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Managers on their winning strategy

Managers on their winning strategy
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First Published: Fri, Mar 13 2009. 10 15 PM IST

Higher returns: Reliance Capital’s Amit Tripathi.
Higher returns: Reliance Capital’s Amit Tripathi.
Updated: Fri, Mar 13 2009. 10 15 PM IST
Mumbai: Category: India Conservative Allocation
Reliance Capital Ltd’s Reliance Monthly Income Plan, which pays a monthly dividend to investors, has won the Morngingstar award for the best fund in the conservative allocation category.
Higher returns: Reliance Capital’s Amit Tripathi.
Morningstar India Pvt. Ltd, the local arm of Morningstar Inc., a US-based independent research provider on mutual funds, stocks, hedge funds and other investment alternatives, defines conservative allocation funds as those that seek to provide capital appreciation and income by investing in three major areas—stocks, bonds and cash. These portfolios tend to hold smaller positions in stocks than moderate-allocation portfolios, with equity allocation not exceeding 30%.
According to Morningstar, there are 57 schemes in this category, managing assets worth about Rs4,800 crore. Average returns offered by such funds worked out to –4.8% in 2008 and three-year annualized returns have been 6.8%. Only 24 of such schemes qualified to be considered for the awards as per Morningstar’s evaluation methodology.
Amit Tripathi, who manages the Rs170 crore Reliance Monthly Income Plan, spoke on how its debt portfolio is oriented towards a higher return to ensure regular dividend payouts to investors. Edited excerpts:
What is the investment philosophy behind the fund?
The portfolio of this fund aims at achieving returns on a consistent basis to enable regular dividend payouts. At the same time, we want to ensure that the long-term investors also achieve capital appreciation from the equity exposure. Thus, a larger proportion of the debt portfolio is oriented towards a higher running return with less volatility.
The duration of the debt portfolio is, therefore, not very high. Since the stability of assets under management in this fund is higher than that of pure debt funds, slightly longer term credit plays are also taken in this fund to increase returns.
In the current environment, how do you plan to allocate equity and debt to maximize returns?
The asset allocation pattern is designed in such a way that there is a cap of 20% on the equity exposure in the portfolio. Prudent value plays in the equity space are identified, which will pay off in the medium- to long-term as the economy recovers. This exposure is undertaken in such a way that the downside risk is reduced.
On the debt front, the portfolio of monthly income plans (MIPs) contains a prudent balance of debt and money market instruments, which ensure a reasonable rate of running return as well as appreciation because of falling interest rates. A hygienic rate of return is achieved by taking exposures to short-duration corporate debt and the duration play is undertaken through long-term government securities and high-grade papers of public sector undertakings.
How different is your fund from others in its peer category?
Reliance MIP is the right mix of debt and equity for the investors who are interested in earning regular returns with a minimal risk exposure and growth in capital.
The fund is different from other MIP funds because of its focus on value plays, both in debt and equity. This ensures that the fund is able to achieve consistent returns, with capital returns for the medium- to long-term investors. While this fund endeavours to make regular payouts, the medium- to long-term investors truly benefit from the impact of the value plays.
In a market where it’s difficult to manage funds, what message do you have for your investors?
There is too much of volatility and there is a lot of ambiguity about where the equity markets are heading. Experts say equities are available at bargain prices, but there is a lack of confidence in entering the asset class. Against this backdrop, the MIPs are a feasible investment option.
In a falling interest rate environment, MIPs are expected to give decent returns. Moreover, in the present market wherein safety of capital is of utmost importance, regular profit-booking through periodical dividend payments turns out to be a prudent option.
What kind of investor should invest in your fund?
Our fund is targeted towards investors who are fundamentally interested in earning regular returns with a minimal risk exposure and moderate growth in capital over the medium- to long-term. This fund can be a very good product for an investor who has a medium- to long-term investment horizon and a moderate risk appetite.
What’s your outlook on equity and debt markets?
We believe the strong fundamentals and the long-term growth story of India reinstates confidence in the strong trajectory of markets. Other key aspects in India’s favour are low credit penetration and a robust banking system, with most of the transactions in the form of plain vanilla loans. The sharp fall in global crude oil prices and commodities is a positive contribution to the Indian economy.
From a medium- to long-term point of view, Indian markets are expected to yield consistent, superior risk-adjusted returns as the macro story based on rising consumption and investment plays out. We believe Indian markets could be among the first to bounce back once the global situation stabilizes.
Category: India Liquid
LIC Mutual Fund Asset Management Co. Ltd’s Liquid Fund has won Morningstar’s award for the best fund in the liquid funds category, beating 27 contenders.
Though only 27 funds were considered for the awards, there are 63 funds in this category, collectively managing about Rs80,000 crore, making it the second largest category in terms of assets under management (AUMs), according to Morningstar.
Safety first: LIC Mutual Fund’s Ashish Kumar. Ashesh Shah / Mint
Liquid funds are short-term funds and typically invest in money market instruments, commercial papers and certificates of deposits.
Money invested in this fund would have, on an average, given 8.62% return for 2008. LICMF Liquid Fund had a yield of 9.46%. Ashish Kumar, who manages the Rs14,000 crore LICMF Liquid Fund, told how the fund’s safety-first investment style helped it manage the spate of redemptions. Edited excerpts:
What is your investment philosophy?
Our investment philosophy flows from our endeavour to ensure consistent returns with safety, security and liquidity to our investors. Our investment options include various debt instruments such as overnight call money, CBLO (collateralized borrowing and lending obligation, which is a money market instrument typically used by those who can’t access the overnight inter-bank market), commercial papers, corporate securities, etc. The investment in debt securities will usually be in instruments which have been assigned investment grade ratings by recognized credit rating agencies.
The maturity profile of debt instruments will be selected in line with the outlook for the market and objectives of the scheme. The investment strategy emphasizes investments in securities that give consistent returns at low levels of risks.
How did you tackle the liquidity crisis in October-November when investors rushed to withdraw from liquid funds?
We have had prudent asset-liability management that helped us see through the phase. Secondly, LIC’s brand image rallied around to keep investor confidence high during those days. We have seen rise in our AUMs (assets under management) in subsequent months.
How different is your fund from its peers?
Our emphasis is on the consistency of returns with low risk levels.
What kind of investor should invest in your fund?
Our investor base is spread across all investor categories in India. Our products cater to both institutions and retail investors. We focus on mobilizing savings of people from rural and semi-urban areas.
Do you think the best time for bonds are over?
The Reserve Bank of India has been following a softer monetary policy stance. A series of cuts in key rates have been announced since October 2008. At the same time, the government has announced three stimulus packages. To balance that, the government’s borrowing programmes have been going up. We expect the market to be range bound.
Category: India Immediate/Long term bond fund
Fortis Investment Management India Pvt. Ltd’s Flexi Debt Fund won Morningstar’s award for the best fund in the this category, beating 26 contenders. There are 45 funds in this category, which manage approximately Rs25,000 crore.
Quick gains: Fortis Investment’s Alok Singh.
According to Morningstar, the long-term bond portfolios are those that invest primarily in corporate and other investment-grade fixed income issues and have average effective maturities greater than seven years.
Fortis Flexi Debt Fund has about half of its money invested in government bonds, while the rest is spread over instruments issued by quasi-government institutions. The long-term bond fund category had one of highest returns among all categories, yielding, on an average, Rs117.50 on Rs100 invested at the beginning of the year. The winner in this category would have fetched you Rs123.90 on an investment of Rs100.
Alok Singh, fund manager at Fortis Mutual Fund who manages the Rs95 crore (at the end of February) fund, said his fund is suitable for investors with a 6-12 month investment horizon. Edited excerpts:
What’s your investment strategy?
The investment process aims to deliver superior risk-adjusted returns by following a well-defined process of research, portfolio construction and risk management. The research process looks at the macro-environment, valuations and sentiment to deliver a view on liquidity, interest rates and credit... Performance and risk monitoring is an integral part of the investment process.
How different is your fund from others in its peer group?
Fortis Flexi Debt Fund is an actively managed debt scheme where our current view is reflected via the maturity profile of the securities and the subsequent duration of the scheme. The duration of the scheme will tend to be longer if we believe that the interest rates will decline and vice-versa. When the view on interest rates is neutral, the fund prefers to hold a low-duration portfolio as the flexibility to realign is higher.
The key focus is to capitalize on opportunities as they appear. During periods of low activity, the fund invests some portion in money market instruments and waits patiently till a suitable opportunity arises. The Fortis Flexi Debt takes strong calls on yields and actively manages the duration for higher returns.
What kind of investor should invest in your fund?
This fund is suitable for investors who have an investment horizon of 6-12 months and wish to take advantage of a dynamic debt market. Movements in fixed income markets are unpredictable and investors shouldn’t shy away due to short-term volatility.
Do you think that the best time for bonds is over?
We believe that the fundamentals that drove the rally over the past two-three months still remain intact...
Another factor that has been supporting the markets is the government’s willingness to spend. And this has resulted in enough liquidity in the market. RBI’s (Reserve Bank of India) initiatives like purchasing securities through open market operations along with its willingness to cut rates and managing the domestic liquidity further could keep the downside in check.
This should be considered as an opportunity to enter this segment with a medium- to long-term horizon. We believe that the yield on the 10-year paper, which is currently trading at 6-6.2%, should move towards lower levels in the coming months.
Category: India short-term bond
ICICI Prudential Asset Management Co. Ltd’s Short-Term Plan won Morningstar’s award for the best fund in the short-term bond fund category, beating 15 contenders.
Barbell approach: Chaitanya Pande of ICICI Prudential.
Morningstar said there are 40 funds in this category, which manage about Rs20,000 crore in all. Short-term bond portfolios invest primarily in corporate and other investment-grade fixed-income issues and have average effective maturities of one-three years.
The one-year average return for this category is 12.1%. ICICI Prudential’s short-term plan yielded Rs116.40 on Rs100 invested at the beginning of the year.
Chaitanya Pande, co-head of fixed income at ICICI Prudential Mutual Fund who manages the Rs1,000 crore (at the end of February) fund, spoke on the fund’s barbell approach to investment and how it helped the fund gain high returns. Edited excerpts:
What is the investment philosophy behind the fund?
The ICICI Prudential Short Term Plan invests predominantly in top-rated corporate and bonds of public sector undertakings. The fund looks to ride down the lower end of the yield curve and typically runs an average maturity between 18 and 36 months. The fund uses a barbell approach to adding duration and takes active cash calls as well. As corporate bonds tend to be relatively illiquid, the fund also builds in regular maturities in a ladder format to handle flows.
How did you manage the liquidity crisis in October-November?
The problem faced in October and November was because of the systemic issue of liquidity availability and a crisis of confidence due to the global credit crisis. In such a scenario, portfolio quality and disclosure standards gain significance and provide comfort to the investors. ICICI Prudential AMC (asset management company) has a long-standing track record of unmatched disclosure standards and also has high-quality portfolio. For instance, ICICI Prudential AMC was the first to disclose complete PTC (pass through certificates) and securitization details in the monthly fact sheet.
How different is your fund from others in its peer category?
A strong investment philosophy, stringent risk measures and top quality portfolio are the USPs of our fund. The flexibility to increase and decrease duration through prudent use of gilts and long corporate bonds adds further investment value for our investors. The plan has a sound and high-quality portfolio and predominant exposure is in AAA-rated public sector and private corporate bonds, thereby ensuring very low credit risk. This is a crucial factor in the current scenario where credit quality and long-term solidity of the investment is key to investment decisions.
What kind of investor should invest in your fund?
The fund provides an ideal investment avenue for investors seeking returns linked to fixed income markets, without taking significant price risk.
Is the best time for bonds over?
Corporate spreads still remain relatively high on the back of heightened credit and liquidity fears.
As easy liquidity gets priced in, on the back of the recent rate cuts and falling inflation, corporate spreads are likely to continue their recent downtrend. We believe that with active central bank intervention, the higher government borrowing is manageable. In the absence of any significant inflationary pressures and easy liquidity, interest rates are expected to maintain their downward trajectory over the next three-six months.
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First Published: Fri, Mar 13 2009. 10 15 PM IST