Why DSP MF’s Kalpen Parekh is bullish on long duration debt

Kalpen Parekh, MD & CEO of DSP Mutual Fund
Kalpen Parekh, MD & CEO of DSP Mutual Fund

Summary

  • Parekh, a conservative investor, is switching to long duration debt to capture changes in the interest rate cycle

Kalpen Parekh, 51, believes in conservative investing. However, the managing director and chief executive officer of DSP Mutual Fund, has now tweaked his strategy on debt investments. “Our view is that interest rates are now reasonably priced and long-duration looks attractive right now," Parekh says.

After four-five years of staying away from it, Parekh has invested in DSP Strategic Bond Fund, an actively-managed duration fund. The fund is currently invested in debt papers that are of eight-nine years duration, says Parekh in an interaction with Mint for the Guru Portfolio series. In this series, leaders in the financial services industry share how they manage their own money.

 

Kalpen Parekh's investments
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Kalpen Parekh's investments

Portfolio mix

Parekh’s portfolio has over the past 12 months delivered 29% returns.

“A lot of my incremental investments have been channelled into hybrid funds as markets are expensive right now," Parekh says. He likes hybrid funds, especially during expensive markets, as they come with a built-in feature to re-balance asset allocations as per market valuations -- cheap market valuations: higher equity and lower debt; expensive markets: lower equity and higher debt. Some hybrid funds such as multi asset allocation funds and equity savings funds also increase exposure to other defensive assets such as gold and put options when markets appear expensive. Put option prices rise during market corrections.

He says he follows one principle: invest for good and don’t exit unless you need money.

Hybrid funds such as DSP Multi Asset Allocation Fund, DSP Dynamic Asset Allocation and DSP Equity Savings Fund account for 26% of Parekh’s overall portfolio. Equity funds make up for 35% of exposure, global equity funds 14%, debt funds 15%. Gold exposure through DSP World Gold Fund of Fund (invests in gold mining companies) and government-run Sovereign Gold Bond is 10%. Almost 87% of Parekh’s portfolio is in DSP Mutual Fund schemes, as all DSP employees can only invest in DSP’s schemes. The remaining investments were made before he joined DSP.

What has worked

He says some of the theme-based funds did well for him over the last year. For instance, DSP Natural Resources and New Energy Fund delivered around 45% returns. The fund accounts for 6-7% of Parekh’s overall portfolio. He says both global natural resources and domestic natural resources segments performed well, which helped the fund.

Also, DSP Healthcare and DSP Global Innovation Fund did well. A bounce-back in global technology companies helped the latter. DSP Value Fund also helped Parekh’s portfolio as the fund had zero exposure to banking segment, which has underperformed over the last year. Instead, the fund had exposure to global funds investing in global technology and global luxury goods companies, which have done well over the last six months. The fund also has 6.5% exposure to Berkshire Hathway, the holding company of the legendary investor Warren Buffet.

Apart from this, DSP Small Cap Fund that invests primarily in micro cap stocks, has done well for Parekh’s portfolio.

Investing style

Parekh says he is a very low portfolio turnover investor. “I rarely like to switch, I rarely like to redeem my investments," he says.

He doesn’t like to book capital gains, as he says this not only makes you lose the benefit of compounding, but there is also a taxation impact from the capital gains.

Instead of focusing on a particular market cap (large-, mid- or small-cap), Parekh categorizes his investments in growth and defensive buckets. When markets correct, he increases allocation towards growth investments. When markets turn expensive, he increases allocation to defensive investments such as hybrid funds, debt and gold.

Parekh sticks to his asset allocation approach and simply rebalances his portfolio when changes in market valuations move his portfolio away from his target allocation.

For example, Parekh’s target asset allocation is in the ratio of 65 to 35 (equity:debt and gold). As market valuations have remained on higher side, he is making new investments in 50:50 mix. Market rally has increased value of his equity investments, but by making higher allocation to defensive assets, he aims to maintain his 65:35 target allocation.

“As investors, we can’t do too much about valuations. Now, there is a concern around broader market valuations. No one knows whether valuations are likely to come down or remain high. Like last year, the markets appeared expensive and we thought there should be a correction, but that didn’t happen. Some pockets of markets became even more expensive," he points out.

Investing philosophy

Parekh says he doesn’t put too much stock on short-term returns. “For me, annual returns are not that important. I believe in investing for decades. My investing mantra is simple: seek reasonable returns for unreasonable amount of time as that is how you can really see benefit of compounding. And how can you stay invested that long? By ring-fencing your portfolio to mitigate impact of external shocks and market volatility," Parekh explains.

“A hybrid fund would just automate that for me. I am not required to do anything or sell any investment to increase equity exposure. When stock markets correct, it will automatically sell debt (or any defensive asset like gold) and invest in equity. It will do the reverse when valuations turn expensive," Parekh says.

He adds that when markets are expensive; data shows that there isn’t a huge difference between three-five year returns of equity and bonds. “This rule works 80% of time, 20% of time it doesn’t seem to work," he says.

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