Past year has been a roller coaster ride for debt markets. It won’t be an exaggeration to say that debt market showed similar level of volatility as that of equity markets. Besides the debt default by IL&FS which resulted in a huge liquidity crunch, the economy also went through a turmoil with currency depreciating against the dollar, oil prices shooting through the roof and a spiralling fiscal deficit.
We spoke with Lakshmi Iyer, CIO & Head – Fixed Income & Products, Kotak Mahindra Asset Management Company Ltd, to understand her views on the outlook for debt markets in 2019 and her expert advice for investors. Iyer has been with the Kotak MF since 1999 where she joined as a fund manager, and was responsible for credit research as well as deal execution, managing fund performance across all debt funds and assisting sales in client interaction. Excerpts:
We would like to begin by understanding your views on global macros and how it affect Indian markets. Can you enlighten our readers as to where we are headed?
Globally, growth is slowing down – especially China and the US. The US FOMC (Federal Open Market Committee) may not be able to raise rates aggressively, which bodes well for interest rates across the globe, including India. Crude oil prices are on the wane and seem to be stabilising at current levels. This has also improved our domestic macros which means we could be in a neutral /softening rate trajectory for some time
We read your recent interview wherein you had advised retail investors to stay away from long duration debt funds. However, over past 2-3 months modified duration of dynamic bond fund category has risen from 2.85 yrs to 3.48 years. How should investors perceive it? Markets are also expecting RBI to stay on a prolonged pause on interest rates, inflation is low, oil has stabilised. Do you think there is potential in duration strategy hereon?
Long duration funds are not bad in the current scenario. However, it comes with heightened volatility and hence may not be palatable to many investors. Hence for those wanting to play out interest rate story, one could do with short to medium duration funds. W.r.t. dynamic bond fund, we do take tactical calls with a view to capture some near-term market moves as well. It is fair to allocate to such strategies if investors are willing to be invested for three years and beyond and ok to assume interest rate volatility
How long do you think it will take for rate cycle to revert or RBI stance to change?
It may change stance from calibrated tightening to neutral stance maybe in the upcoming monetary policy committee meeting. While the rate cut expectations are being baked in by markets, it may not culminate immediately. Sustained low CPI readings and a benign crude would be key for immediate rate cut
How is Kotak MF’s dynamic bond fund positioned now?
Kotak Dynamic Bond Fund (DBF) has a duration of around 2.5 years now. We took some profit in the current g-sec rally and are currently overweight on corporate bonds to take advantage of the high carry. The fund is actively managed to try capture market movements both near term and also broader market views.
This year was a bumper year for FMPs (fixed maturity plans); we saw huge sum being garnered by FMPs till October. We don’t see many FMPs being floated anymore. Are three-year FMPs no longer attractive since rates are already below their peak? Should one look at shorter FMPs?
FMPs are cyclical strategies. When yields are high, there is a rush towards FMPs. As yields ease, demand tends to recede. Investors are quite savvy and they do track market movements closely. Short FMPs may not have a wider audience as such and hence are very niche offerings.
On the credit side, we have seen some serious drama unfolding in the past couple of months. There are concerns about more such downgrades in the industry. What are your views on the credit market scenario in India?
Credit spreads have widened post IL&FS credit issue. At current levels, there is good quality business available for investment. Accidents don’t render a drive unworthy. One needs to have more caution while investing in credit assets. In mutual funds, the credit risk space is slowly but steadily growing. It is a good sign as real estate sector has credit needs which can also be fulfilled by mutual funds apart from banks and others institutions.
IL&FS was rated AAA by the rating agencies but defaulted on its payments. What do you think went wrong in the rating agencies’ approach in evaluating the credit risk? As a fund manager, who depends on ratings and assures investors based on it, what is your expectation from those agencies?
As a user of ratings, we expect due diligence from rating agencies which incorporate qualitative as also quantitative factors. Exceptions may occur, but onus lies on agencies to try to minimise such instances and learn from what went wrong in the past.
Would you like to tell our readers about the credit evaluation process at Kotak Mahindra AMC. How would you make a decision of purchasing or not purchasing a particular security? How much weight do ratings carry in the process?
We use ratings as a hygiene check. For us ratings are a necessary condition mostly, but never a sufficient condition. The quality of management, underlying strength of business and so on are some of the qualitative checks that also act as inputs to our decision making. Quantitative factors are anyway available for us to track. Company management meetings give us a lot of colour on various aspects of the business, its people, process and so on. Periodic surveillance throws up any potential red lights or actionable areas from credit stand point. Thus, we believe credit risk evaluation has to be more holistic to avoid mishaps in future
It is often difficult for investors to assess their risk appetite and align their long-term investment goals accordingly. It is not easy for retail investors to tactically shift from duration to accrual strategies. Or vice versa. What would you tell them?
Fixed income is not very complex to undertake investments. One has to ascertain the intended investment horizon and invest as per that. The recent SEBI categorisation of schemes has only made this easier. According to me, one does not need to shift core allocations made to fixed income. Tactical calls may be taken if he/she is quite adept at getting market timings right.
What would be your advice to retail investor at this point in time and what should investors focus on in the coming year?
Key to bear in mind while investing in fixed income is that there is no capital lost – unless there is a credit default. Fixed income offers solutions for various interest rate cycles and to suit varied investment horizons too. In the current environment, we believe a combination of short/medium duration strategies could be part of core fixed income allocation. Key is to engage with a good advisor who is able to guide you towards achieving your goals in case one is not able to do it solo.