Franklin Templeton winding down of six of its credit strategy-oriented debt mutual fund schemes weighed on investor sentiment on Friday, but investors should not look the event in isolation as market forces are to be blamed for the fiasco, Vaibhav Sanghavi, Co-CEO, Avendus Capital Alternate Strategies told Moneycontrol.
In a special ‘Market Podcast’ with Moneycontrol, Sanghavi highlighted the management of Franklin has acted in the interest of the investors and that is why they have taken these steps.
“We need to see some sanctity in the debt market the way papers are traded, and for long term basis I would recommend the regulator to increase the ambit of investors who can invest into this debt market,” he said.
“This would help bring in more liquidity into debt markets. What it would do is that in case these kinds of things occur, investors can get an easy exit without disrupting the supply to a great extent,” highlights Sanghavi.
Hedging help outperform:
These are testing time and effective hedging can help minimize losses. Sanghavi highlighted that Avendus did see some amount of redemption pressure, but considering the fact that we are one of the most liquid names – we didn’t face any issues.
“We can effectively use long-short pierces of our portfolio to protect capital and generate any alpha which we can amid volatility. In the last month – when markets were down by about 24 percent we didn’t lose 1 percent,” explains Sanghavi.
“This was possible because of our effective hedging mechanism. In the equity-related products, we have outperformed by over 400-500 bps purely by taking aggressive calls in terms of hedging and going into cash,” he said.
What should investors do?
COVID-19 is an unprecedented event, and there is no history that could help investors or fund managers map the trajectory. But, investors could look at the intrinsic value of the stocks to pick companies for investments with a time horizon of 3-5 years.
“We are facing the event for the first time which essentially means that the volatility is likely to continue for the next 2 quarters. One essential factor which investors should not overlook is a price-to-book ratio,” says Sanghavi.
He further added that we are looking at P/B of less than 2 on indices which is favourable to invest in. History suggests that if someone invests when the P/B ratio is 1.75-2x – the next 3 years the annual return has been close to 30 percent which is a phenomenal number.
(Tune in to the podcast for more)
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