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Recent reforms can deepen secondary corporate bond market

Initiatives and reforms undertaken recently have the potential to positively impact the space.
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First Published: Tue, Oct 09 2012. 07 53 PM IST
Hemant Mishra/Mint
Hemant Mishra/Mint
Quietly, but effectively, PineBridge Investments, India (erstwhile AIG Investments), has been sharpening its repertoire of mutual fund schemes. Few in number, its schemes are known for their consistency. Last week, PineBridge Investments completed the acquisition of AIG Investments. Known for actively managing his debt funds, rather than launching fixed maturity plans like many in the industry, its head of fixed income, Vikrant Mehta, has successfully navigated the highs and lows of interest rates in India. His short-term bond fund, PineBridge India Short Term Fund, has been one of the better schemes in the bond funds space.
Recently, the ministry of finance put a cap on bulk deposits that banks can issue. Will demand for corporate papers such as commercial paper (CP) go up at the expense of certificates of deposit (CD)? What will be the impact?
The cap on bulk deposits has created demand for corporate credit. Even their spreads over sovereign bonds have considerably narrowed over the past two-three months. By limiting the amount of wholesale bulk deposits, which include fixed deposits as well as CDs, investors such as mutual funds, insurance companies and even bank and company treasuries will pay a premium for investing in debt obligations of quality corporate entities. So creditworthy borrowers are likely to benefit from lower borrowing costs, which today are much lower than the average banking base rate, positively influencing their profit. Initiatives and reforms undertaken by the government and regulators recently have the potential to positively impact and deepen the secondary corporate bond markets, benefiting the economy.
Short-term debt funds, such as yours, often get classified as ultra short-term by rating agencies because of your conservative strategy. Are you okay with that?
We manage money in a fiduciary capacity and we would like to be prudent in our outlook. In a rising interest rate scenario, a lower maturity and conservative stance benefited the fund. We continuously evaluate dynamic market conditions and portfolios are realigned on that basis. Thus, over the past quarter, the maturity of the PineBridge India Short Term (formerly AIG Short Term) has been increased. PineBridge India Short Term is an open-ended income scheme and it is benchmarked to the Crisil Short-Term Bond Fund Index. I would not like to comment on the classification methodologies of rating outfits.
In your short-term fund, you have mostly CDs in your portfolio, just one or two CPs. In fact, you have more non-convertible debentures (NCDs) than CPs. Why so?
Our short-term fund was predominantly invested in bank CDs for a considerable period till June. Changing market conditions like the cap on bulk deposits and improvement in liquidity, lower growth and likelihood of lower interest rates led us to increase the maturity profile of the fund. Unlike CPs, which mature within a year, NCDs provided us the opportunity to have a longer maturity profile.
How do you decide between investing in a NCD as against a CP?
There is no definitive answer to this. CPs are debt instruments that mature within a year, while NCDs are for longer tenors. Investments are based on our assessment of market conditions. Over the past two-three months, since we felt that we needed to extend the maturity of the fund, NCDs were preferred.
Why has PineBridge Investments, India largely stayed away from fixed maturity plans when almost the whole MF industry was furiously launching them in the past two years?
We have done a comprehensive post facto study of the performance of PineBridge India Short Term over almost two years, beginning August 2010 (when the valuation guidelines for debt instruments were significantly revamped) till June. Performance was analysed over 3- and 12-month investment horizons. Compared with a passive buy-and-hold investment strategy of investing in CDs, the active strategy followed by PineBridge India Short Term delivered better over a major part of the assessment period. The fact that PineBridge India Short Term has no exit load could be an added advantage.
New Sebi rules mandate that all fund houses must have a single plan in debt funds. How will you manage that? Your liquid fund, for instance, has retail, institutional and super institutional options.
All fund houses are at present accepting fresh purchases into only one plan. We currently have a single “standard plan”, where we are accepting fresh investments.
What will be the new expense ratio in your single plan?
In case of open-ended debt funds, the current single “standard plan” expense ratio is in line with the lowest expense ratios that prevailed earlier.
Effective 1 October, debt funds also have to limit their investments to 30% in a single sector. Will that impact your debt funds?
Our debt funds are not going to be affected by the limit. We are well below the threshold restrictions. In addition to the 30% sectoral limits, Sebi in its recent board meeting, decided to allow an additional 10% investment in housing finance companies. PineBridge India Short Term has typically been invested in bank CDs, bonds of top rated public sector entities and government bonds, and these are exempt from the new investment norms. Recently, we have taken exposure to borrowings of AAA rated housing finance and corporate entities.
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First Published: Tue, Oct 09 2012. 07 53 PM IST
More Topics: Money Guru | bond market | reforms | PineBridge |