Credit as an asset class remains attractive due to valuation comfort owing to the high spread between accrual schemes and repo. According to Manish Banthia, Senior Fund Manager, ICICI Prudential Mutual Fund, this provides a good margin of safety for investments.
Across your fixed income schemes, there has been a reasonable exposure to AA rated papers. What’s your strategy?
Due to heightened risk aversion, select good quality corporate bonds AA names were trading at attractive valuations. Currently, the Indian economy is getting into a deleveraging cycle and credit growth is likely to remain muted. In the absence of credit growth, we expect the prevailing high spreads to reduce substantially. So, the move to increase exposure to AA papers was with an aim to tap into investment opportunities that are available at a high carry over repo with a reasonable risk-reward profile.
What is the thought process behind such the model-driven fixed income portfolio?
We are of the view that a model-driven portfolio helps inculcate an investing discipline that is devoid of individual biases.
Our experience with ICICI Prudential Balanced Advantage Fund and ICICI Prudential All Seasons Bond Fund, both of which are model based, is that the discipline followed has aided us to take research calls on the basis of certain set parameters and not be affected by sentiments (both individual and market based).
The other advantage of a model-driven strategy is that they are at certain points in time counter-cyclical to the market direction and effectively help in managing funds better, especially in terms of portfolio sizing.
Do you reckon now is the time to add duration to one’s portfolio?
We have been positive on duration category since the latter part of April 2020. We believe this will play out in the near term; so is most suitable for funds with shorter time frames. From a medium-term perspective, we are of the view that one should look at carry on the portfolio for a meaningful return.
Credit risk as a category has been the most affected by the developments over the past few months. Do you think the worst is behind us?
From April end till mid-May, the segment saw huge outflows mainly due to the panic around winding up of debt schemes incident. However, investors have realized that the trouble in debt markets is not systemic in nature and it has been business as usual for fund houses with good quality underlying debt paper.
From a cyclical point of view, Indian credit is going through a burst phase. If one invests in this period, we believe it is difficult to lose money, making it an opportune time to invest in this asset class. Credit as an asset class remains attractive due to valuation comfort owing to the high spread between accrual schemes and repo, which provides a good margin of safety for investments made.
Your fund house has thus far has not faced any challenges (downgrades/defaults) in terms of portfolio quality. What have you done differently when compared to other industry peers?
We were one of the early movers among the fund houses having instituted an in-house independent risk management team entrusted with overseeing credit evaluation and approval processes. The Risk Management team is independent of the Investment Team and the decision to onboard a credit is taken after detailed due diligence and in accordance with Debt Investment Policy.
We were always of the view that external credit rating is one of the inputs in investment decision, but not the sole determinant in decision making. Focus on client selection and avoiding concentration are the two key tenets of our credit decision-making which has helped us to keep away from trouble debt papers, thereby aiding our endeavour to deliver a positive investment experience.
How has the debt fund strategies changed in the wake of the recent setbacks faced within the debt mutual fund universe?
At ICICI Prudential AMC, our risk management processes followed has held us in good stead till date. But, as an industry, the current debt market situation has sharply brought into focus the importance of robust risk management practices. Our process of credit due diligence which considers both qualitative and quantitative factors has helped navigate the credit ecosystem for delivering better risk-adjusted returns to our investors.
With the interest rate on a decline, many new investors may be looking to invest into debt mutual funds. What are the various aspects such an investor should be mindful about?
Currently, both duration and credit offer attractive investment opportunities. Since the yield curve is steep, short and medium duration funds present an interesting investment opportunity.
Those looking to invest with a longer-term investment horizon can consider investing in dynamic duration schemes, wherein the fund manager can invest based on the evolving environment in the debt segment.
Those with a higher risk appetite can consider investing in the credit space. This space remains attractive due to valuation comfort owing to the high spread between accrual schemes and repo, which provides a good margin of safety for investments.
Investors should be mindful of the fact that the key to better investment experience lies in selecting a well-managed fund that matches one’s goals and risk appetite. To identify such funds requires certain skill sets, which retail investors may not necessarily have. Here, financial advisers play a very important role in the value chain by guiding investors to choose the right funds.
