Kamal Manocha
It is absurd to call Franklin Templeton event an isolated one. It is an unfortunate event. Franklin Templeton brought the concept of accrual debt investing to Indian investors who were otherwise always mispredicting the movement of interest rates and never made fine returns in debt.
First of all, let's stop calling the corporate bond market as a low-quality debt. Here is the definition of AA, and A-rated corporate bonds as per rating agencies - AA means high credit quality, and A means adequate credit quality. These are considered to be investment-grade corporate bonds as allowed by SEBI for debt mutual funds.
Secondly, the rating is not the sole mechanism to understand the quality of the company. ILFS & DHFL were AAA. There are many other factors.
Thirdly, India is a developing country. AA and A-rated companies are much more in number and no less important than AAA companies. For that matter, one should check India's rating. It is BBB-(Fitch).
Fourthly, NBFCs are the most important part of the Indian financial system. Some AA and A-rated NBFCs are very finely working towards stalwart visions of "financial inclusion" set by PM Modi. Their asset quality is better than many AAA financial companies.
Hence, the AA and A companies that are held by Franklin Templeton should not be blindly termed as low-quality corporations. Most of the companies are large corporates with more than 10-15 years of history, offering strong products and services, with well-established brands and many are listed companies with diversified businesses. Many are leaders in their respective industry. And, some less known ones, have got have a series of PE funding in the last three years. Overall, the portfolio is well-diversified across various sectors.
Of course, these companies have higher risk profile if one just goes by rating and compares to AAA. The problem is not an isolated event as it’s not the problem of the credit crisis. Its the problem of liquidity given the unprecedented situation. The reason responsible for the liquidity crisis is a perceptual risk aversion and flight to safety given the uncertain situation created by COVID-19 and lockdown.
With this understanding, industry & regulators need to come together to ensure that the situation is handled properly. Announcements must be made by regulators on steps being taken to ensure the Franklin Templeton investor interest is not compromised.
Lastly, the industry needs to understand that 3.1 lakh investors of Franklin Templeton are common investors to all AMCs. Calling this event isolation is not at all going to enforce the investors' trust. Every AMC instead of boasting about their AAA portfolio percentages should spread wisdom on the fact that all AA or A-rated companies are not low-quality debt.
India’s rating is BBB- So are we a low-quality nation? Don’t we see great potential in our economy? Investors’ fear cannot be addressed by showing them AAA portfolios. It is like running away from reality. The industry needs to take the responsibility of educating investors that AA and A doesn't necessarily mean a default.
Fear is like darkness. It can only go away by the light of wisdom and not by running away from the fear.
(The author is CEO and Chief Strategist at PMS AIF World)
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