected ranging from a tourism industry that earns four billion dollars to a daily income

earner such as the trishaw drivers. Foreigners were net seller during the first half, amounting to Rs 6.4bn

(refer table 08).

14

Table 8: All Share Price Index Movement vs. Monthly Net Foreign Inflow Movement – CY 2019

Source: Bloomberg, GFM Research

The Central Bank did its first policy rate cut by 50 basis points at the end of May and successfully brought

down overall interest rate structure of the economy with the intention of stimulating economic growth.

The Colombo stock market rode a wave of optimism in third quarter on the belief that the economy was

on the cusp of moving out from sluggish growth territory which was being supported by declining interest

rates, fiscal stimulus, improving balance of payment situation, stable currency, a better agriculture output

and releasing of government dues to construction sector. This was able to stimulate investor confidence

which pushed the All Share Price Index up by 6.81% in the third quarter. The local retail investors activated

in the last quarter with pre-election retail euphoria and absorbed the selling pressure stemming from the

foreign side (refer table 09).

Table 9: Quarterly Net Purchases/ (Sales) by Investor Type

15


A package of sweeping tax cuts proposed at the first cabinet meeting of the new government in November

further influenced the sentiment. Both indirect and direct taxes were reduced while reduction of VAT

from 15% to 8% alone would release more than Rs 200 bn to the economy and with other cuts it is

expected to generate around Rs 400bn of tax reductions. The stimulus was introduced with an intention

to boost consumption and revive the economic growth which was on a declining trend. Volatility started

again during the latter part of the year driven by positive and negative factors stemming from aggressive

tax cuts and spree of foreign selling.

Table 10: Sector Wise Performance of CSE – CY 2019


Among largest 10 sectors of the CSE, Manufacturing and Telecom became the top performing sectors

which soared by 25% and 27% respectively during the year (refer table 10) after recording the worst

performance (-28% and – 21% respectively) in previous year. However heavy weights: banking, finance &

Insurance sector and Beverage, Food & Tobacco sector dipped during the year offsetting the double digit

growths of some sectors to end the year with a 1.3% return (ASPI).

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2017 2018 2019

LKR

Bn Foreign Companies Foreign Individuals Local Companies Local Individuals

Market Cap

(Rs bn)

Performance

(%)Sector

Market Cap

(Rs bn)

Performance

(%)

BANK FINANCE INS 757.3 -1.0% TRADING 31.8 17.2%

BEV FOOD TOBACCO 592.7 -8.9% PLANTATIONS 27.3 5.5%

DIVERSIFIED 538.9 3.1% CONSTRUCTION ENG 29.2 42.7%

HOTELS TRAVELS 307.4 2.9% INVESTMENT TRUST 30.7 32.6%

TELECOM 157.7 26.7% MOTORS 16.0 -14.8%

MANUFACTURING 111.7 25.4% CHEMICALS PHARMS 19.8 28.0%

LAND PROPERTY 53.5 5.5% FOOTWEAR TEXTILE 39.4 25.7%

HEALTH CARE 45.8 -9.5% STORES SUPPLIES 6.5 -8.0%

OIL PALMS 43.6 1.9% SERVICES 5.0 -2.4%

POWER & ENERGY 36.5 -11.7% IT 0.7 27.5%

16

Table 11: Current vs Five Year Average Relative Valuations of Major Equity Markets

Source: Bloomberg, GFM Research/ as of 31st Dec 2019

Going forward, low interest rates, series of tax cuts and stable political environment should improve

economic activities of the country. This would help to boost corporate earnings in the short term through

revenue growth, interest cost savings and tax savings. These favourable developments together with low

valuations of CSE compared to historical figures and peer country figures (refer table 11) post a strong

investment case for equity in 2020. Risk side of the current investment case is the new development we

see taking place at the time of writing this note (Feb 2020) due to outbreak of COVID 19 virus may trigger

investor nerves as it could disrupt the economic activities and investment flows.

0

10

20

30

Sri L

anka

Ban

glad

esh

Vie

tnam

Arg

enti

na

Ru

ssia

Shan

ghai

Jaka

rta

Thai

lan

d

Ch

ile

Mal

aysi

a

Mex

ico

Ph

ilip

ines

e

Pak

ista

n

Bo

mb

ay

Ho

ng

Ko

ng

Ge

rman

y

Sin

gap

ore

Lon

do

n

Au

stra

lia

New

Yo

rk

Toky

o

Frontier Emerging Developed

Trailing PE 2019/20 Five Year HistoricalPE

17


Table 12: Fund’s Performance Summary as of December 31, 2019

PERIOD* FUND BENCHMARK

ASPI S&P SL 20 ASTRI

2019 (Jan-Dec) 7.77% 1.27% -6.32% 1.70%

Since Inception Cum. 73.74% 11.92% -0.63% 23.37%

Since Inception CAGR 7.29% 1.45% -0.08% 2.71%

Note : All Share Price Index (ASPI) ,All Share Total Return Index(ASTRI) & S&P Sri Lanka 20 Index (S&P SL 20) are based on CSE

data as of 31st December 2019. Inception date of the fund: 27/02/2012

The fund returned 7.77%, outperforming the benchmark All Share Price Index’s return of 1.27% and the

more liquid S&P 20 index’s return of -6.32% for the twelve months ending 2019. This brought up the since

inception annualized return of the fund to 7.29% compared to the ASPI return of 1.45%.

Table 13: Performance of the Fund vs Benchmark Index

Source: CSE data, GAAM

The top five contributors to the fund’s performance of 2019 were Tokyo Cement, Distilleries, Central

Finance, Access Engineering and People’s Leasing & Finance. Both Tokyo Cement and Access Engineering

were buoyed by the retail rally on construction related stocks with an expectation of an infrastructure led

economy with the new government. On top of that, Tokyo Cements’ quarterly earnings were a tailwind

for the rally which ended up with a 70% (TKYO.X) return for the year. The company recorded a Rs 1.6 bn

net profit for the first half compared to Rs 0.2 mn net profit for the same period in previous year.

Significant recovery of the operating margin together with moderate revenue growth boosted the

891011121314151617181920

Feb

-12

May

-12

Au

g-1

2N

ov-

12Fe

b-1

3M

ay-1

3A

ug-

13

No

v-13

Feb

-14

May

-14

Au

g-1

4N

ov-

14Fe

b-1

5M

ay-1

5A

ug-

15

No

v-15

Feb

-16

May

-16

Au

g-1

6N

ov-

16Fe

b-1

7M

ay-1

7A

ug-

17

No

v-17

Feb

-18

May

-18

Au

g-1

8N

ov-

18Fe

b-1

9M

ay-1

9A

ug-

19

No

v-19

Ind

exed

ASPI S & P SL 20 GAEF

18

bottom-line of the company. However, 54% growth in Access Engineering’s share price purely triggered

by expectation of future performance as growth of revenue and net earnings were negative (11% and 21%

respectively) in the first half of FY2019/20. Distilleries Company (DIST) performed well both in terms of

share price (up 15% for the year ) and net earnings (up 32% yoy in 1H FY20). We continue to hold the

company in the portfolio as a top holding due its strong business model and attractive valuation. DIST is

the market leader in the Sri Lankan hard liquor market with two third of the market share and has built a

moat over the years with its flagship brand "extra-special arrack" which accounts for 90% of their sales.

Further, their strong distribution network, sourcing power together with the existing ban on advertising

& promotion have created a strong entry barrier. Their margins are exposed to cost volatility of imported

ethanol which is the prime raw material, which they have been managing by shifting to local supplies

where margins are high.

Table 14: Sector Allocation (including cash) as of December 31, 2019

We maintain our large exposure to Banking, finance & Insurance sector. Banking stocks tumbled in 2019

due to two broad reasons: first was a cyclical factor and second was a secular factor. The Cycle factor was

the elevated Non Performing loans which is part of the business cycle. But this gives a good opportunity

to investors to understand two things: one is how strong each player's' internal lending & recovery

procedures or broadly the business model and two is the management attitude towards transparency and

governance, in simple terms whether they try to hide the true picture or not. This evaluation can’t be

done simply looking at financials but needs on the ground research. We don’t change our valuations based

on the drop in profit due to the cyclical nature of the business, but we use the above discussed information

to evaluate the business & management and factor them accordingly to valuations and multiples. The

Second which the secular factor is the introduction of Basel 3 requirements and IFRS 9. Basel 3 demands

a higher capital base, more liquidity and better transparency while IFRS 9 demands higher loan loss

provisioning and enhanced risk management procedures. This leads to drop in ROEs in the business as

higher capital requirements will increase the denominator and higher provisioning and liquidity decreases

the profitability, in effect the numerator. So, we have to do a permanent adjustment to our valuations or

multiples to capture these changes. However, these negatives come as a package including positive long-

0.2%

2.4%

2.5%

2.9%

3.0%

6.0%

8.8%

11.4%

11.7%

15.3%

35.9%

Chemicals & Pharmaceuticals

Hotels & Travels

Power and Energy

Construction & Engineering

Health Care

Telecom

Cash & Cash Equalant

Beverage,Food & Tobacco

Diversified Holdings

Manufacturing

Banks Finance & Insurance

0% 5% 10% 15% 20% 25% 30% 35% 40%

19

term benefits, such as forcing management to act prudently and transparently going forward in order to

reduce the financial impact of those measures. Therefore, again we have to re-adjust our valuation to

reflect the overall reduction in risk of the business. Trade off between those pros & cons will vary for each

institution. So, considering all these factors combined with the current historically low multiples both

banks and finance companies indicate a good upside potential however need to weight accordingly with

a medium-term outlook.

Table 15: Top Five Holdings of the Portfolio as at 31 Dec. 2019

STOCK TICKER % OF NAV

PEOPLE'S LEASING & FINANCE PLC PLC.N0000 9.02%

CENTRAL FINANCE COMPANY PLC CFIN.N0000 8.72%

DISTILLERIES COMPANY OF SRI LANKA PLC DIST.N0000 6.53%

DIALOG AXIATA PLC DIAL.N0000 5.97%

COMMERCIAL BANK OF CEYLON PLC COMB.N0000 5.80%

Share prices of finance companies we picked, Central Finance and People’s Leasing, recovered in the

second half better than the banking stocks as finance companies normally react faster to the economic

recovery and are benefitted more from reduction in interest rates. The fund continues with current

exposure to the two finance companies given its attractive valuations and relatively risk averse operating

models. However, we keep eye on the behaviour of non-performing loans, liquidity and loan book growth

of these institutions.

In summary, we focus on companies with sustainable business model, good management and attractive

valuations. We continue with our disciplined approach of stock selection with medium term outlook while

stay nimble for gain the market opportunities. The current core holdings of our portfolio are deeply

undervalued and therefore we continue to hold them and rebalance only with changes to the investment

thesis.

20

GUARDIAN ACUITY MONEY MARKET FUND

For the year ended 2019, the Guardian Acuity Money Market Fund provided a return of 10.78% to its

investors. The NDBIB-CRISIL 91 Day T-bill Index gave a return of 9.15% during the corresponding period.

The fund focuses primarily on fixed deposits and other money market instruments with issuers of

investment grade rating and above.

Period GAMMF NDBIB-CRISIL 91 Day T-Bill

Index Annualised Return

2019 10.78% 9.15% 10.78%

SINCE INCEPTION 118.08% 90.87% 10.45%

The average maturity of the fund was 2.93 months as at 31st December 2019. The fund had an exposure

of 94% to fixed deposits. Interest rates peaked during January 2019 and followed a steep path downwards

since April 2019 when Central Bank introduced a fresh ceiling rate structure. The fund was able to

outperform the benchmark as it carried a short maturity profile at the end of 2018, which enabled the

fund to lock in investments when interest rates shot up early 2019.

MATURITY PROFILE - % OF NAV

FUND CREDIT QUALITY - % OF NAV ASSET ALLOCATION

7.2%

18.3%

25.8%

33.4%

15.3%

Fitch Fitch Fitch Fitch Fitch

A AA- A+ A- BBB+ 94.39%

5.61%

Fixed Deposits Savings

61.3%

19.0%13.4%

6.3%

1-3 months 3-6 months 6-9 months 9-12 months

21

The Fund has an emphasis of investing in high credit quality companies to support a capital protection

strategy for its investors. The investee institutions are selected following a thorough analysis which

encompasses both quantitative and qualitative aspects. The approved investee companies are being

subject to a regular ongoing review process as well.

The fund extended its maturity profile when the interest rates rose sharply beginning 2019, as a result of

the attractive return offered substantial inflows were experienced from 2H2019 onwards. Fixed deposit

rates were on a downward trend beginning 2nd half, consequently fresh fund flows had to be invested at

prevalent low fixed deposit rates. As a result fund yield was seen dropping despite cushion provided by

the longer tenor investments made during 1H2020 when yields were high. The fund has consciously

restricted investments in several institutions which continued to offer very high premiums relative to fixed

deposit rates despite improved liquidity conditions. As a result the fund yield has declined, however the

fund maintains a high credit quality portfolio which investors can be confident in.

The fund continues to maintain considerable percentage of investments in short maturities to provide

sufficient liquidity for large investors. The liquidity requirement is assessed frequently by carrying out a

detailed liquidity mapping exercise where current unit holder profile and past experience of unit holder

behaviour is incorporated.

As at 31st December 2019, the total net asset value of the fund was Rs.4,953.09 million with 490 unit

holders in the fund. The subscription and redemption price for the fund on 31st December 2019 was Rs.

18.9374.

22

GOVERNANCE FRAMEWORK

Guardian Acuity Asset Management Limited (GAAM) was formed on June 17th 2011 for the purpose of bringing together the expertise

of the two joint venture partners, Ceylon Guardian Investment Trust PLC and Acuity Partners (Pvt) Ltd, to market and manage unit

trusts. Ceylon Guardian’s management teams contribution to the venture comes through their fund management expertise, while

Acuity brings in their partner network and reach in marketing and distribution of financial products. The diagram below illustrates the

ownership structure.

Ownership Structure

Guardian Acuity Asset Management Limited is the investment manager for three unit trust funds - namely the Guardian Acuity Money

Market Fund, Guardian Acuity Equity Fund and Guardian Acuity Money Market Gilt Fund, all of which are licensed by the Securities

and Exchange Commission.

Being a unit trust managing company, Guardian Acuity Asset Management Ltd (GAAM) has a well-structured governance framework

which plays a vital role in maintaining, enhancing and safeguarding unit holders’ investments. We believe in building a results-driven

and robust governance model which will enable the company to create value and provide accountability and control systems

commensurate with risks involved. As part of this endeavor, GAAM has considered all requirements and compliances of the rules &

regulations stipulated by governing authorities, especially the provisions laid down by the Securities and Exchange Commission, Sri

Lanka. The diagram below depicts the governance framework adopted by the GAAM so as to enhance and protect the best interest

of its investors.

Board of Directors


50% 50%

50% 50%

67%

23

Structure, size, composition and competencies

The Board of Directors of the Company consists of seven members (including one alternate Director), in which two Directors

are non-executive Directors. The names of Board members are as follows.

Mr. D.C.R. Gunawardena –Chairman, Non-Executive Director

( Chairman w.e.f. 9th Sep 2019)

Mr. T.W. de Silva - Non-Executive Director

Mr. D.P.N. Rodrigo - Non-Executive Director

Mr. K. Selvanathan - Executive Director

Mr. M.R. Abeywardena - Executive Director, Joint Managing Director

Mr. S. M. Perera - Executive Director

All Board members are well-experienced, knowledgeable and possess necessary skills in the financial service industry

(Directors’ profiles are given on page 3).

Meetings and Attendance

The Board meets usually once in 2 months, but meets more frequently whenever it is necessary. During the year the Board

met twice. The attendance of the meetings of the Board during the year given below.

NAME OF DIRECTOR STATUS ATTENDANCE*

Mr. M R Abeywardena Joint Executive Director 4

Mr. D C R Gunawardena Director (Chairman w.e.f 09.09.2019) 3

Mr. T W De Silva Director None

Mr. D P N Rodrigo Director 2

Mr. K Selvanathan Joint Executive Director 4

Mr. S M Perera Appointed as Director 3

*in person or by alternate

Role of the Board of Directors

The Board of Directors is responsible for the governance of the company and developing an effective governance framework,

reviewing, developing systems & controls to provide transparency and accountability. Also, they ensure that the activities of

the Unit Trust Funds are conducted to the highest ethical standards and in the best interest of existing and potential investors.

The Board takes necessary steps towards safeguarding the investors, securing integrity of information, management of risks,

implementing effective internal control systems, ensuring good governance and compliance with rules and regulations.

The Board has put in place a corporate management team led by the joint MDs with the required skills, experience and

knowledge to implement the strategies of the company and unit trust funds (the profiles of Management Team are given in

page 6). The management team comprise qualified and experienced personnel drawn from the joint venture partners.

The Investment Committee and Risk & Compliance Team directly report to the Board of Directors and their functions are

stated below.

Functions of the Investment Committee

The primary objective of the Investment Committee is to maintain prudent and effective investment strategies and to

formulate and oversee the investment policies and decisions of the Fund. The committee meets regularly at scheduled

monthly meetings. The main functions of the Investment Committee are as follows.

Advice on selecting stocks and fixed income securities by evaluating industry growth, liquidity, and quality of management,

business model, credit ratings, financial profitability, reasonable market capitalization,etc.

Provide advice in regard to asset allocation between equity and fixed income securities and sector allocation of equity

securities.

Evaluate and approve primary dealers, placement agents, corporate debt issuers and stock brokers

Assess macro environmental risks

24

Evaluate new investment instruments and structures.

Review securities/instruments in portfolios regularly & update the valuations and evaluate risks of instruments.

Role of Risk and Compliance Team

GAAM recognizes compliance and risk management as vital functions regardless of worth, size, or location. Consequently,

the Risk and Compliance Team ensures management of risk through higher level of compliance and reporting

The key functions of the Risk and Compliance Team are;

Develop, initiate, maintain, and revise policies and procedures for the unit trust operation and its related activities to ensure

proper controls are in place and the limits of exposure are observed.

Collaborate with internal auditors for compliance issues and develop procedures to overcome such issues.

Reporting to the Board and Audit Committee for risk management and compliance matters and improvements

Identify and provide guidance to mitigate existing and potential risks. Also conduct training programs for awareness.

Periodically review and update Code of Ethics & Conduct to provide guidance to management and employees.

Monitor the know your clients (KYC) procedures and carry out activities on a continuing basis, taking appropriate steps to

improve its effectiveness and training marketing staff on conducting KYCs.

Documents and evaluates the risk assessment, and control processes and procedures based on the established risk

acceptance level

Identifies potential areas of compliance vulnerability and risk; develops/implements corrective action plans for resolution

of problematic issues, and provides general guidance on how to avoid or deal with similar situations in the future.

Supply of Information

The Management provides timely, quality and appropriate information to the Board by way of Board Papers. Also, the

Management shares results of the unit trust funds in terms of sales, return, risk management and compliances with applicable

rules & regulations monthly/quarterly. The Board seeks additional information as and when necessary. The Chairman ensures

that all Directors are briefed on issues arising at Board Meetings. The Board Papers and the minutes are sent to the Directors

well in advance of the respective Board Meetings, giving adequate time for Directors to study the related papers and prepare

for a meaningful discussion at Board Meetings.

Internal Controls

The Board is responsible for establishing a sound framework of risk management & internal controls and monitoring its’

effectiveness on a continuous basis. Through such an effective framework, GAAM manages its risks & ensures that the Funds’

assets and investors are safeguarded. Unit Trusts Funds are being audited every quarter by BDO Partners, Chartered

Accountants. Also, external auditors; Ernst & Young has independently reviewed the internal controls during their audit of

Financial Statements, annually. Internal audit reports are tabled at the GAAM board meetings. In addition to the Board and

the risk & compliance team closely monitors the audit findings and risk & compliance process of the Funds.

The Unit Trust Funds comply with the Unit Trust Code 2011 and the level compliance is given on page 25 to 30.

Code of Ethics and the Standards of Professional Conduct

GAAM has developed a Code of Ethics and the Standards of Professional Conduct for all Staff Members, which addresses

conflict of interest, integrity, professional competence & due care, fairness & independence, fiduciary duty, professional

behavior, confidentiality of information, protection and compliance with applicable laws and regulations including insider

trading laws and, encouraging the reporting of any illegal or unethical behavior. The Code of Ethics and the Standards of

Professional Conduct have been adhered to in all respects by the Directors and Key Management Personnel.

The Securities and Exchange Commission requires every Unit Trust Managing Company to comply with the Unit Trust Code,

2011. Our structures are in place and the conformity with the requirements are tabulated below under the said rules.

25

2.(1) &

(2)

Applicable governance

regulations

Complied with the provisions of the

Securities and Exchange

Commission of Sri Lanka Act, No.

36 of 1987., the provisions of Unit

Trust Code, 2011, Trust Deed, the

Explanatory Memorandum

2.(3) Maintain a minimum net capital The net capital of GAAM as at 31st

Dec 2019 is Rs.105.68 Mn.

Therefore, we are well above the

minimum net capital requirement of

Rs.25Mn.

3.(1) &

(2)

Buying and selling of securities on

behalf of the unit trust

Adherence to Trust Deed,

investment guidelines and Code of

Ethics and Standards of

Professional Conduct of the

company ensures compliance.

Especially, these guidelines prohibit

the purchase of securities of the

Group.

4. Reasonable care in the operations

relating to the management of the

Unit Trust.

Complied. Every employee accepts

this provision by a declaration in the

Code of Ethics. Also, the internal

audit function is in place to verify the

compliance with the company’s

operating manual. GAAM is liable

for any loss suffered by the Unit

Trust or by unit holders as a result

of any fraud, gross negligence or

malfeasance of employees and

directors.

7.(1)-(3) Deposited property shall be held

by the Trustee on behalf of the

Unit Trust.

Complied. The Funds’ CDS account

and fixed income securities are held

with the Trustee & Custodian, under

the name of the Fund.

9.(1)-(3) Invest the deposited property in

accordance with the provisions of

this Code, the Trust Deed and the

directives issued by the

Commission.

Complied. The investments of the

GAAM are in line with the Trust

Deed and provision of the SEC.

Maintaining required level of

liquidity amounting to at least

three per centum

Complied. Maintain at least 3%

liquidity of the deposited property as

per this provision.

Whenever the total investment

exceeds any investment limit

permitted, the managing company

shall immediately inform the

No instances have arisen.

26

Commission.

10.(1)-

(3)

The managing company shall not

make certain investments under

section 10 (1) a to g unless

permitted by the Commission

Complied.

11.(1) to

(3)

Only payment to be made to the

managing company out of the

deposited property is

remuneration for services

rendered and periodic fee in terms

of the provisions in the Trust Deed

including any taxes levies or

duties imposed from time to time

by the Government.

Complied. GAAM only claims the

management fee at the agreed rate

in the Trust Deed and other

expenses allowed under rule 12(1)

12.(1) &

(2)

Expenses specified in 12 (1) ‘a’ to

‘m’ may be paid by the trustee out

of the deposited property,

provided that adequate disclosure

of such expenses is provided to

unit holders. Commissions paid to

agents, shall not be paid out of the

deposited property.

Complied. The expense claimed

from the Fund were in line with the

provision. The relevant disclosures

are given in the Financial

Statements of Unit Trust Funds.

13. Where the Unit Trust invests in

units of any other Unit Trust, no

increase in the front-end fee,

managing company’s annual fee

or any other costs or charges

borne by unit holders or by the

deposited property.

No such investments were made.

14.(1)-

(2)

The managing company shall not

enter, on behalf of the Unit Trust,

into an underwriting or sub

underwriting agreement without

the prior written consent of the

trustee and the Commission

Not entered into any agreements on

behalf of the Unit Trust Funds

15.(1) &

(2)

Any transaction between the Unit

Trust and the managing company,

an associate, joint venture,

subsidiary or holding company of

the managing company or any

connected person may only be

made with the prior written

consent of the trustee.

Complied. Related party

transactions are disclosed on page

55,and 74

16.(1)-

(5)

When the managing company

sells units to prospective

investors, they requires to provide

a copy of the latest Explanatory

Memorandum, approved by the

Commission.

Complied. In addition to hard copy

of the latest Explanatory

Memorandum which is made

available, investors can find the

Explanatory Memorandum in our

web site.

27

17.(1)-

(4)

Explanatory Memorandum shall

be amended by the managing

company, subject to the approval

of the Commission. Also, it shall

be reviewed by the managing

company at least every two years

and revised where necessary.

Complied.

18.(1)-

(5)

No advertisement shall be issued

or published, without the prior

written approval of the Trustee.

Advertisement needs to be file

with the Commission prior to five

market days to the advertisement

being made available to the public.

No forecast of the Unit Trust’s

performance may be held out to

the public or to unit holders.

Complied

19. A managing company in issuing or

selling units of the Unit Trust shall

not directly or indirectly represent

or imply that units have been

sponsored, recommended or

approved by the Commission.

Complied

20.(1)-

(4)

Issue and redemption prices shall

be calculated daily. An issue price

shall be the maximum price

payable on purchase of units.

Prices shall be published, in at

least one leading Sri Lankan daily

newspaper or on the web site of

the managing company

Complied. We calculate unit prices,

daily by dividing net asset value of

the Unit Trust from number of units

outstanding. Prices are after

adjusting fees and charges made as

per the Trust Deed including exit

fee.

After getting the approval from the

Trustee, we publish unit prices in

Daily FT. Also, prices are available

in our website.

21. The maximum interval between

the receipt of a properly

documented request for

redemption of units and the

payment of the redemption money

to the unit holder, shall not exceed

one calendar month from the

dealing day on which, the request

was received unless there is any

exceptional reason.

Complied. As per the Company’s

service standards, we transfer

redemption funds within T+3 days.

22.(1)-

(4)

Where the Unit Trust deals at a

known price, and based on

information available, the price

exceeds or falls short of the

current value of the underlying

assets by more than five per

centum, the managing company

shall defer dealing and calculate a

No instances have arisen.

28

new price as soon as possible.

23.(1)-

(4)

The section describes that

suspension of dealing may be

allowed in exceptional

circumstances, having regard to

the interest of unit holders, and

with the written consent of the

Commission and the trustee.

Redemption requests day exceed

ten per centum of the total number

of units in issue, may be deferred

to the next dealing day, and

provided the Commission is

notified in writing.

A unit holder wishes to redeem

units three per centum or more of

the net asset value of the Unit

Trust, the unit holder shall give at

least fourteen days written notice.

Complied

24.(1)-

(5)

A managing company may, by

notice in writing to the trustee,

cancel units.

Complied.

25.(1)-

(6)

The managing company shall

maintain or cause to be

maintained an updated register of

the unit holders in a legible form.

The managing company shall take

all reasonable steps and exercise

due diligence to ensure, that the

information contained in the

register is at all times complete

and up to date.

Complied. GAAM has a registrar

system, in-house and ensures

maintaining the details of unit

holders up-to-date. Also, due

diligence process carried out by us

(through KYC documents and Anti

Money Laundering policies)

ensures the accuracy and

completeness of the information

contained in the register.

26.(1)-

(3)

A unit holder shall be entitled to

transfer units held by such unit

holder by a legally accepted

instrument of transfer, which

entitlement is entered into the

register.

During the year one unit holder has

transferred the entitled units

through a legally accepted

instrument of transfer.

27.(1)-

(5)

The managing company shall be

responsible for keeping the Unit

Trust’s accounts and preparing

and publishing the Unit Trust’s

reports. Not less than two reports

shall be published in respect of

each financial year.

Complied. Interim and year-end

financial statements are prepared

and distributed among unit holders

with three month after the period

end, with the approval of the

Commission.

28. (1)-

(5)

All reports produced by or for the

Unit Trust shall be approved by the

Commission and the trustee prior

to

Complied

29

Dissemination and shall file such

reports with the Commission and

the trustee for review and

comment not less than two weeks

prior to distribution.

29.(1)-

(2)

30. & 31.

A managing company shall

maintain and preserve for a period

of five years accounts, books and

other documents forming the basis

for financial statements, income &

distribution accounts and reports

including daily records which need

to be made available for

inspection/examination by the

trustee and the Commission.

Complied. GAAM policy is to

maintain the records for a period of

6 years.

32.(1)-

(4)

The trustee shall, appoint an

auditor for the Unit Trust with the

approval of the Commission. The

auditor of the Unit Trust shall not

have been during the previous two

years, the auditor of the managing

company or trustee as the case

may be. The audit fees shall be

determined by the managing

company with the approval of the

trustee.

Complied. KPMG is the auditor of

the Managing company and Ernst &

Young does the audit on Unit Trust

Funds.

The auditor shall provide auditor’s

opinion they give a true and fair

view of the financial position of the

Unit Trust.

The Auditors’ report is given on

page 36,57 and 77

33. The section 33 ‘a’ & ‘b’ states

where the trustee can make

written request for approval of the

Commission of any amendment to

be made to a Trust Deed.

Complied. The Trust Deed of

Guardian Acuity Fixed Income Fund

has changed in line with provisions

of this section.

34. The managing company shall

make available a copy of the Trust

Deed, and any supplementary

deed, for inspection to any

member of the public at all times

during normal office hours.

Complied

35.(1) to

(4)

Winding up of the Unit Trust Guardian Acuity Money Market Gilt

Fund has been approved for

liquidation by the Securities and

Exchange Commission of Sri

Lanka. The liquidation date was

agreed to be 16th Jan 2020. Hence

the liquidation audit was conducted

and financials were sent to the SEC.

Final approval and returning of the

certificate is pending.

30

36.(1)-

(3)

A managing company may

manage the securities portfolios of

persons other than a Unit Trust

(third party portfolios) provided

that the managing company

obtains a certificate of registration

from the Commission as a market

intermediary under the category of

“investment manager”. Make

ensure that managing third party

portfolios are not in conflict with

the Unit Trusts.

Complied. We are registered with

the SEC as Investment Managers.

Adherence to Trust Deed,

investment guidelines and Code of

Ethics and the Standards of

Professional Conduct of the

company ensures compliance and

avoidance of any conflict of interest.

37. No statement made in an

Explanatory Memorandum,

advertisement, report or in

announcements to unit holders,

the public, the press or other

communication media, may be

attributed to any person, unless

such person has given consent in

writing

Complied.

38. The duties of the managing

companies and Trustees imposed

upon them by the provisions of the

Act, provisions

of Unit Trust Code and directives

issued by the Commission.

Complied.

We also comply with the Directives issued by the Commission.

31

RISK MANAGEMENT

Overview of Risk Management

Risk Management is the process of identification and assessment of risks arising due to factors which are internal and external to the

entity, in order to mitigate such risks. Management of risk helps avoid or minimize unanticipated losses being incurred. It is not a one

time or period assessment, rather it is a continuous process, which is also an integral part of normal business operations and the

management of the entity.

Risk Management structure

As mentioned earlier, GAAM manages two active unit trusts which provide investment solutions to suit different risk appetites and

return expectations. Investment strategies are pursued with the aim of fulfilling the investment objectives of each fund.

The Board of Directors has oversight of the Risk Management Framework (RMF) established in the Company. The function of Risk

Management is delegated to the management team of the Company. Fund Managers are responsible for the management of

investments portfolios, whereas the research division provides recommendations together with analysis at both macro and micro

environment level. The Investment Committee drawn up from amongst a selection of experts from the Company have a wide ranging

knowledge of different industry sectors, investment trends, economic fundamentals and other macroeconomic issues relevant to

decision making. They share their insights and knowledge to enhance the quality of the decision making process. The management

team responsible for business and operations, identify and assess the risk involved in the Company and its environment, and adopt

risk mitigating actions. The Risk & Compliance Team conducts process / compliance audits periodically and provide

recommendations to the Board of Directors and Management team in order to improve the internal controls on operations and

process, as well as risk management practices.

Key Risk Categories

Overall macro-economic conditions and political factors affect the risk profiles of unit trusts. The variations of macro-economic

variables like Gross Domestic Product (GDP), interest rate, inflation, exchange rates and changes in the political environment and

government policies affect the performance and the variations of returns of the funds.

Unit trust funds are exposed to the following key risks, arising from the nature of its investment objectives and investment strategies.

32

Guardian Acuity

Equity Fund :

Investments would

focus on medium to

long term holdings

of liquid, high growth

stocks of well

managed

companies exposed

to key economic

sectors of the

country.

The main

investment objective

of the Fund is to

achieve long term

capital appreciation

through share

market investments.

Macro-economic risks :

Share prices are sensitive

to developments in the

global and local economy,

such as a change in

interest rates, value of

currency, inflation rate,

government policies, tax

rates, and central bank

policies. All these tend to

influence the prices of

equity securities and

investor sentiment,

Including that of both

foreign and local

investors.

Monitoring of macro-

economic variables,

policy changes and

assess the impact on

economy and capital

markets.

Implementation of a

structured investment

process which considers

macro environmental

impacts. .

Monitoring global factors

which impact capital

markets worldwide and in

Sri Lanka.

Shifting of asset allocations,

stock allocations in line

with economic trends,

and industry changes.

Liquidity risks:

Liquidity is the tradability

of the securities in the

market. Less liquidity of

securities could affect the

fund manager’s ability to

transact, which in turn,

could affect the fund’s

overall performance. This

might be due to poor

market sentiment of a

security, or low levels of

publicly traded quantities.

Investing in companies with a

reasonable free float.

Focus on highly traded stocks

when investing.

Monitor market turnover of

the stocks which we focus

on.

Determine the top

shareholders in the

company

General security risks :

Companies may not

perform as per the

investors’ expectations;

and earning levels and

entity growth may reduce

due to company specific

factors, structural /policy

changes in the industry,

etc. This could lead to

underperformance of the

stocks in the fund’s

investment portfolio.

The investment process

follows a bottom-up

approach. The

investment in stocks is

focused on the

Company’s

fundamentals, growth,

management and

competitive position in the

industry.

Monitoring sector exposure

and single company

exposure as

diversification and a

mitigation strategy.

Guardian Acuity

Money Market Fund

:

Default Risk :

Loss of capital invested

and interest entitled due

Evaluation of financial

stability, reputation of the

institution which is

33

Invest in a portfolio

of securities that will

mature within 365

days.

to a default by the

financial institution/

counter party.

performed as an ongoing

practice as a part of

investment process.

Consider standard rating

criteria in evaluating

credit quality.

The investment

objective of the fund

is to provide an

annual income by

investing in a

portfolio of securities

which will mature

within 365 days with

a lower level of risk.

Close monitoring of

environmental conditions

in financial sector.

Internal financial institution/

counter party approval

process.

Interest Rate Risk :

Changes to interest rates

will cause the values of

the instruments in the

portfolio to vary which will

have a direct bearing on

the yield of the fund. This

will have an impact on the

comparative return of the

fund.

Closely monitoring the

behavior of interest rate

determinant factors, and

adopt an investment

strategy in line with

anticipated interest rate

trends.

Liquidity Risk :

Insufficient liquidity of the

fund to meet investors’

redemptions. Losses due

to distressed sale of

instruments caused by

lack of marketability.

Maintenance of sufficient

amount of allocation into

more liquid like overnight

repos.

Maintenance of other assets

with a routine maturity

cycle.

In additions to the above risks which are specifically applicable to the funds owing to

the investment objectives and the investment portfolios, Unit Trusts Funds across in

all the categories, face Operational Risk and Regulatory risk. Since the units trusts

are of Investors’ interest at public and it’s a financial service, the industry is supervised

and monitored by regulatory authorities. Hence, operations of unit trusts should be in

compliance with regulatory requirements and industry practices.

Operational Risk

and Regulatory risk

Operational risk

Fails to act in accordance

with industry laws and

regulations, internal

policies or prescribed

best practices.

Carry out internal audits in

order to make sure the

compliances are adhered

to.

Compliance personnel

conduct periodic reviews

of progress against the

compliance program

Implementation of a

structured governance

framework

Training and development of

all staff on compliance

processes

34

Know your clients (KYC)/

Anti-Money Laundering

(AML)

Adhere to the relevant KYC

documents and proper

follow up procedures.

Third party verifications on

high risk clients.

Cash collections are done

through the banks, hence

not accepting the cash

physically.

KYC reviews are conducted

on a periodic basis to

ensure that existing

customer information is

kept updated.

Reputation Risk Risk of losing the trust

due to fraudulent

activities or mis-selling

Strong Board oversight on

matters of strategy,

policy, execution and

transparent reporting.

Effective corporate

governance and

communication among

staff members

Proper cultural alignment to

manage compliance in

proactive and holistic

manner.

Quality public reporting

GUARDIAN ACUITY EQUITY FUND

FINANCIAL STATEMENTS

31 DECEMBER 2019

GSM/SKWD/MHM

INDEPENDENT AUDITORS’ REPORT

TO THE TRUSTEE OF GUARDIAN ACUITY EQUITY FUND

Report on the Financial Statements

Opinion

We have audited the Financial Statements of Guardian Acuity Equity Fund (‘the Fund’), which comprise the Statement

of Financial Position as at 31 December 2019, and the Statement of Profit or Loss and Other Comprehensive Income,

Statement of Movement in Unit Holders’ Funds and Statement of Cash Flows for the year then ended, and Notes to the

Financial Statements, including a summary of significant accounting policies.

In our opinion, the accompanying financial statements give a true and fair view of the financial position of the Fund as

at 31 December 2019 and of its financial performance and its cash flows for the year then ended in accordance with Sri

Lanka Accounting Standards.

Basis for Opinion

We conducted our audit in accordance with Sri Lanka Auditing Standards (SLAuSs). Our responsibilities under those

standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our

report. We are independent of the Fund in accordance with the Code of Ethics issued by CA Sri Lanka (Code of Ethics)

and we have fulfilled our other ethical responsibilities in accordance with the Code of Ethics. We believe that the audit

evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Manager’s Responsibility for the Financial Statements

The Manager, Guardian Acuity Asset Management is responsible for the preparation of financial statements that give

a true and fair view in accordance with Sri Lanka Accounting Standards, and for such internal control as the Manager

determines is necessary to enable the preparation of financial statements that are free from material misstatement,

whether due to fraud or error.

In preparing the financial statements, the Manager is responsible for assessing the Fund’s ability to continue as a going

concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting

unless management either intends to liquidate the Fund or to cease operations, or has no realistic alternative but to do

so.

The Manager is responsible for overseeing the Fund’s financial reporting process.

Auditor’s responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from

material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with

SLAuSs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are

considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic

decisions of users taken on the basis of these financial statements.

(Contd...2/)

37

As part of an audit in accordance with SLAuSs, we exercise professional judgment and maintain professional skepticism

throughout the audit. We also:

Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error,

design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and

appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from

fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions,

misrepresentations, or the override of internal control.

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are

appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the

Fund’s internal control.

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and

related disclosures made by Manager.

Conclude on the appropriateness of Manager’s use of the going concern basis of accounting and, based on the

audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast

significant doubt on the Fund’s ability to continue as a going concern. If we conclude that a material

uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the

financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based

on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may

cause the Fund to cease to continue as a going concern.

Evaluate the overall presentation, structure and content of the financial statements, including the disclosures,

and whether the financial statements represent the underlying transactions and events in a manner that achieves

fair presentation.

We communicate with the Manager regarding, among other matters, the planned scope and timing of the audit and

significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

Report on other legal and regulatory requirements

The financial statements are prepared and presented in accordance with and comply with the requirements of the Unit

Trust Code of the Securities and Exchange Commission of Sri Lanka and Unit Trust Deed.

13 February 2020

Colombo


NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2019

-38-

1. GENERAL INFORMATION

Guardian Acuity Equity Fund is an open ended unit trust Fund approved by the Securities and Exchange

Commission of Sri Lanka. The Fund was launched on 27 February 2012.

The Fund is managed by Guardian Acuity Asset Management Limited which is incorporated and domiciled in

Sri Lanka. The registered office of the management company is located at No. 61, Janadhipathi Mawatha,

Colombo 01. The trustee of the Fund is Deutsche Bank AG having its place of business at No 86, Galle Road,

Colombo 03.

The investment objective of the Fund is to achieve long term capital appreciation through investing prudently

in a portfolio of listed shares.



-39-

2. ACCOUNTING POLICIES

2.1 Basis of Preparation

The financial statements have been prepared on the historical cost basis unless otherwise indicated. The

financial statements are presented in Sri Lankan rupees. The statement of financial position is presented on a

liquidity basis.

2.1.1 Statement of Compliance

The financial statements which comprise the statement of financial position as at 31 December 2019, Statement

of Profit or Loss and Other Comprehensive Income, Statement of Movement in Unit Holders’ Funds and Cash

Flow Statement for the year then ended, and a summary of significant accounting policies and other

explanatory information have been prepared and presented in accordance with Sri Lanka Accounting Standards

and the requirements of the Unit Trust Deed and Unit Trust Code of the Securities and Exchange Commission

of Sri Lanka.

2.1.2 Going Concern

These financial statements are prepared on the assumption that the Fund is a going concern i.e. as continuing

in operation for the foreseeable future. It is therefore assumed that the Fund has neither the intention nor the

necessity of liquidation or of curtailing materially the scale of its operation.

2.2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

2.2.1 Financial instruments

2.2.1.1 Initial recognition

Financial assets and liabilities are initially recognized on the trade date, i.e the date that the Fund becomes a

party to the contractual provisions of the instrument. This includes purchases or sales of financial assets that

require delivery of assets within the time frame generally established by regulation or convention in the market

place.

2.2.1.2 Initial measurement of financial instrument

The classification of financial instruments at initial recognition depends on their contractual terms and the

business model for managing the instruments. At initial recognition, the Fund measures a financial asset at its

fair value plus transaction costs that are directly attributable to the acquisition of the financial asset. Transaction

costs of financial assets carried at FVPL are expensed in the statement of profit or loss.

2.2.1.3 Measurement categories of financial assets and liabilities

The Fund classifies all of its financial assets in the following measurement categories:

those to be measured at amortised cost

those to be measured at fair value through profit or loss

Financial liabilities of the Fund are measured at amortised cost, and includes all financial liabilities, other than

those measured at fair value through profit or loss. The financial liabilities of the Fund include accrued

expenses and other payables.



-40-

2.2.1.4 Subsequent measurement

Amortised cost: A debt instrument is measured at amortised cost if it is held within a business model whose

objective is to hold financial assets in order to collect contractual cash flows and its contractual terms give rise

to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Debt instruments at amortised cost in the statement of financial position comprise of investments in treasury

bill repurchase agreements. Any gain or loss arising on de-recognition is recognised directly in profit or loss

and presented in realised gain/(loss) on debt instruments held at amortised cost.

FVPL: A financial asset is measured at fair value through profit or loss if:

(a) Its contractual terms do not give rise to cash flows on specified dates that are solely payments of principal

and interest on the principal amount outstanding

Or

(b) It is not held within a business model whose objective is either to collect contractual cash flows or to both

collect contractual cash flows and sell.

Or

(c) At initial recognition, it is irrevocably designated as measured at FVPL when doing so eliminate or

significantly reduces a measurement or recognition inconsistency that would otherwise arise from

measuring assets or liabilities or recognising the gains and losses on them on different bases.

A gain or loss on a debt investment that is subsequently measured at FVPL is recognised in profit or loss and

presented net within unrealised gains/(losses) in the period in which it arises. Financial assets at fair value

through profit or loss at statement of financial position comprise of investment in quoted equity securities

2.2.1.5 Impairment

The Fund assesses on a forward looking basis, the expected credit losses associated with its debt instruments

carried at amortised cost. The impairment methodology applied depends on whether there has been a

significant increase in credit risk.

ECLs are based on the difference between the contractual cash flows due in accordance with the contract and

all the cash flows that the Fund expects to receive, discounted at an approximation of the original effective

interest rate.

ECLs are recognized in two stages. For credit exposures for which there has not been a significant increase in

credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are

possible within the next 12-months (a 12-month ECL).

For those credit exposures from which there has been a significant increase in credit risk since initial

recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure,

irrespective of the timing of the default (a lifetime ECL)

The Fund uses ratings from Fitch Rating and ICRA both to determine whether the debt instrument has

significantly increased in credit risk and to estimate ECLs.

Consistent with the policies of the Fund, rated below BBB- are considered non-investment grade investments

and Fund considers such investments as significant deterioration of credit risk incurred. Such investments are

considered for life time ECL calculation.

Further, movements within the ratings of the investment grade stipulate significant deterioration of credit risk.

Significant deterioration is measured through a two notches downgrade of the external credit rating of the

counterparty since the origination of the instrument.



-41-

For debt instruments at amortized cost issued by Sovereign, the Fund applies the low risk simplification.

The Fund’s debt instruments at amortized cost comprise solely of Treasury bill repurchase agreements that are

obtained from primary dealers with a collateral of either treasury bills or bonds that are graded in the top

investment category- AAA rating and, therefore, are considered to be low risk investments.

2.2.1.6 Derecognition

A financial asset is derecognised when,

1) The rights to receive cash flows from the asset have expired.

2) The Fund has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay

the received cash flows in full without material delay to a third party under a ‘pass–through’ arrangement;

and either,

The Fund has transferred substantially all the risks and rewards of the asset or

The Fund has neither transferred nor retained substantially all the risks and rewards of the asset, but has

transferred control of the asset

2.2.1.7 Offsetting of financial instruments

Financial assets and financial liabilities are offset and the net amount reported in the statement of financial

position if, and only if:

there is a currently enforceable legal right to offset the recognised amounts and

there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously

2.2.2 Recognition of income

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Fund and the

revenue can be reliably measured. The following specific criteria must also be met before revenue is

recognised.

(i) Interest Income

For all financial instruments measured at amortised cost, interest income is recorded using the effective interest

rate (EIR), which is the rate that exactly discounts the estimated future cash payments or receipts through the

expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of

the financial asset. Interest income of Treasury bills repurchase agreements is recognised gross of notional tax

credit until 31 March 2018. Subsequent to the enactment of the new Inland Revenue Act No. 24 of 2017,

effective 01 April 2018, an Eligible Unit Trust would not be liable for Income Tax on any Income which is a

pass through to its unit holders. Accordingly, post 31 March 2018, the Fund has considered all income as being

a pass through to its unit holders (Refer Note 2.2.4 and 4.1).

(ii) Dividend Income

Income is recognized when the right to receive the dividend is established

(iii) Unrealised gains/(losses) on financial assets held at fair value through profit or loss

Unrealised gains/(losses) on financial assets held at fair value through profit or loss includes all gains and

losses that arise from changes in fair value of financial assets held at fair value through profit or loss” as at

the reporting date.

(iv) Realised gains/(losses) on financial assets held at fair value through profit or loss

Realised gains/(losses) on financial assets held at fair value through profit or loss includes results of buying

and selling of quoted equity securities.



-42-

2.2.3 Cash and cash equivalents

Cash and cash equivalents in the statement of financial position and statement of cash flows comprise cash at

bank.

2.2.4 Income tax

Until 31 March 2018 the Fund is liable to pay income tax at the rate of 10% in accordance with the Inland

Revenue Act No.10 of 2006. Thereafter, current tax assets and liabilities for the current year are measured at

the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used

to compute the amount are those that are enacted or substantively enacted, at the reporting date.

Subsequent to the enactment of the new Inland Revenue Act No. 24 of 2017, effective 01 April 2018, an

Eligible Unit Trust would not be liable for Income Tax on any Income which is a pass through to its unit

holders. Accordingly, post 31 March 2018, the Fund has considered all income as being a pass through to its

unit holders.

2.2.5 Expenses

The management, trustee fees and custodian fee of the Fund as per the trust deed is as follows,

Management fee - 2.25% p.a of net asset value of the Fund

Trustee fee - 0.25% p.a of net asset value of the Fund

2.2.6 Unit holders’ Funds

Unit holders’ Funds has been calculated as the difference between the carrying amounts of the assets and the

carrying amounts of the liabilities, other than those due to unit holders as at the reporting date.

Units can be issued and redeemed based on the Fund’s net asset value per unit, calculated by dividing the net

assets of the Fund as described in the Trust Deed and directives issued by the Securities and Exchange

Commission of Sri Lanka, by the number of units in issue. Income not distributed is included in net assets

attributable to unit holders.

3. FINANCIAL RISK MANAGEMENT

(a) Financial Instruments

The Fund’s principal financial assets comprise the investments in quoted equity securities, treasury bill/bond

repurchase agreements and cash at bank. The main purpose of these financial instruments is to generate a return

on the investment made by Unit Holders. The Fund’s financial liabilities comprise accrued expenses and other

payables which arise directly from its operations.

In accordance with SLFRS 9 Financial Instruments: Recognition and Measurement, the Fund’s financial

investments in debt securities are classified as ‘financial assets at amortised cost’. Investments in Quoted

Equity securities are classified as ‘fair value through profit or loss’, meaning they are valued at fair value.

Amounts attributable to Unit Holders are classified as ‘Unit Holders Funds’ and are carried at the redemption

amount being net asset value. Payables are designated as ‘Accrued expenses’ at amortized cost.



-43-

(b) Financial risk management objectives, policies and processes

The Fund’s activities expose it to a variety of financial risks: market risk (including price risk and interest rate

risk), credit risk and liquidity risk.

Financial instruments of the Fund comprise investments in quoted equity securities and treasury bill/bond

repurchase agreements for the purpose of generating a return on the investment made by Unit holders, in

addition to cash at bank and other financial instruments such as receivables and payables, which arise directly

from its operations.

Risk arising from holding financial instruments is inherent in the Fund’s activities, and is managed through a

process of ongoing identification, measurement and monitoring. The Manager is responsible for identifying

and controlling the risk arising from the financial instruments held in the Fund and has policies for managing

each of the risks identified below.

The Manager also monitors information about the total fair value of financial instruments exposed to risk, as

well as compliance with established investment mandate and regulatory limits. These mandate limits reflect

the investment strategy and market environment of the Fund, as well as the level of risk that the Fund is willing

to accept, with additional emphasis on selected industries. This information is prepared and reported to relevant

parties within the Management Company on a regular basis as deemed appropriate, including the Fund

Manager, Risk and Investment Personnel and ultimately the Trustees of the Fund.

The Fund uses different methods to measure different types of risk to which it is exposed. These methods

include sensitivity analysis in the case of interest rate and other price risks and ratings analysis for credit risk.

Concentration of risk arises when a number of financial instruments or contracts are entered in to with the

same counterparty, or where a number of counterparties are engaged in similar business activities. The

Securities and Exchange Commission of Sri Lanka as Regulator has stipulated the level of concentration

permitted per counter party. The Fund itself applies and adheres to stringent internal limits.

Further, the Manager has appointed an investment committee which meets monthly to review, evaluate and

reassess the investment policies and risk.

Market risk

Market risk represents the risk that the value of the Fund’s investments portfolios will fluctuate as a result of

changes in market prices. While market risk cannot be eliminated the Fund manager will attempt to reduce this

risk by diversifying the Fund’s investment portfolio in line with investment objectives of the Fund.

Price risk

Price risk is the risk that the fair value of the Fund’s investment in trading securities in fluctuates as a result of

changes in the price of the Fund’s investments in trading securities. Price risk exposure arises from the Fund’s

investment portfolios.

This risk is managed by ensuring that all investment activities are undertaken in accordance with established

investment restrictions and investments strategies. As such, Unit holders can manage this risk through their

choices of which investment portfolios to participate in.

Within the underlying investment portfolio, diversification is achieved at a number of levels. The diversified

portfolio is invested across a range of market sectors.

Paragraph below sets out how this component of price risk is managed and measured. Investments are

classified in the statement of financial position at fair value through profit or loss. All securities investments

present a risk of loss of capital, the maximum risk resulting from financial instruments is determined by the

fair value of the financial instruments.



-44-

The table below shows the impact on the statement of profit or loss and other comprehensive income and

statement of financial position due to a reasonably possible change in the price of the Fund’s investment in

financial assets held at fair value through profit or loss in note 7, with all other variables held constant:

2019 2018

Increase/ (decrease)

of (loss)/profit before

tax and amounts

attributable to Unit

Holders

Rs.

Increase/ (decrease) of

(loss)/profit before tax

and amounts

attributable to Unit

Holders

Rs.

Change in price of the Fund’s

investments in financial assets held at

fair value through profit or loss

+10% 30,514,177 29,009,678

-10% (30,514,177) (29,009,678)

Interest rate risk

Interest rate risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market

interest rates.

The Fund’s interest bearing financial assets expose it to risks associated with the effects of fluctuations in the

prevailing levels of market interest rates on its financial position and cash flows. The risk is measured using

sensitivity analysis. However, due to the short term nature of the instruments of repurchase agreements it is

reasonably expected that the fluctuation in interest rate will not materially impact the net assets value of the

Fund. The table below summarises the Fund’s exposure to interest rate risks.

31 December 2019 Floating

interest

rate

Fixed

interest rate

Non- interest

bearing

Total

Rs. Rs. Rs. Rs.

Financial assets

Cash and cash equivalents - -

805,223

805,223

Debt instruments at amortised cost - 29,398,809 - 29,398,809

Other receivables - - 342,790 342,790

Total exposure - 29,398,809

1,148,013

30,546,822


interest rate

Fixed

interest rate

Non-interest

bearing

Total

Rs. Rs. Rs. Rs.

Financial assets

Cash and cash equivalents - - 240,770 240,770

Debt Instruments at Amortised

Cost

- 27,896,339 - 27,896,339

Other Receivables

- - 512,173 512,173

Total Exposure - 27,896,339 752,943 28,649,282



-45-

(c) Credit risk

Credit risk is the risk that the counterparty to the financial instruments will fail to discharge an obligation and

cause the Fund to incur a financial loss of interest and/or principal.

The main concentration of credit risk, to which the Fund is exposed, arises from the Fund’s investment in

government repurchase agreements and cash and cash equivalents.

The exposure to credit risk for repurchase agreements is very low as the Fund has considered the collateral

that the primary dealers provided which are government bills and bonds rated as AAA.

The Fund is also subject to credit risk on its bank balance and receivables. The carrying value of these assets

under SLFRS 9 impairment represents the Fund’s maximum exposure to credit risk on financial instruments

and are not deemed to be significant. Hence, no separate credit risk disclosure is provided for these instruments.

(d) Liquidity risk

Liquidity risk is the risk that the Fund may not be able to generate sufficient cash resources to settle its

obligations in full as they fall due or can only do so on terms that are materially disadvantageous.

The Fund is exposed to daily cash redemptions of units. Due to the nature of a unit trust, it is unlikely that a

significant number of unit holders would exit at the same time. However to control liquidity risk, it primarily

holds investments that are traded in an active market and can be readily disposed.

The time frame for return of cash to investors is six business days in which time equities may be liquidated to

realize cash for redemption payouts. In addition, the Securities Exchange Commission and the Fund require

additional business days’ notice to the Fund from large investors redeeming over 3% of the Fund and the Fund

is also permitted to borrow up to 15% of the deposited property for redemption payouts. No such borrowings

have arisen during the period.

Furthermore, the unit trust code requires a minimum of 3% of the deposited property to be maintained in cash

or near cash. (near cash means investments such as bank/call deposits, repurchase agreements with maturities

of less than 3 months, commercial paper endorsed or guaranteed by a Licensed Commercial Bank or Licensed

Specialized Bank with maturities of less than 3 months and government securities including government bonds

with maturities of less than one year which can be readily convertible into cash.)

(e) Capital risk management

The Fund considers its net assets attributable to unit holders as capital, notwithstanding net assets attributable

to unit holders are classified as a liability. The amount of net assets attributable to unit holders can change

significantly on a daily basis as the Fund is subject to daily applications and redemptions at the discretion of

unit holders.

Daily applications and redemptions are reviewed relative to the liquidity of the Fund's underlying assets on a

daily basis by the Management Company Under the terms of the Unit Trust Code, the Management Company

has the discretion to reject an application for units and to defer redemption of units if the exercise of such

discretion is in the best interests of unit holders.



-46-

Following being the disclosures of Unit holders’ Funds;

The movement in the Unit holder’s Funds as at 31 December 2019

I. In term of Value

Rs.

Unit Holders' Funds as at 01 January 2019 317,695,229 Creations during the year 44,550,959

Redemptions during the year (48,779,806)

Increase in net assets attributable to Unit Holders 21,192,720

Unit Holders' Funds as at 31 December 2019

334,659,102

II. In term of No of units

Opening no of units as at 01 January 2019 19,507,476

Unit creations during the year 2,584,005

Unit redemptions during the year (3,023,486)

Closing no of units as at 31 December 2019 19,067,995

As stipulated within the Trust Deed, each unit represents a right to an individual share in the Fund and does

not extend to a right to the underlying assets of the Fund. There are no separate classes of units and each unit

has the same rights attaching to it as all other units of the Fund.


STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOMEYear ended 31 December 2019

Notes 2019 2018

Rs. Rs.

INCOME

Interest Income 4 1,812,674 2,534,664

Dividend Income 12,744,797 15,808,687

Realised (Loss)/Gain on Financial Assets Held at Fair Value Through Profit or Loss (5,421,409) 16,742,606

Unrealized Gain/(Loss) on Financial Assets Held at Fair Value Through Profit or Loss 22,009,782 (39,641,039)

Net Investment Income 31,145,844 (4,555,082)

EXPENSES

Management Fees (6,445,889) (9,100,910)

Trustee and Custodian Fees (1,009,730) (1,346,699)

Audit Fees (279,382) (372,860)

Brokerage Expenses (1,914,566) (3,466,147)

Impairment Provision for Income Tax Receivable (81,640) (1,214,257)

Other Expenses (221,917) (299,002)

(9,953,124) (15,799,875)

NET PROFIT/(LOSS) BEFORE TAX 21,192,720 (20,354,957)

Income Tax Expense 6 - -

NET PROFIT/(LOSS) AFTER TAX FOR THE YEAR 21,192,720 (20,354,957)

TOTAL COMPREHENSIVE INCOME/ (LOSS) FOR THE YEAR 21,192,720 (20,354,957)

The accounting policies and notes on pages 51 through 55 form an integral part of the Financial Statements.

47


STATEMENT OF FINANCIAL POSITIONAs at 31 December 2019

Notes 2019 2018

ASSETS Rs. Rs.

Cash and Cash Equivalents 5 805,223 240,770

Financial Assets at Fair Value through Profit or Loss 7 305,141,771 290,096,780

Debt Instruments at Amortised Cost 8 29,398,809 27,896,339

Other Receivables 9 342,790 512,173

Income Tax Receivable 6 - 81,640

335,688,593 318,827,702

LIABILITIES

Accrued Expenses and Other Payables 11 1,029,491 1,132,473

1,029,491 1,132,473

NET ASSETS 334,659,102 317,695,229

UNIT HOLDERS' FUNDS

Net Assets Attributable to Unit holders 334,659,102 317,695,229

334,659,102 317,695,229

(0) (1)

……………………………….

Director Director

Management Company Management Company


13 February 2020

Colombo

The Manager is responsible for these Financial Statements and these Financial Statements were approved by the Manager. Signed

for and on behalf of the Manager by;

…...…………………………

48


STATEMENT OF MOVEMENT IN UNIT HOLDERS' FUNDSYear ended 31 December 2019

2019 2018

Rs. Rs.

UNIT HOLDERS' FUNDS AS AT 01 JANUARY 317,695,229 438,953,091

Total Comprehensive Income/(Loss) for the Year 21,192,720 (20,354,957)

Received on Creation of Units 44,550,959 3,519,861

Paid on Redemption of Units (48,779,806) (104,422,766)

Net Decrease due to Unit holders' Transactions (4,228,847) (100,902,905)

UNIT HOLDERS' FUNDS AS AT 31 DECEMBER 334,659,102 317,695,229


49


STATEMENT OF CASH FLOWSYear ended 31 December 2019

2019 2018

Notes Rs. Rs.

Cash Flows from Operating Activities

Interest Received 1,813,391 2,570,754

Dividend Received 12,899,180 17,175,491

Management Fees and Trustee Fees Paid (7,424,895) (10,710,746)

Other Expenses Paid (2,549,520) (4,045,697)

Net Cash Flow generated from Operating Activities 4,738,156 4,989,802

Cash Flows from Investing Activities

Sale Proceeds from Sale of Equity Securities 89,037,482 215,447,078

Purchase of Equity Investments (87,494,100) (106,540,747)

Net Investment (in)/from Treasury Bill/Bond Repos (1,503,187) (12,809,480)

Net Cash generated from /(used in) Investing Activities 40,195 96,096,851

Cash Flows from Financing Activities

Cash Received on Creation of Units 44,566,959 3,536,861

Cash Paid on Redemption of Units (48,780,856) (104,422,716)

Net Cash used in Financing Activities (4,213,897) (100,885,855)

Net increase in Cash and Cash Equivalents 564,454 200,798

Cash and Cash Equivalents at the beginning of the year 240,770 39,972

Cash and Cash Equivalents at the end of the Year 5 805,223 240,770


50


NOTES TO THE FINANCIAL STATEMENTSYear ended 31 December 2019

4. GROSS INCOME 2019 2018

Rs. Rs.

Interest on

Treasury Bill/Bond Repurchase Agreements (4.1) 1,653,461 2,388,371

Savings Deposits (4.1) 159,213 146,293

1,812,674 2,534,664

4.1

5. CASH AND CASH EQUIVALENTS 2019 2018

Rs. Rs.

Cash at Bank 805,223 240,770

805,223 240,770

6. TAXATION 2019 2018

Rs. Rs.

Tax expense for the year - -

- -

6.1

2019 2018

Rs. Rs.

Net profit/(loss) before tax for the year 21,192,720 (20,354,957)

Taxable net profit for the year (Applicable 03 months profits up to 31.03.2018) - 26,599,767

Total statutory loss (2.2.4) - (6,978,788)

Income tax (2018 - 10%)

Income tax expense reported in the Statement of Profit or Loss and Other Comprehensive Income - -

6.2 Tax Loss brought Forward 8,785,094 1,930,459

Adjustments based on prior period income tax returns (5,297,735) (124,153)

Tax Losses incurred during the year - 6,978,788

Tax Losses Carried Forward 3,487,359 8,785,094

2019 2018

Rs. Rs.

6.3 Income Tax Receivable

Income Tax Receivable 1,295,897 1,295,897

Impairment Provision for Carried Forward Notional Tax Credit (1,295,897) (1,214,257)

- 81,640

As detailed under Note 2.2.4, interest income of Treasury Bill/Bond Repurchase Agreements are recognised gross of notional tax credit and

interest income from Savings Deposits are recognised gross of withholding tax until 31 March 2018. Subsequent to the enactment of the new

Inland Revenue Act No. 24 of 2017, effective 01 April 2018, Notional Tax is not applicable for Treasury Bill Repurchase Agreements. In

relation to interest income from Savings Deposits interest income has been recognized net of withholding tax as the Fund considers its income

to be a pass through to its unit holders.

A reconciliation between the tax expense and the product of taxable loss multiplied by the statutory tax rate is as follows:

As of 31 December 2019, Income Tax Recoverable comprises of Notional Tax Credit amounting to Rs. 1,214,257/- and WHT credit of Rs

81,640/-. Notional Tax credit carried forward balance will be carried forward as per section 138(2) of the lnland Revenue Act No 10 of 2006 to

be set off against future income tax liability if any within three consecutive years of assessment commencing from the year of assessment

2018/2019. However, subsequent to the enactment of the new Inland Revenue Act No 24 of 2017, effective 01 April 2018, an Eligible Unit

Trust would not be liable for income tax on any income which is a pass through to its unit holders. Therefore, the Manager is unable to assess

with reasonable certainty that there will be a future income tax liability to offset this income tax receivable balance. Accordingly an impairment

provision is made against the income tax receivable balance amounting to Rs. 81,640 /- (2018- Rs. 1,214,257/-).

The Fund has not recognized a deferred tax asset as at 31 December 2019 due to the Fund being unable to assess with reasonable certainty that

taxable profits would be available to recover the asset in the foreseeable future, against which the tax losses amounting to Rs.3,487,359/- (2018 -

Rs. 8,785,094/- ) can be utilized.

51



7. FINANCIAL ASSETS - HELD AT FAIR VALUE THROUGH PROFIT OR LOSS

Company

Banks, Finance and Insurance

Central Finance Company PLC 280,658 29,188,432 8.7% 278,096 24,667,115 7.8%

Commercial Bank of Ceylon PLC 204,458 19,423,510 5.8% - - -

People's Leasing and Finance PLC 1,687,473 30,205,766 9.0% 1,715,000 27,954,500 8.8%

Sampath Bank PLC 113,704 18,465,530 5.5% 112,886 26,528,210 8.4%

Nations Trust Bank PLC 179,409 14,352,720 4.4% 368,418 32,862,886 10.3%

Ceylinco Insurance PLC 10,000 8,400,000 2.5% 21,200 20,140,000 6.3%

120,035,958 35.9% 132,152,711 41.6%

Beverage, Food and Tobacco

Ceylon Tobacoo Company PLC 3,000 3,300,900 1.0% - - -

Distilleries Company of Srilanka PLC 1,181,236 21,852,866 6.5% - - -

Cargills (Ceylon) PLC 67,438 13,015,534 3.9% 154,782 30,956,400 9.7%

38,169,300 11.4% 30,956,400 9.7%

Diversified Holdings

John Keells Holdings PLC 90,000 15,084,000 4.5% 50,000 7,985,000 2.5%

Hemas Holdings PLC 231,832 18,546,560 5.5% 159,000 14,119,200 - 4.5%

Expolanka Holdings PLC 1,080,000 5,508,000 - 1.6% - - -

39,138,560 11.6% 22,104,200 7.0%

Hotels and Travels

Aitken Spence Hotel Holdings PLC 290,575 7,874,583 2.4% 290,575 7,845,525 2.5%

7,874,583 2.4% 7,845,525 2.5%

Manufacturing

Alumex PLC 430,000 6,364,000 1.9% 430,000 5,805,000 1.8%

Tokyo Cement Company (Lanka) PLC - - - 234,799 5,916,934 1.9%

470,000 18,424,000 5.5% 98,312 2,261,176 0.7%

Chevron Lubricants Lanka PLC 185,000 13,856,500 4.1% 185,000 13,468,000 4.2%

Ceylon Grain Elevators PLC 184,526 12,640,031 3.8% 192,796 11,471,362 - 3.7%

51,284,531 15.3% 38,922,472 12.3%

Construction & Engineering

Access Engineering PLC 441,389 9,622,280 2.9% 666,389 9,396,085 3.0%

9,622,280 2.9% 9,396,085 3.0%

Telecommunication

Dialog Axiata PLC 1,624,312 19,979,038 6.0% 1,894,312 19,132,551 6.0%

19,979,038 6.0% 19,132,551 6.0%

Footwear & Textiles

Hayleys Fabric PLC - - - 190,348 1,732,167 0.5%

- - 1,732,167 0.5%

Power & Energy

Lanka IOC PLC - - - 308,531 7,589,863 2.4%

LVL Energy Fund PLC 1,100,000 8,250,000 2.5% 1,100,000 9,240,000 - 2.9%

8,250,000 2.5% 16,829,863 5.3%

Chemicals & Pharmaceuticals

CIC Holdings PLC-Non Voting 13,435 639,505 0.2% 13,435 403,050 0.1%

639,505 0.2% 403,050 0.1%

Health Care

The Lanka Hospital Corporation PLC 249,337 10,148,016 3.0% 249,337 10,621,756 3.3%

10,148,016 3.0% 10,621,756 3.3%

305,141,771 91.2% 290,096,780 91.3%

Number of

Shares

Tokyo Cement Company (Lanka) PLC-Non

Voting

Number of

Shares

Market

Value

Rs.

Holding as a %

of Net Asset

Value

Market

Value

Rs.

Holding as a

% of Net

Asset Value

2019 2018

52



8. FINANCIAL ASSETS AT AMORTISED COST 2019 2018

Rs. Rs.

Debt Instruments at Amortised Cost

Treasury Bill Repurchase Agreements (8.1) 29,398,809 27,896,339

29,398,809 27,896,339

8.1 Treasury Bill / Bond Repurchase Agreements

First Capital Treasuries PLC 29,398,809 27,896,339

29,398,809 27,896,339

9. OTHER RECEIVABLES 2019 2018

Rs. Rs.

Amount Receivable on Creation of Units 5,000 21,000

Dividend Receivable 336,790 491,173

Redemption Refund Receivable 1,000 -

342,790 512,173

10. FAIR VALUE OF FINANCIAL INSTRUMENTS

Determination of fair value and fair value hierarchy

Level 1 Level 2 Level 3

Financial Assets Held at Fair Value Through Profit or Loss Rs. Rs. Rs.

Quoted equity securities

As at 31 December 2019 305,141,771 - -

As at 31 December 2018 290,096,780 - -

Financial Assets and Financial Liabilities not carried at fair value

Assets Liabilities

Cash and Cash Equivalents Accrued Expenses and Other Payables

Debt Instruments at Amortised Cost

Other Receivables

11. ACCRUED EXPENSES AND OTHER PAYABLES 2019 2018

Rs. Rs.

Fund Manager Payable 648,984 617,704

Trustee Fee and Custodian Fee Payable 94,937 95,493

Audit Fee 285,520 314,833

Other payables 50 104,443

1,029,491 1,132,473

Level 1 – An investment in a fund is classified in Level 1 of the hierarchy when that investment is quoted in an active market and measured at

the unadjusted quoted price at the reporting date.

Level 2 – An investment in a fund is classified in Level 2 of the hierarchy when that investment is measured using inputs that are directly

observable at the reporting date.

Level 3 – An investment in a fund is classified in Level 3 of the hierarchy when the investment is measured using unobservable inputs at the

reporting date.

The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy:

The Fund uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:

For financial assets and financial liabilities that have a short term maturity (original maturities less than a year), it is assumed that the carrying

amounts approximate their fair values.

Accordingly, the following is a list of financial instruments whose carrying amount is a reasonable approximation of fair value.

53



12. CONTINGENCIES

13. EVENTS OCCURRING AFTER THE REPORTING DATE

14. CAPITAL COMMITMENTS

15. UNITS IN ISSUE AND UNIT PRICE

16. RELATED PARTY DISCLOSURE

16.1 Management Company and Trustee

The Trustee is Deutsche Bank AG.

16.2 Key management personnel

i) Directors

Mr.R. Abeywardena

Mr.D.C.R. Gunawardena

Mr.K. Selvanathan

Mr.T. De Silva

Mr.D.P.N. Rodrigo

Mr. S.M. Perera

Mr. Asanka Jayasekara - Fund Manager

16.3 Key management personnel compensation

16.4 Other transactions within the Fund

The Management Company is Guardian Acuity Asset Management Limited.

There are no material contingencies existing as at the reporting date that require adjustments to, or disclosure in the Financial Statements.

There have been no material events occurring after the reporting date that require adjustments to or disclosure in the Financial Statements.

Key management personnel are paid by Guardian Acuity Asset Management Limited. Payments made from the Fund to Guardian Acuity

Asset Management Limited do not include any amounts directly attributable to the compensation of key management personnel.

Units in issue and deemed to be in issue as at 31 December 2019 is 19,067,995.46 (2018 - 19,507,476.70). Unit price as at the reporting date

is Rs.17.3736 (2018 - Rs.16.2872).

Key management personnel includes persons who were directors of Guardian Acuity Asset Management Limited at any time during the

financial year.

Other persons with responsibility for planning, directing and controlling the activities of the Fund, directly or indirectly during the financial

year.

There were no material capital and financial commitments as at the reporting date.

Apart from those details disclosed in note 16.5 and 16.6, key management personnel have not entered in to any other transactions involving

the Fund during the financial year.

54



16. RELATED PARTY DISCLOSURE (Contd...)

16.5 Related party unit holding and other transactions

As at 31 December 2019

Unit holder Rs. % Rs.


Joint Venture partner in

the Management

Company

310,079.4 5,387,196 2% -

Ceylon Investment PLCAffiliate of the

Management Company 310,079.4 5,387,196 2% -

Key Management Personnel 226,265 - 3,931,030 - 1% -




Joint Venture partner in

the Management

Company

310,079.4 5,050,315 2% -

Ceylon Investment PLCAffiliate of the

Management Company 310,079.4 5,050,315 2% -

Key Management Personnel 53,523.0 871,737 0.3% -

16.6 Transactions with and amounts due to related parties

2019 2018 2019 2018

Rs. Rs. Rs. Rs.

Management Fees - Guardian Acuity Asset Management Limited 6,445,889 9,100,910 648,984 617,704

Trustee Fees and Custodian Fees Payable - Deutsche Bank AG 1,009,730 1,346,699 94,937 95,493

805,223 240,770

17.

2019 2018

Rs. Rs.

Net Asset Value as per Financial Statements 334,659,102 317,695,229

Income Tax Receivables - ** (81,640)

Audit fee adjustment 37,889 28,527

Dividend Write Off - 79,380

Published Net Asset Value 334,696,991 317,721,496

Number of units outstanding 19,067,995.5 19,507,476.7

Net Asset Value per Unit 17.5528 16.2872

** An impairment provision is made against the income tax receivable balance amounting to Rs. 81,640 /- (2018- Rs. 1,214,257/-).

Relationship

Distribution

paid or

payable by

the Fund

No. of

Units

Value of

units held

Total interest

held

RECONCILIATION BETWEEN THE NET ASSET VALUE AS PER FINANCIAL STATEMENTS AND THE PUBLISHED NET

ASSET VALUE

The fees charged by the Management Company, Trustee and other related parties for services provided during the year and the balances

outstanding from such dues as at period end are as disclosed below:

Charge for the year Payable as at

31 December

The Bank balance held at Deutsche Bank AG as at 31 December

31 December

RelationshipNo. of

Units

Value of

units held

Total interest

held

Distribution

paid or

payable by

the Fund

55

56

GUARDIAN ACUITY MONEY MARKET FUND


31 DECEMBER 2019

57

GSM/SKWD/JJ


TO THE TRUSTEE OF GUARDIAN ACUITY MONEY MARKET FUND


Opinion

We have audited the Financial Statements of Guardian Acuity Money Market Fund (‘the Fund’), which comprise the

Statement of Financial Position as at 31 December 2019, and the Statement of Profit or Loss and Other Comprehensive

Income, Statement of Movement in Unit Holders’ Funds and Statement of Cash Flows for the year then ended, and

Notes to the Financial Statements, including a summary of significant accounting policies.


at 31 December 2019 and of its financial performance and its cash flows for the year then ended in accordance with Sri


Basis for Opinion











In preparing the financial statements, the Manager is responsible for assessing the Fund’s ability to continue as a going

concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting

unless management either intends to liquidate the Fund or to cease operations, or has no realistic alternative but to do

so.









(Contd...2/)

-58-













Conclude on the appropriateness of Manager’s use of the going concern basis of accounting and, based on the

audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast

significant doubt on the Fund’s ability to continue as a going concern. If we conclude that a material

uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the

financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based

on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may

cause the Fund to cease to continue as a going concern.



fair presentation.






13 February 2020

Colombo



-59-


Guardian Acuity Money Market Fund (formerly known as Guardian Acuity Fixed Income Fund) is an open

ended unit trust Fund approved by the Securities and Exchange Commission of Sri Lanka. The Fund was

launched on 27 February 2012. The Fund name has been changed to Guardian Acuity Money Market Fund

with effect from 18 January 2016.


Sri Lanka. The registered office of the management company is located at No.61, Janadhipathi Mawatha


Colombo 03.

The investment objective of the Fund is to provide an annual income by investing in a portfolio of Money

Market securities with a lower level of risk by investing with high credit quality institutions.



-60-



The financial statements have been prepared on the historical cost basis unless otherwise indicated. The

financial statements are presented in Sri Lankan rupees. The statement of financial position is presented on a

liquidity basis.


The financial statements which comprise the statement of financial position as at 31 December 2019, Statement





of Sri Lanka.

2.1.2 Going Concern

These financial statements are prepared on the assumption that the Fund is a going concern i.e. as continuing

in operation for the foreseeable future. It is therefore assumed that the Fund has neither the intention nor the

necessity of liquidation or of curtailing materially the scale of its operation.




Financial assets and liabilities, are initially recognized on the trade date, i.e the date that the Fund becomes a

party to the contractual provisions of the instrument. This includes purchases or sales of financial assets that


place.

2.2.1.2 Initial measurement of financial instrument



fair value plus transaction costs that are directly attributable to the acquisition of the financial asset. Transaction

costs of financial assets carried at FVPL are expensed in the statement of profit or loss.


The Fund classifies all of its financial assets in the following measurement categories:

those to be measured at amortised cost


Financial liabilities of the Fund are measured at amortised cost, and includes all financial liabilities, other than

those measured at fair value through profit or loss. The financial liabilities of the Fund includes accrued




-61-


Amortised cost: A debt instrument is measured at amortised cost if it is held within a business model whose



Debt Instruments at amortised cost in the statement of financial position comprise of investments in

commercial papers, fixed deposits, trust certificates and treasury bill repurchase agreements. Any gain or loss

arising on derecognition is recognised directly in profit or loss and presented as realised gain/(loss) on debt

Instruments held at amortised cost.




Or



Or




A gain or loss on a debt investment that is subsequently measured at FVPL is recognised in profit or loss and

presented net within unrealised gains/(losses) in the period in which it arises. Financial Assets at fair value

through profit or loss at Statement of Financial Position comprise of investment in treasury bills. As of 31

December 2019, the Fund has no such investments.

2.2.1.5 Impairment

The Fund assesses on a forward looking basis, the expected credit losses associated with its debt instruments

carried at amortised cost. The impairment methodology applied depends on whether there has been a

significant increase in credit risk.

ECLs are based on the difference between the contractual cash flows due in accordance with the contract and

all the cash flows that the Fund expects to receive, discounted at an approximation of the original effective

interest rate.

ECLs are recognized in two stages. For credit exposures for which there has not been a significant increase in

credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are

possible within the next 12-months (a 12-month ECL).

For those credit exposures from which there has been a significant increase in credit risk since initial

recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure,

irrespective of the timing of the default (a lifetime ECL)

The Fund uses ratings from Fitch Rating and ICRA both to determine whether the debt instrument has

significantly increased in credit risk and to estimate ECLs.

Consistent with the policies of the Fund, rated below BBB- are considered non-investment grade investments

and Fund considers such investments as significant deterioration of credit risk incurred. Such investments are

considered for life time ECL calculation.

Further, movements within the ratings of the investment grade stipulate significant deterioration of credit risk.

Significant deterioration is measured through the two notches downgrade of the external credit rating of the

counterparty since the origination of the instrument.



-62-

For debt instruments at amortised cost, the Fund applies the low risk simplification. At every reporting date,

the Fund evaluates whether the debt instrument is considered to have low credit risk using all reasonable and

supportable information that is available without undue cost or effort.

In certain cases, the Fund may also consider a financial asset to be in default when internal or external

information indicates that the Fund is unlikely to receive the outstanding contractual amounts in full. A

financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows.

ECLs are recognised using a provision for impairment account in profit and loss, with the corresponding

amount recognised as a reduction in the carrying amount of the asset in the Statement of Financial Position.

Investment in corporate debt securities measured at amortised cost has been considered for 12-month ECL and

as at 31 December 2019, the impact on the financial statements resulting from the same is not significant.


A financial asset is derecognised when,

1) The rights to receive cash flows from the asset have expired.

2) The Fund has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay


and either,


The Fund has neither transferred nor retained substantially all the risks and rewards of the asset, but has

transferred control of the asset







Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Fund and the


recognised.

Interest Income




the financial asset. Interest income of Treasury bill/bond repurchase agreements, fixed deposits, commercial

papers and Savings deposits are recognised gross of notional/withholding tax credit until 31 March 2018.

Effective 01 April 2018, Notional Tax is not applicable for treasury bill/bond repurchase agreements. Interest

income from fixed deposits, income from commercial papers and savings deposits have been recognized net

of WHT as the Fund considers such income to be a pass through to its unit holders (Refer note 2.2.4 and note

4.1).



-63-

Unrealised gains/(losses) on financial assets held at fair value through profit or loss

Unrealised gains/(losses) on financial assets held at fair value through profit or loss includes all gains and

losses that arise from changes in fair value of financial assets held at fair value through profit or loss” as at

the reporting date.

Realised gains/(losses) on financial assets held at fair value through profit or loss

Realised gains/(losses) on financial assets held at fair value through profit or loss includes results of buying

and selling of Treasury bills.


Cash and cash equivalents in the statement of financial position and statement of cash flows comprise cash at

bank.

2.2.4 Income tax

Until 31 March 2018 the Fund is liable to pay income tax at the rate of 10% in accordance with the Inland Revenue

Act No.10 of 2006. Thereafter, current tax assets and liabilities for the current year are measured at the amount

expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the

amount are those that are enacted or substantively enacted, at the reporting date.

Subsequent to the enactment of the new Inland Revenue Act No. 24 of 2017, effective 01 April 2018, an Eligible

Unit Trust would not be liable for Income Tax on any Income which is a pass through to its unit holders.

Accordingly, post 31 March 2018, the Fund has considered all income as being a pass through to its unit holders.

2.2.5 Expenses


Management fee - 0.60% p.a of net asset value of the Fund

Trustee fee - 0.15% p.a of net asset value of the Fund











The Fund’s overall risk management programme focuses on ensuring compliance with the Fund’s Trust Deed

and seeks to maximize the returns derived for the level of risk to which the Fund is exposed. Financial risk

management is carried out by the Management Company.



-64-

Financial instruments of the Fund comprise investments in trading securities and treasury bills repurchase

agreements, commercial papers and fixed deposits for the purpose of generating a return on the investment

made by Unit holders, in addition to cash at bank and other financial instruments such as receivables and

payables, which arise directly from its operations.


investments in debt securities are classified as ‘financial assets at amortised cost’. Amounts attributable to

Unit Holders are classified as ‘Unit Holders Funds’ and are carried at the redemption amount being net asset

value. Payables are designated as ‘Accrued expenses’ at amortized cost.



3.1 Market risk

Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because

of changes in market prices.

Interest rate risk


interest rates.



sensitivity analysis. However, due to the short term nature of the instruments it is reasonably expected that the

fluctuation in interest rate will not materially impact the net assets value of the Fund. The table below

summarises the Fund’s exposure to interest rate risks.

31 December 2019

Floating interest

rate

Fixed interest

rate

Non- interest

bearing Total

Rs. Rs. Rs. Rs.

Financial assets

Cash and cash equivalents

-

-

343,711,696

343,711,696

Debt Instruments at

Amortised Cost

-

4,598,913,659

-

4,598,913,659

Other receivables

-

-

14,220,506

14,220,506

Total exposure

-

4,598,913,659

357,932,202

4,956,845,861



-65-


interest

rate

Fixed

interest rate

Non- interest

bearing

Total

Rs. Rs. Rs. Rs.

Financial assets


330,630,074

330,630,074

Debt Instruments at Amortised

Cost - 4,330,125,800 - 4,330,125,800

Other receivables - - 4,186,008 4,186,008

Total exposure - 4,330,125,800

334,816,082

4,664,941,882

3.2 Credit risk


cause the Fund to incur a financial loss of interest and/or principal.

The main concentration of credit risk, to which the Fund is exposed, arises from the Fund’s investment in debt

securities, cash and cash equivalents and other receivables.

The exposure to credit risk for repurchase agreements is very low as the Fund has considered the collateral

that the primary dealers provided which are government bills and bonds rated as AAA.

The Fund is also subject to credit risk on its bank balance and receivables. The carrying value of these assets

under SLFRS 9 impairment represents the Fund’s maximum exposure to credit risk on financial instruments

and are not deemed to be significant. Hence, no separate credit risk disclosure is provided for these instruments.

(i) Debt securities

The credit risk exposure on these instruments is not deemed to be significant. It is the Fund’s policy to enter

into financial instruments with reputable counterparties with high credit quality.

The credit ratings of the counterparties with which the Fund places investments are as set out below:

Counterparty Credit Rating Rating Agency

AMW Capital Leasing and Finance PLC BBB+ Fitch

Central Finance Company PLC A+ Fitch

DFCC Bank PLC AA- Fitch

HNB Finance Ltd A Fitch

LB Finance PLC A- Fitch

National Development Bank PLC A+ Fitch

People's Leasing & Finance PLC AA- Fitch

Senkadagala Finance PLC BBB+ Fitch

Seylan Bank PLC A- Fitch

Siyapatha Finance PLC A- Fitch

The Fund is also subject to credit risk on its bank balance and receivables. The credit risk exposure on these

instruments is not deemed to be significant.



-66-

3.3 Liquidity risk











Furthermore the unit trust code requires a minimum of 3% of the deposited property to be maintained in cash





3.4 Capital risk management




unit holders.






The movement in the Unit holder’s Funds as at 31 December 2019

In term of Value

Rs.

Unit Holders' Funds as at 01 January 2019 4,673,369,514

Creations during the year 13,789,153,724

Redemptions during the year (14,062,597,492)

Increase in net assets attributable to Unit Holders 553,163,204

Unit Holders' Funds as at 31 December 2019 4,953,088,950



-67-

In term of No of units

Opening no of units as at 01 January 2019 272,633,805

Unit creations during the year 761,993,721

Unit redemptions during the year (773,076,330)

Closing no of units as at 31 December 209 261,551,196





STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOMEYear ended 31 December 2019

Notes 2019 2018

Rs. Rs.

INCOME

Interest Income 4 611,704,547 567,393,663

611,704,547 567,393,663

EXPENSES

Management Fees (34,638,114) (28,976,120)

Trustee Fees (9,728,015) (8,164,123)

Audit Fees (371,017) (316,042)

Bank Charges (534,200) (461,415)

Overdraft Interest (361,727) (1,542,633)

Impairement Provision for Income Tax Receivable (12,697,763) -

Other Expenses (210,507) (326,513)

(58,541,343) (39,786,846)

NET PROFIT BEFORE TAX 553,163,204 527,606,817

Income Tax Expense 5 - (14,800,739)

NET PROFIT AFTER TAX FOR THE YEAR 553,163,204 512,806,078

TOTAL COMPREHENSIVE INCOME FOR THE YEAR 553,163,204 512,806,078


68


STATEMENT OF FINANCIAL POSITIONAs at 31 December 2019

Notes 2019 2018

Rs. Rs.

ASSETS

Cash and Cash Equivalents 6 343,711,696 330,630,074

Financial Assets - Debt Instruments at Amortised Cost 7 4,598,913,659 4,330,125,800

Other Receivables 14,220,506 4,186,007

Income Tax Receivables - 12,697,763

4,956,845,861 4,677,639,644

LIABILITIES

Accrued Expenses and Other Payables 8 3,756,911 4,270,130

3,756,911 4,270,130

NET ASSETS 4,953,088,950 4,673,369,514

UNIT HOLDERS' FUNDS

Net Assets Attributable to Unit holders 4,953,088,950 4,673,369,514

4,953,088,950 4,673,369,514

The Manager is responsible for these Financial Statements and these Financial Statements were approved by the Manager.

Signed for and on behalf of the Manager by;

………………………… …………………………

Director Director



13 February 2020

Colombo

69


STATEMENT OF MOVEMENT IN UNIT HOLDERS' FUNDYear ended 31 December 2019

2019 2018

Rs. Rs.

UNIT HOLDERS' FUNDS AS AT 31 JANUARY 4,673,369,514 5,034,965,463

Total Comprehensive Income for the Year 553,163,204 512,806,078

Creation of Units 13,789,153,724 13,588,317,357

Redemption of Units (14,062,597,492) (14,462,719,383)

Net Decrease due to Unit holders' Transactions (273,443,768) (874,402,027)

UNIT HOLDERS' FUNDS AS AT 31 DECEMBER 4,953,088,950 4,673,369,514


70


CASH FLOWS STATEMENTYear ended 31 December 2019

2019 2018

Rs. Rs.


Interest Received 441,404,075 583,173,030

Management Fees and Trustee Fees Paid (44,292,251) (37,111,795)

Other Expenses Paid (1,392,808) (2,408,815)

Net Investment from Treasury Bill/Bond Repos - 251,176,879

Net Investment in Fixed Deposits (98,487,387) (1,802,893,622)

Net Investment from Commercial Papers - 2,207,208,716

Net Cash Flow generated from Operating Activities 297,231,629 1,199,144,393


Cash Received on Creation of Units 13,779,119,224 13,586,405,456

Cash Paid on Redemption of Units (14,063,269,232) (14,462,036,986)

Net Cash used in Financing Activities (284,150,008) (875,631,530)

Net Increase in Cash and Cash Equivalents 13,081,622 323,512,863

Cash and Cash Equivalents at the beginning of the year 330,630,074 7,117,210

Cash and Cash Equivalents at the end of the year 6 343,711,696 330,630,074


71



4. GROSS INCOME 2019 2018

Rs. Rs.

Interest on

Fixed Deposits (4.1) 588,434,650 386,232,509

Treasury Bill/Bonds Repurchase Agreements (4.1) - 7,167,655

Commercial Papers (4.1) 1,112,423 162,379,397

Savings Deposit (4.1) 22,157,474 11,614,102

611,704,547 567,393,663

4.1

5. TAXATION 2019 2018

Rs. Rs.

Tax expense for the year - 14,800,739

- 14,800,739

5.1

2019 2018

Rs. Rs.

Net profit before tax 553,163,204 527,606,817

Taxable net profit for the year (Applicable 03 months profits up to 31.03.2018) - 148,007,390

Total statutory income (2.2.4) - 148,007,390

Income tax (2018 - 10%)

- 14,800,739


Income tax receivable 12,697,763 12,697,763

Impairment for Income tax receivable (12,697,763) -

- 12,697,763

6. CASH AND CASH EQUIVALENTS 2019 2018

Rs. Rs.

Cash at Bank 343,711,696 330,630,074

343,711,696 330,630,074

Income tax expense reported in the Statement of Profit or Loss and Other

Comprehensive Income

A reconciliation between the tax expense and the product of taxable profit multiplied by the statutory tax rate is as

follows:

As of 31 December 2019, the net Income Tax Recoverable comprises of WHT of Rs. 12,697,763/-. The Fund Manager

intends to claim the WHT recoverable by means of a refund. However, subsequent to the enactment to the new Inland

Revenue Act No 24 of 2017, effective 01 April 2018, an Eligible Unit Trust would not be liable for Income Tax on any Income

which is a pass through to its unit holders. Therefore, the Manager is unable to assess with a reasonable certainty that there will

be a future income tax liability to offset this income tax receivable balance. Hence an impairment provision is made against the

income tax receivable balance amounting to Rs 12,697,763/-.

As detailed under Note 2.2.4, interest income of Treasury Bill/Bonds Repurchase Agreements are recognized gross of notional

tax credit, and interest income from Fixed Deposits, Savings Deposits and Commercial Papers are recognised gross of

Withholding Tax until 31 March 2018. Subsequent to the enactment of the new Inland Revenue Act No. 24 of 2017, effective

01 April 2018, Notional Tax is not applicable for Treasury Bill/Bond Repurchase Agreements. In relation to interest income

from Fixed Deposits, Savings Deposits and Commercial Papers has been recognized net of Withholding Tax as the Fund

considers its income to be a pass through to its unit holders.

72



7. FINANCIAL ASSETS AT AMORTISED COST

2019 2018

7.1 Fixed Deposits Rs. Rs.

AMW Capital Leasing & Finance PLC 52,039,819 156,838,183

Central Finance Company PLC 673,578,701 483,755,096

Citizens Development Business Finance PLC - 227,451,130

DFCC Bank PLC 245,231,890 -

HNB Finance Limited 349,749,770 493,201,181

LB Finance PLC 673,688,828 563,378,878

National Development Bank PLC 310,146,638 -

National Savings Bank - 493,350,839

People's Leasing & Finance PLC 647,212,449 513,638,555

Senkadagala Finance PLC 692,436,370 -

Seylan Bank PLC 258,733,233 632,662,677

Siyapatha Finance PLC 696,095,961 -

Union Bank of Colombo PLC - 602,253,678

Vallible Finance PLC - 163,595,583

4,598,913,659 4,330,125,800

8. ACCRUED EXPENSES AND OTHER PAYABLES 2019 2018

Rs. Rs.

Management Fee Payable 2,671,777 2,589,646

Trustee Fee Payable 721,389 729,642

Audit Fee 219,489 267,696

Other Payable 144,256 683,146

3,756,911 4,270,130

9. FAIR VALUE OF FINANCIAL INSTRUMENTS

Assets for which Fair Value Approximates Carrying Value:

Assets Liabilities

Cash and Cash Equivalents Accrued Expenses and Other Payables

Financial Assets - Debt Instruments at Amortised Cost

Other Receivables

10. CONTINGENCIES

11. EVENTS OCCURRING AFTER THE REPORTING DATE

12. CAPITAL COMMITMENTS

For financial assets and financial liabilities that have a short term maturity (original maturities less than a year), it is assumed that

the carrying amounts approximate their fair values.

Accordingly, the following is a list of financial instruments of which carrying amount is a reasonable approximation of fair value.

There were no material capital and financial commitments as at the reporting date.

There have been no material events occurring after the reporting date that require adjustments to or disclosure in the Financial

Statements.

There are no material contingencies existing as at the reporting date that require adjustments to, or disclosure in the Financial

Statements.

73



13. UNITS IN ISSUE AND UNIT PRICE

14. RELATED PARTY DISCLOSURE

14.1 Management Company and Trustee

The Management Company is Guardian Acuity Asset Management Limited.

The Trustee is Deutsche Bank AG.

14.2 Key management personnel

i) Directors

Mr.R.Abeywardena

Mr.D.C.R Gunawardena

Mr.K Selvanathan

Mr.T De Silva

Mr.D.P.N. Rodrigo

Mr. S. M. Perera

ii) Other key management personnel

Ms. Crishani Perera - Assistant Fund Manager

14.3 Key management personnel compensation

14.4 Other transactions within the Fund

14.5 Related party unit holding and other transactions



Guardian Acuity Asset Management

Limited

Management Company 688,234.4 13,033,370 0.26% -

Ceylon Guardian Investment Trust PLC Joint Venture Partner in

the Management

Company

8,775,156.2 166,178,643 3.36% -

Ceylon Investment PLC Affiliate of the

Management Company

10,645,914 201,605,925 4.07% -

Carson Cumberbatch & Co.Ltd:

Administrative Staff Provident Fund

Affiliate of the

Management Company

5,061,984.9 95,860,832 1.94% -

Rubber Investment Trust Ltd Affiliate of the

Management Company

15,726,415.5 297,817,421 6.01% -

Guardian Fund Management Ltd Affiliate of the

Management Company

607,257.0 11,499,868 0.23% -

Guardian Capital Partners PLC Affiliate of the

Management Company

7,643,374.2 144,745,635 2.92% -

Key Management Personnel 21,269.5 402,790 0.01% -

Key management personnel includes persons who were directors of Guardian Acuity Asset Management Limited at any time during the

financial year.

Other persons with responsibility for planning, directing and controlling the activities of the Fund, directly or indirectly during the financial

year are given below;

Key management personnel are paid by Guardian Acuity Asset Management Limited. Payments made from the Fund to Guardian Acuity Asset

Management Limited do not include any amounts directly attributable for the compensation of key management personnel.

The following are the related party holdings of Guardian Acuity Money Market Fund.

RelationshipNo. of

Units

Total interest

held

Distribution

paid or payable

by the Fund

Apart from those details disclosed in note 14.5 and 14.6, key management personnel have not entered in to any other transactions involving the

Fund during the financial year

Value of units

held

Units in issue and deemed to be in issue as at 31 December 2019 is 261,551,196.0 (2018 - 272,633,804.6) and the creation and redemption Unit

price as at this date is Rs.18.9374 (2018 - Rs.17.0951).

74



14. RELATED PARTY DISCLOSURE (Contd...)


Unit holder

Guardian Acuity Asset Management

Limited

Management Company 1,135,318.9 19,408,389 0.42% -

Ceylon Guardian Investment Trust PLC Joint Venture Partner in

the Management

Company

10,162,652.0 173,731,552 3.73% -

Carson Cumberbatch & Co.Ltd:

Administrative Staff Provident Fund

Affiliate of the

Management Company

1,566,577.3 26,780,796 0.57% -

Rubber Investment Trust Ltd Affiliate of the

Management Company

20,025,893.3 342,344,648 7.35% -

Guardian Fund Management Ltd Affiliate of the

Management Company

754,819.9 12,903,722 0.28% -

Guardian Capital Partners PLC Affiliate of the

Management Company

3,560,136.4 60,860,887 1.31% -

Key Management Personnel 358,836.1 6,134,340 0.13% -

14.6 Transactions with and amounts due to related parties

2019 2018 2019 2018

Rs. Rs. Rs. Rs.

Management fees - Guardian Acuity Asset Management Limited 34,638,114 28,976,120 2,671,777 2,589,646

Trustee fees - Deutsche Bank AG 9,728,015 8,164,123 721,389 729,642

70,256,899 20,761,231

15.

2019 2018

Rs. Rs.

Net Asset Value as per Financial Statements 4,953,088,950 4,673,369,514

Income Tax Receivables - ** (12,697,763)

Audit Fee Adjustment - 28,263

Published Net Asset Value 4,953,088,950 4,660,700,014

Number of units outstanding 261,551,196.0 272,633,804.6

Net Asset Value per Unit 18.9374 17.0951

** An impairment provision is made against the income tax receivable balance amounting to Rs.12,697,763/-.

31 December

The fees charged by the Management Company, Trustee and other related parties for services provided during the year and the balances

outstanding from such dues as at period end are as disclosed below:

RECONCILIATION BETWEEN THE NET ASSET VALUE AS PER FINANCIAL STATEMENTS AND THE PUBLISHED NET

ASSET VALUE

RelationshipNo. of

Units

Total interest

held

Distribution

paid or payable

by the Fund

Value of units

held

The Bank balance held at Deutsche Bank AG as at 31 December

DFCC Bank PLC (Joint share holder of Acuity Partners (Pvt) Ltd) Interest earned from DFCC Bank PLC is amounting to Rs. 40,486,583/-

(2018 - Nil). Outstanding fixed deposits maintained with DFCC Bank

PLC as at 31st December 2019 is Rs. 245,231,890/- (2018 - Nil)

Charge for the year

31 December

Payable as at

75

76

GUARDIAN ACUITY MONEY MARKET GILT FUND


16 JANUARY 2020

77

GSM/SKWD/JJ


TO THE UNIT HOLDERS OF GUARDIAN ACUITY MONEY MARKET GILT FUND


Opinion

We have audited the Financial Statements of Guardian Acuity Money Market Gilt Fund (‘the Fund’), which comprise

the Statement of Financial Position as at 16 January 2020, and the Statement of Profit or Loss and Other Comprehensive

Income, Statement of Movement in Unit Holders’ Funds and Statement of Cash Flows for the period then ended, and

Notes to the Financial Statements, including a summary of significant accounting policies.


at 16 January 2020 and of its financial performance and its cash flows for the period then ended in accordance with Sri


Basis for Opinion






Emphasis of Matter

We draw attention to Note 2.1.2 to the financial statements which explains the Fund’s inability to continue as a going

concern and the Manager’s intent to liquidate the Fund. Accordingly, the financial statements have been prepared on a

basis other than as a going concern as described in Note 2.1.2. Our opinion in not qualified in respect of this matter.






In preparing the financial statements, the Manager is responsible for assessing the Fund’s ability to continue as a

going concern and when the Manager decides that it is not a going concern, disclosing as applicable, matters relating

to use of the basis of accounting other than going concern.


(Contd...2/)

78




















Conclude on the appropriateness of the Manager’s use of the other than a going concern basis and assess the

adequacy of related disclosures based on the audit evidence obtained. If we conclude that the other than a

going concern basis of accounting and related disclosures are inadequate, we are required to modify our report.



fair presentation.






13 February 2020

Colombo


NOTES TO THE FINANCIAL STATEMENTS Period ended 16 January 2020

-79-


Guardian Acuity Money Market Gilt Fund is an open ended unit trust Fund approved by the Securities and

Exchange Commission of Sri Lanka. The Fund was launched on 24 March 2015.


Sri Lanka. The registered office of the management company is located at No.61, Janadhipathi Mawatha


Colombo 03.

The investment objective of the Fund is to provide a secure annual income by investing in a portfolio of

Government securities.



-80-



The financial statements have been prepared on other than a going concern basis of accounting as further

explained under Note 2.1.2 reflecting the cessation of the operations of the Fund based on a decision made by

the Manager and the Trustees.

The financial statements are presented in Sri Lankan rupees, which is the Company’s functional currency


The financial statements which comprise the statement of financial position as at 16 January 2020, Statement





of Sri Lanka.

2.1.2 Going Concern

The Fund has no investments as at the reporting date as all of the unit holders have redeemed their units during

the year and remaining units transferred to Guardian Acuity Money Market Fund on 16 of January 2020.

Considering the above factors, the Trustee has been informed and its approval obtained on January 21, 2020

to terminate the Fund. Accordingly, the Manager has decided to prepare and present the Fund’s Financial

Statements on a basis other than as a going concern.

As a result, following accounting policies were adopted in relation to assets and liabilities as of the reporting

date;

all assets are stated at the lower of cost and recoverable amount; and

provisions are made for all known liabilities except the expenses which will be borne by the

management company as stated below.

Further, Board of Directors of the Management Company “Guardian Acuity Asset Management Limited” has

passed a board resolution to bear all future expenses pertaining to the Fund including audit fees.

2.1.3 Comparative Information

The Comparative figures may not be directly comparable as the financial statements are prepared for a period

from 01 January 2019 to 16 January 2020 as the Fund Manager has decided to terminate the Fund. Accordingly,

the Fund has adopted the following policies detailed under 2.1.2 to determine the carrying value of assets and

liabilities as of 16 January 2020.



-81-




All financial assets and liabilities are initially recognized on the trade date, i.e. the date that the Fund becomes

a party to the contractual provisions of the instrument. This includes purchases or sales of financial assets that


place.

Initial measurement of financial instrument



fair value plus transaction costs that are directly attributable to the acquisition of the financial asset.

Transaction costs of financial assets carried at FVPL are expensed in the statement of profit or loss.


From 1 January 2018, the Fund classifies all of its financial assets in the following measurement categories:

those to be measured at amortized cost


Financial liabilities of the Fund are measured at amortized cost, and includes all financial liabilities, other than

those measured at fair value through profit or loss. The financial liabilities of the Fund include accrued



Amortized cost: A debt instrument is measured at amortized cost if it is held within a business model whose



Debt Instruments at amortized cost comprise of investments in Treasury bill repurchase agreements. However

as of 16 January 2020 the Fund did not have any investment in debt instruments at amortized cost. Any gain

or loss arising on de-recognition is recognized directly in the Statement of Profit or Loss and presented as

realized gain/ (loss) on debt Instruments held at amortized cost.




Or



Or




A gain or loss on a debt investment that is subsequently measured at FVPL is recognized in profit or loss and

presented net within unrealized gains/ (losses) in the period in which it arises. Financial assets at fair value

through profit or loss comprise of investment in treasury bills. As of 16 January 2020, the Fund has no such

investments.



-82-


A financial asset is derecognized when,

a. The rights to receive cash flows from the asset have expired,

b. The Fund has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay


and either,


The Fund has neither transferred nor retained substantially all the risks and rewards of the asset, but

has transferred control of the asset







Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Fund and the


recognized.

(i) Interest Income




the financial asset. Interest income of treasury bills and treasury bills repurchase agreements are recognized

gross of notional tax credit until 31 March 2018. Subsequent to the enactment of the new Inland Revenue Act

No. 24 of 2017, effective 01 April 2018, an Eligible Unit Trust would not be liable for Income Tax on any

Income which is a pass through to its unit holders. Accordingly, post 31 March 2018, the Fund has considered

all income as being a pass through to its unit holders (Refer Note 2.2.4 and 4.1).

(ii) Unrealized gains/(losses) on financial assets held at fair value through profit or loss

Unrealized gains/(losses) on financial assets held for trading includes all gains and losses arise from changes

in fair value of financial assets held at fair value through profit or loss as at the reporting date.


Cash and cash equivalents in the statement of financial position comprise cash at bank.

For the purpose of the statement of cash flows, cash and cash equivalents consist of cash and cash equivalents

as defined above.



-83-

2.2.4 Income tax

Until 31 March 2018, the Fund is liable to pay income tax at the rate of 10% in accordance with the Inland

Revenue Act No.10 of 2006. Subsequent to the enactment of the new Inland Revenue Act No. 24 of 2017,

effective 01 April 2018, an Eligible Unit Trust would not be liable for Income Tax on any Income which is a

pass through to its unit holders. Accordingly, post 31 March 2018, the Fund has considered all income as being

a pass through to its unit holders

2.2.5 Expenses


Management fee - 0.30% p.a of Net Asset Value of the Fund

Trustee fee - 0.20% of Net Asset Value (NAV) of the Fund if NAV up to Rs. 500Mn

- 0.18%, if NAV Rs. 500Mn – Rs. 1,000Mn

- 0.16%, if NAV Rs. 1,000Mn – Rs. 2,000Mn

- 0.15%, if NAV above Rs. 2,000Mn

- with a further sum of Rs. 25,000/- per month

Effective from December 17, 2018, the Manager and the Trustee have waived off the management and trustee

fees respectively.









(a) Financial Instruments

The Fund’s principal financial assets comprise the investments in treasury bill, treasury bill repurchase

agreements and cash at bank. The main purpose of these financial instruments is to generate a return on the

investment made by Unit Holders. The Fund’s financial liabilities comprise accrued expenses and other

payables which arise directly from its operations.


investments in treasury bills repurchase agreements are classified as ‘debt securities at amortized cost’.

Investments in treasury bills are classified as ‘fair value through profit or loss’, meaning they are valued at fair

value. Amounts attributable to Unit Holders are classified as ‘Unit Holders Funds’ and are carried at the

redemption amount being net asset value. Payables are designated as ‘Accrued expenses’ at amortized cost.

(b) Financial risk management objectives, policies and processes

Risk arising from holding financial instruments is inherent in the Fund’s activities, and is managed through a

process of ongoing identification, measurement and monitoring. The Manager is responsible for identifying

and controlling the risk arising from the financial instruments held in the Fund and has policies for managing

each of the risks identified below.



-84-



The Fund’s overall risk management program focuses on ensuring compliance with the Fund’s Trust Deed

and seeks to maximize the returns derived for the level of risk of which the Fund is exposed. Financial risk

management is carried out by the Management Company.



3.1 Market risk

Market risk is the that the fair value of future cash flows of a financial instrument will fluctuate because of

changes in market prices

Price Risk

Price risk is the risk that the fair value of the Fund’s investment in trading securities in fluctuates as a result of

changes in the price of the Fund’s investments in trading securities. Price risk exposure arises from the Fund’s

investment portfolios.

3.2 Interest rate risk


interest rates.



sensitivity analysis. However, due to the short term nature of the instruments it is reasonably expected that the

fluctuation in interest rate will not materially impact the net assets value of the Fund. The table below

summarizes the Fund’s exposure to interest rate risks

As at 16 January 2020 Floating

interest

rate

Fixed

interest rate

Non- interest

bearing

Total

Rs. Rs. Rs. Rs.

Financial assets

Cash and cash equivalents - - 13,140 13,140

Total exposure - - 13,140 13,140

As at 31 December 2018 Floating

interest

rate

Fixed

interest rate

Non- interest

bearing

Total

Rs. Rs. Rs. Rs.

Financial assets


223,845

223,845

Total exposure - -

223,845

223,845



-85-

3.3 Credit risk


cause the Fund to incur a financial loss.

The Fund’s exposure to credit risk from its financial assets arises from default of the counter party, with the

current exposure equal to the fair value of financial instruments. It is the Fund’s policy to enter into financial

instruments with reputable counter parties. The investment grade rating of the primary dealers in relation to

Treasury bill repurchase agreements have not been considered as the Fund has considered the collateral that

the primary dealers provided which are government bills and bonds rated as AAA.

The Fund is also subject to credit risk on its bank balance and receivables. The credit risk exposure on these

instruments is not deemed to be significant.

3.4 Liquidity risk











Furthermore the unit trust code requires a minimum of 3% of the deposited property to be maintained in cash





3.5 Capital risk management




unit holders.







-86-


The movement in the Unit holder’s Funds as at 16 January 2020

I. In term of Value

Rs. Unit Holders' Funds as at 01 January 2019

Total Comprehensive Income for the Period (15,583)

25,038

Creations during the period 1,000

Redemptions during the period (10,455)

Net decrease due to Unit Holders transactions (9,455)

Unit Holders' Funds as at 16 January 2020

-

II. In term of No of units

Opening no of units as at 01 January 2018 60

Unit creations during the period 7.98

Unit redemptions during the period (67.98)

Closing no of units as at 16 January 2020 -





STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOMEPeriod ended 16 January 2020

Notes

Period Ended Year Ended

16 Jan 2020

31 Dec 2018

Rs. Rs.

INCOME

Interest Income 4 - 112,662,646

Realised Loss on Financial Assets at Fair Value Through Profit or Loss - (72,506)

Unrealised Gain on Financial Assets at Fair Value Through Profit or Loss - (2,960,520)

Investment Income - 109,629,620

Other Income 18,092 -

18,092 109,629,620

EXPENSES

Management Fees - (3,116,586)

Trustee and Custodian Fees - (2,548,723)

Audit Fees 5,896 (198,500)

Bank Charges 1,050 (83,100)

Impairment Provision for Carried Forward Notional Tax Credit 5 - (1,635,719)

Other Expenses - (130,563)

6,946 (7,713,191)

NET LOSS BEFORE TAX 25,038 101,916,429

Income Tax Expense 5 - (4,879,091)

NET (LOSS)/PROFIT AFTER TAX FOR THE YEAR 25,038 97,037,338

TOTAL COMPREHENSIVE (LOSS)/INCOME FOR THE YEAR 25,038 97,037,338

The accounting policies and notes on page 91 form an integral part of the Financial Statements.

87


STATEMENT OF FINANCIAL POSITIONPeriod ended 16 January 2020

Notes As at As at

ASSETS 16 Jan 2020 31 Dec 2018

Rs. Rs.

Cash and Cash Equivalents 6 13,140 223,845

13,140 223,845

LIABILITIES

Accrued Expenses 7 - 238,094

Other Payables 13,140 1,334

13,140 239,428

NET ASSETS - (15,583)

UNIT HOLDERS' FUNDS

Net Assets Attributable to Unit holders - (15,583)

- (15,583)

The Manager is responsible for these Financial Statements and these Financial Statements were approved by the Manager.

Signed for and on behalf of the Manager by;

………………………… …………………………

Director Director



13 February 2020

Colombo

88


STATEMENT OF MOVEMENT IN UNIT HOLDERS' FUNDPeriod ended 16 January 2020

As at As at

16 Jan 2020 31 Dec 2018

Rs. Rs.

UNIT HOLDERS' FUNDS AS AT 1 JANUARY (15,583) 1,851,440,598

Total Comprehensive Income for the Period 25,038 97,037,338

Creation of Units 1,000 2,586,764,454

Redemption of Units (10,455) (4,535,257,973)

Net Decrease due to Unit holders' Transactions (9,455) (1,948,493,519)

UNIT HOLDERS' FUNDS FOR THE PERIOD ENDED 16 JANUARY 2020 - (15,583)


89


STATEMENT OF CASH FLOWSPeriod ended 16 January 2020


16 Jan 2020 31 Dec 2018

Rs. Rs.


Interest Received - 153,568,587

Other Income Received 18,092 -

Management Fees and Trustee Fees Paid (72,070) (6,304,669)

Other Expenses Paid (159,077) (363,140)

Net Investment from Treasury Bill/Bond Repos - 1,300,577,340

Net Investment from Treasury Bill and Bonds - 499,557,394

Net Cash Flow (used in)/generated from Operating Activities (213,055) 1,947,035,512


Cash Received on Creation of Units 1,000 2,586,764,454

Cancellation of Unit Redemptions 1,350 -

Cash Paid on Redemption of Units - (4,535,256,639)

Net Cash generated from/(used in) Financing Activities 2,350 (1,948,492,185)

Net Decrease in Cash and Cash Equivalents (210,705) (1,456,673)

Cash and Cash Equivalents at the beginning of the year 223,845 1,680,518

Cash and Cash Equivalents at the end of the year 13,140 223,845


90


NOTES TO THE FINANCIAL STATEMENTSPeriod ended 16 January 2020

4. GROSS INCOME Period Ended Year Ended

16 Jan 2020 31 Dec 2018

Rs. Rs.

Interest on

Treasury Bill / Bond Repurchase Agreements (4.1) - 89,465,264

Treasury Bills (4.1) - 23,197,382

- 112,662,646

4.1

5. TAXATION Period Ended Year Ended

16 Jan 2020 31 Dec 2018

Rs. Rs.

5.1 Tax expense for the period/year - 4,879,091

- 4,879,091

5.2


16 Jan 2020 31 Dec 2018

Rs. Rs.

Net profit before tax 25,038 101,916,429

Taxable net profit for the year (Applicable 03 months profits up to 31.03.2018) 48,790,910

Total statutory income (2.2.4) - 48,790,910

Income tax (2018-10%)

- 4,879,091


Income Tax Receivable 1,635,719 1,635,719

Impairment Provision for Carried Forward Notional Tax Credit (6.4) (1,635,719) (1,635,719)

- -

5.4

6. CASH AND CASH EQUIVALENTS Period Ended Year Ended

16 Jan 2020 31 Dec 2018

Rs. Rs.

Cash at Bank 13,140 223,845

13,140 223,845

Income tax expense reported in the Statement of Profit or Loss and Other

Comprehensive Income

As of 16 January 2020, the Income Tax Receivable balance comprises of Notional Tax Credit carried forward of Rs.

1,635,719/-. Since the Fund Manager is in the process of liquidating the Fund, a full provision is made against the Income

Tax Receivable balance.

A reconciliation between the tax expense and the product of taxable profit multiplied by the statutory tax rate is as

follows:

As detailed under Note 2.2.2, interest income of Treasury Bill Repurchase Agreements and Treasury Bills are recognised

gross of notional tax credit until 31 March 2018. Subsequent to the enactment of the new Inland Revenue Act No. 24 of

2017, effective 01 April 2018, Notional Tax is not applicable for Treasury Bills /Treasury bill Repurchase Agreements. The

Fund considers such income to be a pass through to its unit holders.

91