At the fixed income panel discussion held at the Morningstar Investment Conference last month in Mumbai, three leading fixed income CIOs shared their key takeaways they would want to leave with advisers.
Maneesh Dangi, Co-Chief Investment Officer, Birla Sun Life AMC
- Big money would always be made if it is appropriately managed dynamically and when I say dynamic, it has to be really unconstrained.
If one well, an unconstrained strategy, which delves into both duration as well as carry at appropriate time, would deliver substantial alpha vis-à-vis any passive strategy, be it a pure duration strategy, which internally could be actively-managed, or pure credit strategy. I manage a pure credit strategy, let's say, MTP, but I'm constrained by the fact that even in 2014 or 2015 when I see rates moving down dramatically and it's quite commonsensical, not only in hindsight but even then one could have argued that it's too high on a 10-year bond and you would make a lot of money by investing in long-tenured security. These funds are constrained.
Many believe that these funds have to necessarily invest in carry-only or credit-only, though there may not be appropriate times to invest in carry. An investor would optimize itself if he participates in an unconstrained strategy such as dynamic.
- Question the bandwidth and the capability that the fund managers and fund houses have built, especially on the credit side.
It's a pretty strain-full job. I run a team of eight members and – in the credit team I mean – and I find that I still need to add more people.
We need much more experience than you would typically need in duration or liquidity management, because the guys would have seen cycles and how promoters and managements have actually behaved through the cycles from 1980s till date. That bit if history must reside in your fund management platform. It cannot be borrowed. How a particular corporate's intentions have moved. That quantitative capability has to reside on your fund management platform because you can't check the quality of it, because only post facto exposed you would realize that the fund manager was good or bad. At least the bare minimum basic check has to be there that the good bandwidth is available.
Investors must ask about the capabilities and capacities built and what the plans are. Only if you get affirmative answers that the fund house is ready to invest a lot of money in power and energy, it is when you should kind of participate in that platform as far as credit is concerned.
Rahul Bhuskute, Head - Structured and Credit Investments, ICICI Prudential AMC
Two years back we were possibly the biggest bull in the market on duration. We feel that perhaps this is the right time to get into accrual funds. The risk-return trade-off seems to be far better here than 2 to 3 years back.
We believe in purity of products. So, I think, ultimately what you see on the can is what you get. Unconstrained strategies might work but they come with their own sense of risk since you have an asset allocation risk on top of the credit risk and duration risk.
Would a July 2013 kind of event affect the dynamic bond fund more or an accrual fund? We are slowly getting into the scenario where the rates cuts are largely over and the possibility of a rate hike - I think over a period of time you will see that probability moving up.
From that perspective, I would definitely advise advisers to look at accrual funds. Look at the right shop. Look at the decision-making process of that shop. Is it just one person taking the decision or there is a proper system? Is there a risk department also looking at the same proposals? Very important.
At this point in time, invest in accrual funds and invest with the right fund manager.
Suyash Choudhary, Head – Fixed Income, IDFC AMC
Suppose the risk-free rate goes to 6.5%, but even today at 6.70-6.75%, one large theme with advisers is probably a sense of panic that two years back rates were at a different level. It was so easy to make the asset allocation decision. You can buy almost everything and it's 8% to 9%. But at a 6.5% risk-free rate where an AAA corporate bond is basically residing at 7.10-7.15%, some of the retail plans ex of expense will probably not make that much sense anymore.
The natural propensity in a phase like this is to dilute your risk parameters. I completely agree that as the trade moves away from duration, the industry will naturally increase allocation to accrual, although I don't see why we call it accrual, it's credit risk products and we are going to do one soon. So, we are pretty much on board. But the point is, there is a natural tendency to go towards this away from the risk-free, away from the AAA, which is the natural order of things as flow moves as rates begin to bottom out.
- Be aware of what your risk parameters are. Be aware of your risk appetite. Because accidents will happen. Credit in India is still an asset class which is unhedgeable/ unliquidatable. It doesn't give you smooth price discovery.
This is not an anti-credit speech. But the fact is that you have to understand the nature of that risk in India versus the nature of the risk of the discoverable part of the bond curve, which is, sovereign, AAA, probably AA+ where NAVs are seamless where hedging and probably liquidity is available and accordingly, decide your risk parameters. Because it can't be that as we compress the risk-free towards the 6 mark, you suddenly become a very adventurous investor from what used to be the case two years back. So, it always happens in bull markets. It's greed that kind of overtakes fear.
The last accident that happened in credits basically exposed not the fact that it was an un-called-for risk to have been taken because the NAVs smoothened over eventually, people got back a lot of the money. But in that phase there was enough discussion about “should I redeem?”, “should I pay the exit load?”, “should I pay taxation disadvantage and redeem?" And that is all just a manifestation of the fact that there were sitting in the product those who had no business sitting there.
- The question to ask in this phase of the market where the risk-free doesn't sound that exciting is: should I dilute my return expectation to some extent cognizant of the fact that tax-free rates are heading towards 6%, bank fixed towards 7%, AAA corporate at 7.05-7.10% and inflation is at 4.5-5%? Or should I unlimitedly expand my risk appetite?