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The winning strategy

The winning strategy
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First Published: Fri, Mar 13 2009. 10 07 PM IST

Managing duration: ICICI Prudential’s Rahul Goswami
Managing duration: ICICI Prudential’s Rahul Goswami
Updated: Fri, Mar 13 2009. 10 07 PM IST
Mumbai:Category: India short government
ICICI Prudential Asset Management Co. Ltd’s Gilt Treasury Plan has won Morningstar’s award for the best fund in the India short government category, beating 14 other contenders.
Managing duration: ICICI Prudential’s Rahul Goswami
Morningstar said there are 18 funds in this category, which collectively manage about Rs2,000 crore. The rater defines short-government portfolios as those that have at least 90% of their bond holdings in bonds backed by the Indian government or by government-linked agencies. These portfolios have average effective maturities of up to three years. They are relatively less sensitive to interest rates, and thus have lower risk.
On an average, this category had one-year returns of 10.02% and three-year annualized returns of 7.15%, relatively sedate compared with other debt fund categories. ICICI Prudential Gilt Treasury Plan had a one-year return of 20.65% and a three-year return of 11.25%.
Rahul Goswami, co-head of fixed income at ICICI Prudential Mutual Fund, who manages the Rs1,000 crore (at the end of February) fund, spoke on how an active management of duration and liquidity makes this fund different from its peers. Edited excerpts:
What is your investment philosophy?
The underlying philosophy is to prudently manage downside risks. The fund seeks to limit volatility by deploying money in short-term gilts. The objective is to closely manage portfolio risks arising out of changes in the market rates by actively managing the duration of investment in the portfolio.
How did you manage the liquidity crisis in October-November?
That was a challenging phase for economies and companies globally as liquidity was tightening and credit crisis was deep. However, with RBI’s (Reserve Bank of India) prudent policies, the scenario has improved significantly. In fact, inflows into our debt funds have increased significantly since November.
How different is your fund from its peers?
Active management of duration, maturity and liquidity is the major advantage derived from this fund. For instance, when interest rates were high, the average portfolio was low. In the current scenario of downward interest rates, the maturities are relatively longer. The advantage of the fund lies in its successful portfolio management strategy.
What kind of investor should invest in your fund?
The risk-free gilt funds mainly invest in sovereign bonds that have outperformed in the current credit market. Such funds are an ideal investment option for investors who don’t have the appetite for high interest-rate volatility. With investors increasingly becoming risk-averse due to the current liquidity and credit scenario, gilt funds have become an attractive investments option for investors.
Is the best time for bonds over?
The major factors influencing interest rate direction are inflation, that is showing a sharp downward trend; lower growth in GDP (gross domestic product) and industrial production due to the global demand scenario; and an increasing trend in unemployment. Hence, risk appetite is also likely to remain low.
All these factors prompt central banks to follow counter-cyclical policies to be pro-growth and accommodative. The initiatives will thus continue towards providing high liquidity in the market and reducing interest rates. Some initiatives have already been taken, but the impact of the action is yet to be seen.
The downward trend will continue, but will be gradual due to the stress created by government borrowings and the fiscal scenario. Investing in bond funds with a three- to six-month view will help optimize returns.
Category: India intermediate/long government
Canara Robeco Asset Management Co. Ltd’s Canara Robeco Gilt PGS has won Morningstar’s award for the best fund in the long-term government bond fund category, beating 28 contenders.
Appetite for risk: Canara Robeco’s Ritesh Jain
Morningstar said there are 40 funds in this category, which manage approximately Rs4,200 crore. It defines long/intermediate government portfolios as those that have at least 90% of holdings invested in bonds backed by the Indian government or by government-linked agencies. As these portfolios have average effective maturities greater than three years for intermediate grouping and seven years for long category, they are more sensitive to interest rates and thus riskier than portfolios that have shorter maturities.
The returns in this category match the high risks with such funds, fetching 26.38% on an average for a one-year investment. The Canara Robeco Gilt PGS offered a return of Rs135.17 on Rs100 invested in the beginning of the year.
Ritesh Jain, head of fixed income equities at Canara Robeco, who manages the Rs120 crore (at the end of February) fund, told how he capitalized on market volatility to fetch almost double the average return and how it’s suitable for investors with some risk appetite. Edited excerpts:
What is your investment philosophy?
In the current economic conditions and anticipation of shaping of markets, we believe that product life cycles are going to become smaller and volatility is going to take the centrestage in the coming year. With uncertainty on the macroeconomic front, as a starting point, we take profits off of the table and also maintain strict stoploss levels. The inherent volatility in the markets provides opportunities to make decent returns.
How did you tackle the liquidity crisis in October-November?
The mutual fund industry passed through really difficult times in October-November. Before this actually hit us, we had anticipated shortage of liquidity in the markets and envisaged short-term interest rates going up. We churned our portfolio and maintained a considerable proportion of our portfolio in liquid or overnight assets. This strategy actually turned out to be a blessing. Not only did we manage to honour our redemptions comfortably, but also managed to provide top returns in the same time period.
How different is your fund from others in its peer category?
The philosophy of our fund is that we would rather not chase AUMs (assets under management) aggressively if it comes at the cost of performance, and do what is best for the investors. Seeing the nature and performance of our debt markets, we believe that there is limited depth in our markets. In such a scenario, we thought that we would be able to do justice to our income fund and investors only up to a certain level and longevity of AUMs. So, we decided to cap the fund for further investments.
What kind of investor should invest in your fund?
Our fund is ideal for investors who have the appetite for volatility and seek to generate returns from the opportunities present in the markets. We believe that our fund should be able to deliver 300 basis points (one basis point is one-hundredth of a percentage point) over liquid returns to the investors with a time horizon of six months and above.
What is your outlook on the bond market?
With uncertainty in economic and fiscal environment around, we believe that volatility is going to be the order of the day. We might not see a considerable secular downward movement in the yields, but would probably see a range bound market with lots of volatility, within which investors would have opportunities to earn decent returns.
We anticipate that the market would behave in this manner for some time to come and we could see pressure on yields towards last quarter of the calendar year 2009. The yield on the 10-year gilt could breach 7.50%.
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First Published: Fri, Mar 13 2009. 10 07 PM IST