Investment manager JPMorgan Asset Management India Pvt. Ltd would not have anticipated the path ahead when it launched three years back in India and barely seven months before the 2008 crisis started. But the fund house is still alive and with veteran debt fund manager Nandkumar Surti heading its investment team, it is looking forward to its second innings. Edited excerpts:
Wrong decision: Nandkumar Surti says the single biggest factor that went against JPMorgan AMC was its call on the last elections.
JPMorgan AMC was launched in May 2007. But your equity funds haven’t really made a splash. Your large-cap and mid-cap funds have underperformed both rising and falling markets and also peer averages. What went wrong and what are you doing about it?
We don’t cash calls in the market. When we started, we did phenomenally well for the first 18 months or so. Then, the 2008 crisis started. Probably, the single worst factor that went against us was our call on the elections.
Secondly, after the elections when markets shot up, the kind of stocks that ran up were predominantly real estate and mid-cap scrips; the kind that went up from Rs10, say during the middle of 2008 crisis, to Rs100. We did not buy these scrips when the markets were falling nor did we buy them when markets rebounded. Looking back while our call on the election was on the defensive side, we would not have invested in such stocks in the first place. We did suffer for a while. If you look specifically the last nine months or so, barring the May effect, we are now back in the top quartile.
As we speak, JPMorgan India Smaller Companies Fund is in the first quartile across time periods. It may not have recovered fully given the fact it was launched right at the peak of the market, but in terms of relative performance to its benchmark index, it’s in the first quartile.
Our investment process did not falter; market situation was extraordinary. We revisited our processes and our ways of stock-picking, but we did not find fault.
You launched a dynamic debt fund before launching plain-vanilla long-term debt funds. Why?
We launched this in June 2008, when the 10-year benchmark interest rate was closer to 8.20-8.30% and the overnight call rate was closer to 11-12%; both very close to their peaks.
A dynamic debt fund is the only fund that can allow you the flexibility to be either a completely money market fund or gilt fund. We wanted to start slightly defensive and ride the downward interest rate curve (when rates fall, debt scrip prices and net asset values of debt funds rise) before we can go aggressive and manage the portfolio dynamically. That is why we went for an active bond fund strategy structure at that time.
So aren’t you open to launch a pure long-term bond fund or a gilt fund?
Long-term bonds will have periods when they will provide an opportunity to make substantial money. As a fund manager, I would like to have that flexibility to be in the segment that gives the maximum returns for the least amount of risk. Having a dynamic debt funds helps me achieve that objective.
As against income funds where 60-70% of their corpus needs to be invested in long-term bonds, and are, therefore, restrictive, dynamic debt funds can move within different maturity buckets of instruments.
Are you saying that plain-vanilla bond funds have outlived their utility since they give seasonal returns?
Not really. If you check out the past one, two and three years’ performances of income funds, they have returned 7-8%. The way debt markets function, you get your opportunity in income funds once in every three to six months, but it helps you earn around 20-40 basis points that can help sustain for a year.
What is your view on interest rates?
The spreads (difference) between the 10-year government security and the reverse repo and repo rates are at least three times higher than historical spreads. If these spreads reduce—and they will sooner or later—bond prices will rise and debt funds will make money. Even though the Reserve Bank of India (RBI) will raise rates, we don’t see lending rates rise in a similar fashion. So, there is plenty of opportunity for long-term bonds now.
Rising interest rates and yet a high 10-year government security rate and lending rates may not rise; the small investor is confused with signals that come out from the debt market. Explain how one should read these signals and ascertain investing in debt funds?
Start by looking at spreads (difference in yields of scrips of different kinds or maturities). You look at spreads of one-year and five-year of corporate bonds or government securities. They’re at their historical high; at least three times than their long-term average. Look at the spread at the overnight rates and 10-year bonds. They are at historical highs. They will have a high spread considering one is one-night and the other is 10-year, but the high these days are three times the historical average. Compare the five-year bond and overnight rate and that too is at a historical high.
Look at the country’s fiscal deficit situation. The worst is behind us as historically fiscal deficit is high during election time when governments spend a lot of money. The government is going to borrow more money this year from the market, but a reducing fiscal deficit is good news. Which means, the supply to the market is either going to be constant or lower. But the demand for bonds from entities like insurance companies, mutual funds, pension and provident funds will continue to grow. More demand and reasonable supply will push the prices of bonds up and, therefore, NAV (net asset value) of debt funds.
Also on account of the global crisis, we don’t see interest rates in the US and Europe rising so fast. Our interest rates are high and so this will attract a lot of foreign money in our debt markets and more such demand of bonds will push up bond prices and consequently a fall in interest rates.
We also hear that the limits of foreign institutional investments in debt investments are set to increase from $20 billion (around Rs94,000 crore) to $30 billion. An increase in these limits, if and when that happens, will further lead to demand for bonds.
Sustainable flows in the economy and calibrated rise in interest rates by RBI is likely to compress spreads on lesser risky assets specially government securities from its current historical high levels. Also, slower credit offtake in the banking system may support current lending rates in the medium term.
Whether it happens in the next six months or a year, we’ll have to see. RBI, too, is not in a hurry to raise interest rates and prefers to wait and watch through this volatile world and Greek and euro crisis. I don’t see the 10-year interest rate to go beyond 8-9%.
RBI doesn’t quite like banks parking their cash in mutual funds. Have you been told, subtly or otherwise, by any regulators or authorities to avoid taking money from banks or discouraging them to come to MFs?
Not at all. Whatever you hear is only from the newspapers. We don’t see a change in the bank’s investment pattern. Yes, RBI has discomfort with banks investing in MFs, but very frankly we see this as a transition phase.
There is excess liquidity in the market and there is no sufficient credit offtake. So, look at bank’s investments in MFs from the bank’s balance sheet size, their surplus liquidity during any particular phase. But as RBI eventually sucks out excess liquidity, banks too will remove money from MFs, and they have been withdrawing gradually already. Their investments in MFs have come down from the historical highs. It’s a phase; when there is surplus liquidity and credit offtake doesn’t pick, banks park their money in MFs. When liquidity goes down or credit offtake picks up, banks pull out.