Canara Robeco Gilt PGS-Growth fund won the Morningstar best intermediate/long government fund award at a ceremony on Monday. Ritesh Jain, head (fixed income), Canara Robeco Asset Management Co. Ltd, talks about the fund’s strategy. Edited excerpts:
Mindspeak: Jain believes any income fund that invests in a combination of government bonds and corporate bonds will outperform plain gilt fund in volatile markets.
What is your fund’s strategy and how did you navigate the interest rate rise and fall in 2008 and 2009?
We follow a dynamic approach in portfolio management by booking profits regularly and triggering stop-loss limits if the market moves negatively. After the Lehman Brothers’ fiasco, we realized that volatility in the market had increased substantially and the characteristics in the markets changed. Hence, a dynamic portfolio management strategy was adopted in these turbulent times.
Given the kind of market vagaries and volatility that the bond market has seen in the past three years, have government security funds lost their relevance? Does it make more sense to go for actively managed bond funds that take a selective exposure in government securities?
We believe any income fund which invests in a combination of both government bonds and corporate bonds will outperform plain gilt fund in volatile markets as the carry/coupon of an income fund is higher than that of a government bond. Government bond yields are expected to harden by 50-75 bps (basis points) in the next six months, but we believe that during this timeframe corporate bonds will outperform government bonds.
In the current market scenario, where risk has got transferred from corporates to the government worldwide in the form of bailouts and stimulus, corporate balance sheets are much better than government balance sheets. Hence, there is a case to be overweight on the de-leveraged corporates versus government which can be done in income funds and not gilt funds.
Graphics: Ahmed Raza Khan / Mint
Once bond prices started to fall in February 2009 and onwards, your government securities exposure has consistently remained high in cash or at best one to three securities. Many other government securities funds are more diversified. Doesn’t this increase your fund’s risk profile?
Considering the asset base of the scheme, there are less number of liquid government securities available in the market. On the basis of the movement in interest rates, we have invested only in liquid securities during the period.
Regarding the risk profile, as mentioned earlier, we follow a very dynamic approach in fund management in order to cut our positions swiftly and remain in cash, if the market yields move otherwise. Moreover, as bond yields harden, liquidity and volumes dry up in the market making a case for going for more liquid securities.
What is the impact on the recent rate hike on Canara Robeco Gilt PGS?
The recent rate hike had a marginal impact on Canara Robeco Gilt PGS, as we increased our cash position substantially before the rate hike. We believe between May and June, inflation would be at its peak. With the borrowing calendar already out by then, the 10-year benchmark yield should be at around 8.5%. The RBI (Reserve Bank of India) has already hiked rates by 25 bps and the April policy will also be behind us at this time.
Therefore, around June it should be a good time to look at duration funds with an investment horizon of more than one year.
What kind of investors do you target for government securities funds?
As the name of the fund suggests, the target investors are generally those looking for pension, gratuity and super annuation funds and, to some extent, informed retail investors who can handle volatility but are considering investment for the long term.
Given the resistance of retail investors to bond funds (and if they come, they come in measured numbers—and are limited to—in short-term funds, long-term bond funds), is it hard to convince retail investors to come into government securities funds?
Yes, it is difficult to convince them to invest in gilt funds, considering the volatility in government securities yields. Further, it is difficult to educate them on the market conditions in such volatile times as they need to stay invested in these schemes for the long term (two-three years) to get a decent return, while overcoming volatility during the period.