What are your views on fixed income market for the medium term?
The fixed income markets have performed well across the duration and credit spectrum. The prime driver for this performance has been significant improvement in macro parameters and structural improvement in liquidity conditions.
We have a very positive and constructive view on these macro parameters going forward and hence we believe the risk return trade-off remains hugely favourable for fixed income markets.
Where do you see the direction of yield curve in the near to mid-term? What will be the key driving force for yields?
We expect bull steepening of the yield curve over the next 12 to 24 months.
Our view is driven by expectations of further cut in the repo rate by 50 bps, structurally positive liquidity conditions, stable, improving macro environment supporting lower yields including low and stable inflation trend and continued discipline on the fiscal side. A gradual turnaround in the economic cycle will also be supportive for investments in good quality private sector corporate bonds.
How have you re-positioned your portfolio after the recent episodes of downgrading of a few companies by rating agencies?
We are one of the first fund houses to launch a dedicated credit fund in 2005. The last decade has seen multiple economic and market cycles. With very high level of due diligence, extensive research and structuring capabilities, we ensure that we manage credit risk efficiently. In the last 4 to 5 years, the upgrade to downgrade ratio for our debt portfolio is nearly 2.5 times.
The credit portfolios also run low to moderate duration because of our firm belief that as we go down the credit curve the visibility reduces for longer tenor investments, due to business cycle dynamics and management related issues. Our flagship credit fund - Reliance Regular Savings (Debt) has consistently run a duration of below 2 years, along with granularity in terms of exposures and cash flow, and a preference for self liquidating structures, which ensures regular cash flows even during tight markets.
Still, there are obvious lessons here to be leant, in terms of restricting concentration risk both at issuer and portfolio levels. While the markets are stabilising we are also running higher cash levels and will be patient in terms of putting this cash to use.
To what extent can debt fund managers rely on credit rating agencies?
We firmly believe that we are in the business of predicting rather than following rating changes. We have to be very forward looking in our approach when we analyze companies, and can't rely on past performance.
Ratings can be a reference point, when we start analyzing a credit , but the decision to lend and the structure in which the lending needs to be done has to be purely driven by thorough in house research and structuring efforts. Ultimately, a lending decision is not an opinion but a real transaction.
Gilt funds have seen healthy inflows in the recent past. Would you recommend investors to consider investing in gilt funds at this juncture?
Investors need to have adequate duration exposure in their portfolios. Depending on the investment horizon, they can choose between pure gilt funds or dynamic bond funds, which will actively manage duration exposure on behalf of the investor.
How often do you re-balance your portfolio?
The internal investment policy clearly defines the ranges within which any scheme operates, whether it is related to duration, credit risk or liquidity. These ranges define the boundaries for that fund within which the portfolio manager will make both strategic (core) and tactical allocations. Typically in a bond fund, at least 70-75% of the allocation is core allocation, which reflects our medium term view on rates, credits and spreads. Hence, turnover ratios will not be very high on a daily basis. The need for portfolio reallocation arises only when there is a change in view on any of the above mentioned three variables.
What is the criteria for entry and exit for bonds in your portfolio?
As mentioned above, the overall allocation within various asset classes (money market, G-Sec and bonds) is driven by the fund positioning and the medium term market view. Within this allocation, entry and exit in corporate bonds is driven by the credit comfort on the issuer and the structure, yield and spread views, and the relative attractiveness of that bond vis-à-vis others, in that order.
What category of funds would you recommend to investors at this juncture?
Investors with a 12 to18 month time horizon can invest in short term bond funds, which will benefit from rate reduction and curve steepening.
Investors with longer term horizon of 2 to 3 years and beyond should allocate between dynamic bond funds and corporate bond funds, depending on their risk appetite for duration and credit.
While choosing corporate bond funds, investors should consider the fund house pedigree and track record, credit research strength and the experience in managing these funds over longer periods of time.
