For the second year in a row, ICICI Prudential Asset Management Co. Ltd won the Morningstar debt fund house of the year award at a ceremony on Monday. Nimesh Shah, managing director of the fund house, says active asset allocation and duration management has helped achieve this feat. Edited excerpts:
Further upside: Shah says that for debt funds, investment opportunities continue to present themselves at the shorter end of the yield curve.
Following the turmoil in 2008, how has the year 2009 been for debt funds?
The year 2009 saw return in investor confidence and investor appetite across debt funds. The importance of credit quality and processes was established during the 2008 downturn. There was acknowledgement of the benefit of following efficient disclosure practices, which led to enhanced investor communication and further improved transparency. The 2008 turmoil was more a result of the global economic crisis which was successfully tided over by the industry in 2009, when it witnessed significant asset growth.
What are the key factors that helped you come out as the top performer both during troubled times and during recovery?
Our investment objective has always been optimizing risk and returns for our investors by investing in high-credit, fixed-income securities, managing interest rate risk and minimizing liquidity risk. Our strategy is to focus on our investment philosophy through which we seek to achieve safety, liquidity, and return (SLR) for our debt portfolio. This approach helped us retain investor confidence during the 2008 downturn and build long-term relationships.
We were doing the right things and the market environment has reinforced our faith in our processes. Our efforts, across debt portfolios, to neutralize credit risk by investing in high-credit quality instruments, minimizing liquidity risk by maintaining an asset–liability match and managing interest rate risk through active asset allocation and duration management has helped us create value for our investors.
How have your investment strategies changed along with change in the market environment after March 2009?
The sharp rise in fiscal deficit and supply of government bonds led to increased focus on active asset allocation and duration management. There was also increased focus on corporate bonds, driven by high spreads on the back of improving credit fundamentals. We continued to recommend short- to medium-term funds, given the increase in volatility at the longer end of the yield curve.
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With interest rates beginning to harden, what is your view on the debt markets going ahead?
The RBI (Reserve Bank of India) has a difficult task of managing interest rate and inflation, while ensuring that the government’s borrowing programme goes through smoothly and as planned. An upward pressure is expected on interest rates. We expect 10-year government securities yields to gradually climb, supported by government intervention through OMO (open market operations) and other steps, such as SLR/HTM (held-till-maturity) hikes. The RBI recently hiked its repo and reverse repo rates in view of high inflation. Post-July, we expect inflation to moderate from the current levels, albeit on the back of good monsoon, base effect and growth. The RBI is still following a relatively easy monetary stance. If the economy continues its growth momentum, then the RBI would look towards a neutral monetary policy.
What kind of funds will do well in this environment?
On the debt fund side, in the current market environment, investment opportunities continue to present themselves at the shorter end of the yield curve. We expect funds that will provide investors with the benefit of staying locked into high yielding instruments of high-credit quality to be good investment options.
With equities doing so well this year, does it make sense for investors to invest in debt funds?
Debt and equity both being different asset classes have an important and balancing role in an investor’s portfolio. Hence, equity and debt exposure would be part of a portfolio based on the investment objective, risk appetite and time horizon. We, therefore, expect asset allocation to provide guidance to investors on the asset class exposure. For investors who are underweight on equity, we recommend them to use all corrections as an opportunity to invest in the equity markets with a long-term view.
Also, India is a linear growth story and one of the fastest growing economies. The corporate sector is bound to benefit from this story over the long term. So, those investing in Indian equity with a long-term view will be well positioned to create value in their portfolio.
What role do debt funds have in the coming years as the regulator is keen on reducing the reliance of mutual funds in corporate money and focus more on retail investors?
There is surely going to be a trend of increase in retail participation across debt funds. So far, retail participation has been mainly through FMPs (fixed maturity plans). However, going forward, we expect that there will be greater retail participation in most of our flagship debt funds. In fact, increasing retail penetration across debt funds along with equity is going to be our focus area over the next few years.
Graphic by Ahmed Raza Khan / Mint