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Corporate route to higher returns

Source : BUSINESS_STANDARD
Last Updated: Fri, Dec 07, 2012 21:01 hrs

pFocus on corporate bonds and keeping credit risk under check helped strongSachin Padwal-Desai strongof Franklin Templeton top the returns chartsppWhile there is unanimity on the trending down of interest rates over the next six months and fund managers are increasing tenure in favour of longer duration debt paper things weren&rsquot as clear a year ago Since March 2010 to December quarter last year the Reserve Bank of India RBI had raised rates by 350 basis points Says Sachin Padwal-Desai &ldquoThe last year was characterised by a difficult policy environment and interest rate direction was uncertain&rdquo Despite the challenges he managed to give returns in the range of 92 per cent to 123 per cent comfortably beating their respective benchmarks which gave returns in the range of 86 per cent to 95 per cent A balanced approach of top down economyyield curve direction and bottom up scrutiny of individual securities analysis has helped the funds deliver consistent returnsppWhile debt fund managers were increasing tenurefocussing on gilt funds last year on hopes of a rate cut Padwal-Desai who manages five funds to the tune of Rs 10000 crore instead chose to focus on corporate bonds &ldquoAt the start of 2012 in anticipation of rate cuts there was a lot of interest in gilt fundsexposure However our macroeconomic analysis indicated a cautious stance and we remained focused on corporate bondsaccruals&rdquo he saysppWhile exposure to corporate bonds most paper in his portfolio are AA rated come attached with higher risk extensive credit research and thorough in-depth analysis company interactions and going beyond published ratings have helped curtail risk &ldquoWe were careful in avoiding undue credit risk in our portfolios&rdquo says this IIM Bangalore alumnus But given the rising non-performing assets and increasing leverage would this not lead to increasing risk for the portfolio The fund house believes that NPAs are manageable and credit issues are concentrated in select sectors Moreover the on-going easing in borrowing and input costs should help ease pressures in the near to medium term &ldquoWe try to mitigate security risk and add alpha through bottom-up analysis and undertake rigorous research on companies before we invest&rdquo says the metallurgical engineer who has been in the investment management field for over 12 years nowppBoth at the fund house and the scheme level there is a structured process aimed at delivering consistent returns across market and rate cycles While all investments go through filters of credit liquidity and interest rate risks the funds are actively managed without taking an extremely aggressive stance &ldquoThe objective is to limit downside and to exploit opportunities available while at the same time staying within prudent limits&rdquo he says So irrespective of the market environment the process ensures that the fund house looks at mispriced securities based on specific investment criteria In addition to this key challenge for an income fund manager he believes is the lack of depth in the local corporate bond markets and absence of a recognised benchmark yield curveppGoing ahead given the imminent cut in interest rates how should investors play the falling rate cycle &ldquoFunds focused on corporate bonds should continue to do well Besides investors could also consider long-dated gilt funds but should be ready for short-term volatility History clearly suggests that long-maturity bond funds with higher sensitivity to interest rate changes tend to do well in an environment of falling rates&rdquo he saysppWhile the fund house believes that there appears a high probability of rate cuts the timing and pace would depend on the growth trends and inflationtwin deficits However with inflation remaining sticky will the RBI cut rates &ldquoWe don&rsquot expect interest rates to come down in hurry&rdquo he says While the central bank raised interest rates about a dozen times since March 2010 there was a single cut over the last year Uncertain policy environment has also meant increased investor interest in dynamic bond funds The dynamic funds in India play on maturities and also tend to take credit calls Their performance in recent times according to the fund house can be attributed mainly to the bullish market rather than any specific tactical rate calls In addition to this investors have also moved in to open-ended actively managed income funds as compared to the fixed maturity plans which held sway last yearp


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