ICICI Prudential Short Term Fund won the Morningstar Fund Award 2022 under the Short Duration category. Manish Banthia, Senior Fund Manager - Fixed Income, ICICI Prudential AMC, takes us through how the fund house has remained immune to credit events and how he is striking a balance between liquidity, safety and return.
During November 2009-December 2021, the fund outperformed most of its category peers. What worked in your favour?
Apart from active duration management based on a view on interest rates, the fund has used a complete breadth of strategies ranging from State Development Loans (SDLs), Overnight Indexed Swap (OIS) spreads, investing in Bank Perpetual Bonds, AA-rated corporate bonds, Floating Rate Bonds, positioning on yield curve etc. to generate alpha returns. The approach while deploying these strategies has always been to choose the ones which provide high margins of safety taking benefit of market dislocations or extremes. The fund has always followed discipline and risk management frameworks while using these differentiated strategies. The approach has been akin to value-based investing in equity markets.
Can you take us through your credit selection strategy as your fund house has been relatively immune to the credit events witnessed by the industry in the past?
It helped that we were probably one of the early movers among the fund houses having instituted an in-house independent risk management team entrusted with overseeing credit evaluation and approval processes. The risk management team is independent of the investment team and does not have any return targets.
We have always believed that credit rating is one of the inputs in investment decisions, but not the sole determinant. The decision to onboard a credit is taken after detailed due diligence. As part of the credit due diligence, we consider various aspects such as financial and operating parameters, management profile, industry outlook, competitive positioning, key risks, mitigants, etc. This discipline has helped us to avoid potential problems.
The two key tenets of our credit decision-making have been the focus on client selection and avoiding concentration. We follow the “four-eyes” concept for approval of credit investments with the decision to invest in any debt instrument being taken after in-depth credit review and not based on the sole judgment of the fund manager. This helps in mitigating individual biases and makes the decision-making more reliant on credit processes. This philosophy has enabled us to deliver a superior investment experience to our investors.
How are you striking a balance between liquidity, safety, and return to ensure investors have a better experience with the fund?
There is a basic framework on which every fund operates. Here, the fund predominantly invests in AAA-rated and government securities. So, liquidity is not a concern. From a credit selection point of view, the process earlier discussed helps in the right asset selection. In effect, a balanced approach between safety and liquidity aids in consistency and continuity of return.
How has been the impact of the Ukraine-Russia war on the Indian fixed income market and how are you tackling it?
The Ukraine-Russia conflict indirectly impacts India by way of increased commodity prices, disruption in supply chains and heightened risk premiums in financial markets. So, from that perspective, risk management becomes paramount in terms of portfolio management. Compared to past years, the room for manoeuvrability for the Reserve Bank of India too has substantially reduced. This calls for a certain degree of caution. From a historical standpoint, Indian fixed income remains expensive so there is no point in being overly aggressive in terms of investing. In such an environment, investors can consider investing in Floating Rate Bonds as this product benefits from interest rate hikes.
How do you plan to sustain the performance of the fund going ahead?
We will continue to work on the framework and strategies followed thus far. The fund will not shy away from taking a differentiated stance on the market compared to its benchmark or peer group.
Winners of Morningstar Fund Awards 2022
