Principal Asset Management Company (AMC) was in the news recently when Sundaram AMC took over its reins. Bekxy Kuriakose, head of Fixed Income at Principal, with over two decades of experience in research and trading, has steered its portfolio to deliver consistent returns. She believes that the Reserve Bank of India (RBI) will aim to contain any sharp rise in the benchmark government security (g-sec) yields. What does that mean for debt fund investors? Vatsala Kamat talks to Kuriakose about debt fund strategies, credit-risks and how an investor can strive for stable returns in such uncertain times.
How do you view bond yields now, in the light of the volatile macroeconomic scenario?
The central bank’s policy announcements (Monetary Policy Review) in the first week of April and the reinforcement of the dovish stance by the Governor in first week of May, indicate support for growth revival in the back drop of the COVID-19 second wave. Reserve Bank of India’s actions will aim to contain any sharp rise in g-sec yields. Also, liquidity is ample in the banking system, which will keep short-term money market rates benign.
With inflationary signs seen in the economy, how are debt funds poised?
How debt funds will perform will largely depend on how RBI manages interest rates. Inflation remains a key macro risk. However, liquidity and low short-term rates could also keep yields in the 1-5 years category for gilts, corporate bonds and state development loans (SDLs) relatively attractive. Investors must allocate money to high-quality short-term debt funds, which maintain moderate durations. High-quality passive funds with short to medium duration (up to five years) and roll-down strategies can be another option.
What is your view on the interest rate cycle, given the second-wave disruptions in the economy?
The large borrowing programme of the government may put pressure on interest rates in the coming months. However, we do not foresee a sharp rise, as RBI would take steps to ensure orderly evolution of the yield curve.
We have had a long trajectory of falling rates. How do we ride a rising interest rate cycle?
First of all, we stick to the duration limits in our funds, as prescribed by the SEBI. Similarly our flagship short-term debt fund, Principal Short term Debt, limits its Macaulay Duration to three years. Other debt funds or debt portion of hybrid funds have moderate duration, so we can manage interest rate hikes, if and when they happen. Besides, we have invested across the gilt and corporate yield curve. We see value and lower risk from a sharp rise in yields.
What strategy do you adopt to stay ahead of the bond market returns?
We analyse peer portfolios on a monthly basis. We also compare our fund strategies with those of peers. We also perform daily portfolio attribution of key debt funds. In our debt portfolios, we strive to optimally manage liquidity, credit and interest rate risks, while undertaking active management.
The US Fed has hinted at tightening rates. How will it impact Indian fund flows and debt markets?
The Indian debt market in the last two years has been sustained by domestic flows and domestic institutions. Foreign portfolio investors have been net sellers. The crucial player is RBI, which has been very active and supportive of the market with Open Market Operations/Operation Twist purchases and secondary market purchases over the last one year.
Given the risks from the second wave of the COVID pandemic and the incomplete vaccination drive world over, I think it may be premature for most of the developed economies to start raising rates unless inflation shoots up sharply and growth accelerates beyond expectations.Principal Credit Risk fund shut down in 2020. There were large withdrawals in 2019 and 2020. As a fund manager, what was your biggest learning from managing a credit risk scheme?
The Principal Credit Risk Fund was primarily a retail-oriented scheme, relatively small in size. During the periods mentioned, the Credit Risk category faced large withdrawals in the Industry and our fund faced withdrawals too. We felt the size had reduced to an extent where it may not be optimal to manage it as a standalone credit risk fund. The fund was merged into the Principal Short Term Debt on September 4, 2020, a much larger sized fund.
During the period of redemption, we were able to meet all withdrawals smoothly, given the liquidity and laddering of the portfolio, without resorting to any borrowing. Hence I would say laddering the portfolio and managing the liquidity are also important while managing open-ended credit risk funds. Investors who are looking to invest in this category should look very closely at portfolios of the credit risk fund. These funds must not form the core part of a portfolio. Allocations to such funds must not be large.