MFs shift AUM towards stronger borrowers to mitigate risks for debt schemes3 min read . Updated: 28 Apr 2020, 03:30 PM IST
- Driven by decline in AUM as well as risk aversion and regulation, mutual funds have been cutting debt exposure to non-banking finance companies and housing finance companies
MUMBAI: Amid increasing pressure of redemption in debt schemes, mutual funds are making big shifts in their asset allocation mix towards stronger borrowers to mitigate risks.
Driven by the decline in assets under management (AUM) as well as risk aversion and regulation, mutual funds have been cutting debt exposure to non-banking finance companies and housing finance companies, down 45%, from the peak in July-August 2018, with even sharper cuts, down 90%, to entities in real estate financing, promoter financing etc., which are down to 1.5% of mutual fund debt AUM, said Morgan Stanley in a report on 27 April.
Mutual fund debt investments in non-banking financial companies (NBFCs) and housing finance companies (HFCs) have been big, especially during FY14 to first half of FY19. Mutual fund debt AUM, after rapid growth during FY15-first half of FY19 has been stagnating and declining since August 2018 -- down 14% year-on-year from August 2018 through March 2020.
Morgan Stanley feels further downside risks to mutual fund exposure to NBFC and HFC segment are contained. Based on a sample of over 25 NBFCs /HFCs, funds in overall borrowings is down from 18% in September 2018 to 12% as of December 19. However, for entities facing funding constraints, it is down more sharply, from 28% to 6%.
“A potential funding risk to the NBFC segment is that mutual funds see accelerated debt outflows. While the dependence of the NBFC/HFC segment on mutual funds has decreased, such potential outflows would coincide with banks' turning risk-averse towards NBFCs after supporting the segment for the past 18 months," said Morgan Stanley.
According to the global foreign brokerage firm’s estimates, mutual fund debt investments in NBFCs/HFCs, as well as of the maturities over the next 12 months with strong parentage, constitute over 80%. Lenders facing funding constraints of any kind represent 5% of overall mutual debt exposure to NBFCs and HFCs. Credit risk funds, which are likely to see redemption pressures, constitute 5% of overall mutual fund debt AUM, it said.
While the debt mutual fund industry had benefited from the sharp rise in financial savings post demonetization in December 2016 quarter, industry AUM growth touched 50% year-on-year. However, there have been repeated shocks from credit events, starting with the IL&FS crisis in September 2018 and followed by several other corporate defaults. The latest crisis being Franklin Templeton closing its six debt schemes, with the RBI swung into action to provide a liquidity window through the banking system.
Analysts at Emkay Global Financial Services feel that the recent events could affect flows into debt funds and that there have been major changes seen in debt fund investment strategies after the IL&FS crisis. It said risk aversion was visible in the ratings profile of the instruments held by debt MFs, while share of corporate paper rated below AAA has fallen off from 41% of AUM pre-IL&FS to 22% now. In absolute terms, this is a 30% drop in total holdings of such lower-rated paper by debt MFs.
It said holdings of government securities (GSec) and public sector undertaking (PSU) bonds rose sharply from 24% of AUM to 40% now. As a result, MF holdings of private sector corporates fell 22%, with private NBFCs suffering a sharper drop of 42% and commercial papers down from 39% of industry AUM to 21% now.
“This has happened despite the ratio of liquid and other short-term funds in industry AUM staying stable all through this period, suggesting that this change is driven more by an active change in asset maturity decision by fund managers (and supply of paper) than a behaviour induced by mix of inflows across various maturity buckets. There was a prudent turn in the quality of paper held, with the share of sub-AAA portfolio falling from 41% to 22%, showing a 30% fall in absolute terms," said analysts at Emkay Global Financial Services Ltd.
It believes that these trends will only continue and strengthen after the recent events.