UTI Mutual Fund has won the Morningstar Best Fund House (Debt) award for three years in a row. The other nominees were Aditya Birla Sun Life Asset Management and Franklin Templeton Asset Management (India).
Amandeep Chopra, Group President and Head of Fixed Income at UTI AMC, chats with Morningstar on the stellar performance across debt funds and how he plans to sustain that going ahead.
How have you been able to make a mark on the debt side by delivering consistent returns?
Thank you for this recognition for the third year in a row. We value this affirmation of our strategies and performance.
Our ability to deliver consistent returns over longer-term is a result of the combined experience of a motivated and enthusiastic fixed income team. The knowledge sharing in the team with the backbone of a strong research-backed process allows us to translate several short-term ideas into active strategies. We combine top-down and bottom-up approaches to investing which allows us to adapt to different market conditions and leverage the investment opportunities at any given time. This has helped us deal with shorter market cycles and higher levels of uncertainty, which has become even more pronounced after the global financial crisis.
What is your fund house strategy for debt funds?
Our core strategy remains the same when we manage our debt funds. What helps us is that each of our fund has a very clear proposition and we never stray from the appropriate strategy just to chase momentum or short term out-performance.
Your outlook in the near future?
In the near term, given our outlook on rates and markets, we feel we need to remain underweight on duration and focus on accrual but do not constrain our flexibility to shift our stance in light of emerging news or events.
Do you think the best of the bond market is behind us? In which direction do you see the yields moving in the near to medium term?
Well, it depends a lot on your time horizon. The trend reversal in key macros do indicate that the best is behind us, in the very near term, as we head into a period of heightened uncertainty with a fractured market sentiment. However, the appropriate way to look at the markets is that given the combination of structural changes in India and cyclicality of economic variables, over a longer-term such reversals present an opportunity to rebalance asset allocation. So while one-year returns from bond funds may not look attractive, the longer-term returns for patient investors in UTI Dynamic Bond Fund has been over 9% over 5, 7 years. Additionally, there are options for investors in other debt fund categories like Short Term and Income Opportunities in such a scenario.
Like I said earlier, given the present trend reversal in key macros and a fragile sentiment, the bias for rates is to head up a bit more. But the markets are clearly beginning to look cheap with the 10-year trading at term premia that’s nearly two standard deviation from the mean and offering a real rate of return even after factoring in a higher consumer price index, or CPI, inflation. So, I would not be surprised to see rates head up a bit from here and then investors begin to see value and start buying in which could narrow this spread going ahead.
Based on your reading of the current macro-economic environment, what are the major negatives that could impact the fixed income market and what factors are you closely watching?
Currently, the rates as represented by the 10-year government security at 7.80% discounts most of the negative local factors and a bit of the global factors as well. However, the uncertainty around the path to be taken by the global central banks led by the US Fed on rates and liquidity with the trend in inflation (read Oil!) in the backdrop of strong growth is a concern for our markets.
What is your view on the regulator’s mandate for consolidation of schemes? How will it affect the performance of debt funds?
We view the recent mandate to consolidate schemes positively as a means to de-clutter the product range and standardize the categories. It definitely helps in aligning the nomenclature with the relevant scheme characteristics. This will eliminate confusion and allow a meaningful comparison of funds. While it is not perfect in all aspects since it takes away the flexibility that the fund managers were used to earlier as well as limits product innovation. I'm sure there will be some tweaking by SEBI later on based on experience and execution, just the way they have permitted some deviations on defensive considerations.
I don't see this move posing a challenge for debt fund performance, if you were already following the concept of "truth in labelling" and maintaining a consistent fund positioning. The terms are consistent with the nature of the fund categories and prevent extreme positions or strategies. The challenge I see is that the degree of freedom is somewhat narrowed down, especially for funds with a narrower duration band and minimum exposure at 80% and such like.
Your advice to investors looking to invest in debt funds?
For 2018, our advice is similar to the one we gave in 2017, which is being underweight on duration and focus on capital preservation with lower volatility of returns. This played out well in ultra-short term and short-term funds (including income opportunity fund) which outperformed long-term bond funds. I feel fixed income plans, or, FMPs, present a good opportunity again for risk-averse investors wanting to capture the present levels. They cannot only beat the deposit rates but also offer real rates of 175-200 basis point. Finally, it may be a good time to begin a systematic investment plan in income funds at these heightened yields.
Valuations are supportive, there is a reasonably strong possibility that with the negative trends in oil, inflation, supply etc. peaking off and the Reserve Bank of India continuing with a neutral stance, one could see decline in yields.
