Bond yields, which shot up after Reserve Bank of India announced series of measures on Tuesday to curtail liquidity in the economy are seen coming back to normalcy in around one and half months once rupee stabilises, A Balasubramanian, CEO, Birla SunLife AMC told CNBC-TV18.
Once rupee stabilises, he expects portfolios to get adjusted in a way that money would flow from longer duration to the short duration instruments. He also sees larger allocation towards the money market funds.
After RBI’s move large redemptions were seen in liquid funds. During that period, some redemptions were to the extent of about Rs 60,000-70,000 crore approximately from all mutual funds put together, Balasubramanian said.
He is underweight on FMCG and cement sector but prefers private banks over publics sector banks on strong fundamentals. He said that AMC would have a larger allocation for the private banks as the fear of non-performing assets, capital adequacy ratio, return on assets and return on equity is lesser in case of private banks..
Below is the verbatim transcript of the interview
Q: Could you update us on what has been happening with redemptions in the fixed income side? Have you seen a lot of that in the last two weeks?
A: Not really in terms of the quantum of redemptions. The larger redemptions were in the nature of liquid fund redemptions that were there immediately post the Reserve Bank of India (RBI) move which was on Tuesday making some changes in terms of the interest rates to go up at the shorter end. During that period, the whole of that particular week there were some redemptions which could have been to the extent of about Rs 60,000-70,000 crore approximately from all mutual funds put together and unlike the last time 2008 crisis where the redemptions were quite substantial which was largely on the premise that credit quality of the portfolios in the mutual funds could potentially pose a threat on their capital, whereas this time around that kind of panic was not seen and the redemptions were largely on the expectations that in the short duration funds especially the money market funds which in India are called as liquid funds had to give negative returns for one or two days given the fact that swing in the rates in the short-term was substantially higher than what we call as a tolerable limit. Yes, there were some redemptions but that segment of the business is coming back to normal.
Q: Do you think the redemptions may not have happened in longer maturity products because people were too frozen? The movement of the yield was so sharp and if the yield does retrace back to 8 percent over the next few days do you expect to see a lot more people redeeming now that they have been stung by the prospect of volatility in the Gilt market?
A: One of the thing which I am seeing in the industry for so long, this time around the level of maturities, the kind of reaction that is coming to the entire move and the portfolio value changes which I call it as negative returns that is being generated, the tolerance has been relatively higher as you rightly mentioned for the simple reason that the swing from yield on 10-year bond yields going up by 1 percent and corporate bond yields going up by 1.5 percent in the longer end the portfolio has got the hit then and there. I think it is immediately got reflected in the portfolios in terms of valuations.
So that is in some sense would definitely hold back the investors. We also have been suggesting is that while one can of course get worried about what is currently happening, given the fact that the view that has been taken by RBI is more to control the volatility in the rupee-dollar movement and as and when we see actually a stability which could be maybe one-one and half months we will see the bond yield coming back to normalcy.
Once it comes what could probably change in our view is, though the long-term views may remain somewhat benign at the same time when the portfolio gets adjusted we will probably see a bit of an allocation from longer duration to the short durations and probably a larger allocation to the money market funds and that is the kind of shift in all probability could happen. At the same time we could also see a shift happening towards accrual kind of products where probably I will able to reasonably estimate what would be the potentially return I would get over the next one-one and half years timeframe. The fact of the matter is that there is high realisation which is there.
That is the beauty of the fixed income. In a money market fund today with the yields going up the portfolio yield also keeps rising because it is all to Mark-to-Market (MTM) on daily basis and today if you look at the portfolio yield it is close to about anywhere around 11-11.25 percent for a 60 days maturity. It clearly indicates that anybody who come in, the potential gain what one will get will be relatively higher which essentially also means that the existing investor is as good as selling the instruments at 11.25 percent.
The question to ask is, is it worth doing that. That is why I think there is high level of tolerance and high level of maturity that is there in the minds of investors this time around given the fact that portfolio has taken a hit, but portfolio yield is high which is not the yield at which one should sell.
Q: How are you treating it as a fund manager in your large diversified funds in terms of your exposure to the outperforming sectors like Fast Moving Consumer Goods (FMCG) versus recent underperformers like banks?
A: The way we have been constructing the portfolio for last many years, especially in last 3-4 years, since that time there have been a high volatility which we are witnessing on either the commodity sectors or any other sectors which could have governance issues in some sense. The way we have done it, one is mapping to the index with respect to the weightages and to what extent we should go underweight and overweight. You cannot afford to go zero in any sectors, at the same time to what extent you can go underweight and to that we of course decide.
On the basis of that if you look at it we have been underweight on sectors like FMCG to some extent given the fact that the valuations have stretched. At the same time the banking and financial services business, the larger sectors within both the Sensex and the Nifty, which of course has been very tricky, affected by the economic slowdown as well as high level of rising Non-Performing Assets (NPA) and so on so forth.
We have allocated funds to private sector banks as they are highly focused on retail and not so much on corporate books reducing the potential threat of NPAs. The private sector banks post the RBI move have got corrected following expectations of rise interest rates which could impact the deposit mobilisation capability increasing their cost of borrowing.
Having said that at least the fear of NPAs, the fear of capital adequacy and the fear of reducing Return on Equity (ROE) and Return on Assets (ROA), those threats are not there, so we will of course have a larger allocation to that sector. That is the way we have built the portfolios. I think the entire motive is not to of course try and significantly outperform the market. Target is to marginally outperform in these kind of occasions, at the same time reduce the portfolio volatility by having exposure to some of these sectors which could have least potential impact in this kind of volatile scenario especially from the results point of view. As a fund house we have gone little bit underweight for very long period of time in public sector banks given the fact that the valuations are cheap, the cheap valuations may also lead to a valuation trap.
Q: How you would have approached ACC-Ambuja announcement? These stocks form a part in most equity portfolio for mutual funds.
A: Fortunately we do not own these stocks big time in any of our portfolio though they have been throwing up lot of cash, but given the uncertain economic environment we have been underweight on sectors including cement. Having said that the announcement which has come in terms of merger, we have to assess to what extent it has not been fair to the shareholders and analyse before we react on that.