Taking calculated risks without compromising on credit quality has helped the fund managers outperform their peers.
Despite the rate hikes, liquidity issues and regulatory changes, UTI Mutual’s fund managers Amandeep Chopra and Manish Joshi made the right calls helping the UTI Floating Rate Fund outperform its peers on a risk-adjusted return basis. The good performance in shorter duration papers helped the duo win the best fund manager award in the debt category. While thus far they have successfully piloted the scheme, with interest rate uncertainty, the challenges in managing the impact of market events as also investor expectations moving up a notch higher, they have their task cut out.
Increasing challenges
The scale and volumes in terms of transactions and a number of regulatory changes on valuation norms (debt paper over 3 months to fall in mark-to-market category) has increased the number of variables the fund managers have to now work with and track. “That’s as big a challenge as your prediction of market movements and direction of the rates,” believes Joshi. Despite the pressures to get the interest rate calls right, the fund house has been clear about not compromising on credit quality. Says Joshi, “We did not want to chase yields and lower our credit quality.” Given the turbulence in the money markets and the fact that shorter tenures react more strongly to negative news than longer duration paper, another decision that helped the team manage things better was to ensure that a substantial part of the fund was in the liquid category.
| CONSISTENT OUTPERFORMER | ||
| Returns (%) | Fund | Category |
| 1 month | 0.54 | 0.49 |
| 3 months | 1.41 | 1.39 |
| Year to date | 3.92 | 3.81 |
| 1 year | 4.84 | 4.67 |
| 3 Years | 7.20 | 6.54 |
| Source: ICRA Online | ||
| FUND FACTS | |
| Launch date | 3-Aug |
| Fund size (monthly average) (Rs cr) | 1,312 |
| Benchmark index | Crisil Liquid |
| Average credit rating | AAA |
| Weighted average maturity (days) | 84 |
| Source: UTI | |
Hits and misses
The scheme made gains over the last two years starting with 2008 when risk aversion took over and people were afraid to park their money. Investors stayed away from the FMPs (fixed maturity plans), which saw redemptions due to concerns on NBFC exposure. The team at UTI thought that it was overdone and that the situation was not as bad as was made out to be. “Our in-house research told us that the worst was behind and we were comfortable about the NBFCs in our portfolio,” says Joshi. This exposure helped the fund improve its performance. Another instance was its exposure to a leading vehicle manufacturer and its finance arm which was going through a lean phase but the team believed that it would come out with better numbers and there was a strong case for upgradation. The duo say that a large part of its success is owed to the collaborative approach of the research team and best practices of T Rowe Price. On the flip side, there was also a situation such as in May 2010 when the duo could not anticipate such a large shortfall in liquidity, which caught them by surprise and had a negative impact on the performance.
Advantage short-term funds
Investors have been parking their funds in short-term funds (mainly FMPs) over the last 18 months. “FMPs take fancy of investors when interest rates are on the upswing and because in terms of returns they are better compared to bank deposits, on a post-tax basis, says Joshi.”
Since it is difficult to predict the movement of interest rates or capture the top/bottom end of a rally, it is prudent to take exposure at various points in time, believe the fund managers. In addition to the short-term funds, the fund house has started advising investors to look at long-term bonds from an asset allocation perspective and to capture any upsides. Says Chopra, “Have a small portion (5 per cent) of your debt portfolio in long-term bonds, you can increase it whenever the tide turns favourable.”