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WF : Can we look forward to a secular decline in interest rates in 2013? Where do you see the 10 yr GSec yields by end of 2013? What are likely to be the key drivers?
Amit : There will be softening of rates over the next 6 to 12 months. We expect RBI to cut Repo rate by 50-75 bps in next 3-6 months. The key variables supporting bond yields will be falling inflation, manageable twin deficits, muted growth and RBI's monetary easing measures in the form of rate cuts and liquidity infusions. Demand-Supply dynamics will also remain favourable.
Given this broader view, we expect the ten year benchmark to touch 7.5% and possibly move down lower during the next 12 months.
WF : There is a lot of optimism building up on debt funds among market participants. Can we look forward to 2013-14 turning out to be a secular bull market like we saw in 2001-2003? In what ways is today's situation different from that big bull market we saw in bonds?
Amit : If inflation does come down as expected, we may see the rate cut cycle and liquidity easing measures extend beyond the first 25-50 bps. The fiscal deficit numbers will also hold key, and the recent moves by the government give reason for hope.
If these macro variables fall in line, we will see a rally similar to the one witnessed in 2001-03. The magnitude of the move may be different but the broader direction will be similar.
Like 2001-03, we are going through a cyclical downtrend in growth, which may last over the next 12 to 18 months.
WF : While a lot of optimism is building on the long end of the curve, there are some concerns on returns from investing in the short end. How do you see the prospects of short term income funds going forward? What will be the key drivers?
Amit : The shorter end of the curve reacts as much to rate changes, as to system liquidity and demand supply dynamics. The initial move to any rate cut may be a parallel shift in the yield curve. But as and when liquidity conditions starting easing further, we will see a bull steepening of the yield curve, where in the short term rates come down by a greater extent.
We expect liquidity conditions to improve meaningfully once the twin deficits become more manageable, and RBI gets more comfortable with inflationary trends. This most probably will play out incrementally over 2013.
WF : Retail investors normally look for reasonable returns, high predictability of returns with little or no volatility. In what way do you manage your retail debt products to try and deliver against this customer expectation?
Amit : We strongly believe that there are varied yet unique propositions in the debt funds space as far as retail investors are concerned.
FMPs provide a high degree of certainty and reasonable returns on a pre and post tax basis. In the open ended space, different funds are uniquely positioned on a duration and credit risk spectrum. While a product like RRSF-Debt (a credit focussed fund) tries to leverage superior credit evaluation skills, and delivers portfolio alpha through credit selection, a dynamic bond fund generates that alpha through active duration management, and an MIP does that through marginal equity allocation.
While open ended funds may exhibit some return volatility over short periods of time, as long as the investor has an adequate holding period horizon, these products endeavour to give higher pre and post tax returns over FDs and similar debt instruments, through an interest rate cycle.
WF : Corporate defaults are at a 10 year high now. Several large companies - and not just the small ones are also restructuring their liabilities. Does such an environment present more hazards or opportunities for a bond fund manager focussing on corporate bonds? How do you navigate in such a challenging environment?
Amit : Credit evaluation is a continuous process. The challenge is to equip oneself with adequate infrastructure both in terms of human capital as well as business and financial information, and to apply that efficiently. For us, credit evaluation is more of a forward looking process than just looking at the data and events gone by. Hence there is that much more importance given to primary research which includes direct interactions with all types of borrowing entities, significant reliance on market intelligence, adequate weight age to the softer aspects of credit research like management quality, banking relationships, gearing philosophy etc.
This ensures that we have greater forecasting abilities and hence are able to stay ahead of the curve in terms of credit cycles. This also helps us in identifying and capturing attractive opportunities in challenging environments.
WF : What policies and processes have you put in place to monitor and limit investment in group companies? What exposure at a fund house level do you have to your own group companies?
Amit : We have a well laid out documented policy in terms of exposures to individual corporate and groups, irrespective of the parentage. This is a board approved policy which forms the backdrop for all our investment decisions. This policy is implemented independently by the Risk department, which reports directly to the CEO.
In fact, as an AMC, we make a detailed presentation on a bi-annual basis to our board of directors and trustees, where each and every exposure is discussed and deliberated upon, including exposure to various groups including our own group. This is on top of the more frequent reporting and discussion at the Investment Committee level, presided directly by the CEO.
As far as exposure to group companies is concerned it is well within stipulated rules and regulations as per SEBI and even as per the more stringent internal investment guidelines.
WF : Economists remain concerned on the fiscal deficit and on the potential impact of populist measures like the food security bill, which may become a reality in 2013. How do you see the fiscal deficit situation panning out in 2013 and how might that impact bond markets?
Amit : The importance of remaining in the path of fiscal consolidation is now well accepted by the government. Also the fear of credit downgrade due to an unsustainable fiscal position is very real, which is something that has been highlighted at the highest levels of the government. While the food security bill may get introduced in the budget session, it will get implemented in a phased manner keeping the overall fiscal health in mind. Direct cash transfer is being looked at as a game changer. If implemented well, it can go a long way towards addressing the ballooning subsidy issue.
The concrete steps that the government has taken in the last few months, including those to get back on the path of fiscal consolidation, has given comfort to a lot of market players, in terms of expectations on the fiscal going forward.
WF : While our equity markets are quite significantly impacted by global liquidity and sentiment, to what extent do our bond markets get impacted by global factors? What global factors, if any, do you see impacting our bond markets in 2013?
Amit : The bond market does get impacted by global environment to some extend but it is mostly affected by domestic events. As major portion of the debt is domestically held, so domestic policy actions, fiscal situation, liquidity have higher impact on bond yields.
Some of the global factors that might impact our bond market in 2013 are global growth prospects, risk aversion, commodity prices, crude oil prices and also US treasury movement.
WF : There is a belief among some participants that income and gilt funds are best left to HNIs and corporate investors who are more nimble and that retail investors should focus on dynamic bond funds, even if they have a 1 year + horizon. Is there merit in this argument?
Amit : Absolutely. Dynamic bond funds, by their very nature manage duration on a dynamic basis, based on medium term views on interest rates. As such, retail investors are best advised to take duration exposures through dynamic bond funds, which allows the fund manager to manage duration proactively, is more tax efficient, and can be part of a core debt allocation for the retail investor. Dynamic bond funds target to beat FD or other similar debt product returns on a pre and post tax basis over a 2 to 3 year period, i.e. through the interest rate cycle.
WF : Where do you find the best opportunities today in the fixed income market?
Amit : Barring leads and lags, we expect the yield curve to bull steepen over the next 12 months, thus presenting investment opportunities across the yield curve. Investors are advised to choose funds based on a) the investment horizon, b) risk appetite (volatility of returns) c) tax considerations.
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