India Inc presses fund houses for more AAA-rated firms in portfolios

Corporates are putting more checks and balances in place before committing monies to debt schemes

Corporate India has stepped up due diligence of its mutual fund investments and is pressing fund houses to tweak their portfolios to include more AAA-rated companies and sovereign public sector undertakings, even if it means sacrificing returns. 

Institutional investors had gravitated towards bigger fund houses that were perceived as safer after the IL&FS crisis. Though this helped to some extent, the larger fund houses also took a hit on net asset values of some of their schemes after a few more credit episodes came to the fore. 

What’s more, fund houses also passed on the losses to investors, making it clear that they could lose their capital on debt investments. 

As a result, corporates have put in more checks and balances in place before committing monies to debt schemes. “Corporates are assessing investment processes of individual fund houses — their philosophy on taking credit risks, on-boarding process, size of internal credit teams, whether they stick to the scheme mandate, and the risk management processes they have in place,” said a debt fund manager, on the condition of anonymity. 

According to him, while a few corporates have stopped investing in MFs altogether, others have flocked to schemes with shorter tenures. Some others are investing in portfolios comprising almost entirely AAA-rated or PSU names, he said. 

“In the past, fund managers have deviated from the scheme mandate and gone down the credit curve in search of higher yield. Companies are taking verbal assurances from them that they will stick to the committed portfolio,” said the debt fund manager. 

While the 16 debt categories broadly give an idea as to where fund managers could invest in, corporates are defining these mandates tightly, added R Sivakumar, head (fixed income), Axis MF. “For corporates that were going down the path of taking higher credit risk, there is a change in the thought process. They have become more sensitive about capital loss and are okay with sacrificing returns for safety.” 

Inflows into long-tenure debt funds have stalled since August 2018, and recent markdowns as well as scheme rollovers are making matters worse. 

Nearly three-fourths of the debt money — as on May 31, 2019 — was invested in securities with duration of below three years.

MFs, too, have become risk-averse and are restricting their lending largely to banks, high-rated NBFCs, collateralised borrowing and lending obligations, and public sector enterprises such as oil marketing companies.

There is uncertainty among investors, with concerns over long-term credit as well as interest rate outlook. Therefore, most are preferring safety to returns, which is why money is flowing to shorter duration funds, said experts. 

A large quantum of money has flowed into debt MFs over the past two years, which was largely invested in short-term papers issued by NBFCs and HFCs that resorted to short-term borrowing to reduce their cost of funds. NBFC and HFCs, in turn, used the short-term borrowing to extend long-term loans, thereby creating an asset-liability mismatch. This surfaced only after the IL&FS fiasco in September last year.

However, things have changed, as most NBFCs and HFCs are now facing liquidity constraints and have curtailed lending. 

Fund houses have trimmed their NBFC exposure to 27 per cent of AUM against 34 per cent in August, with exposure to NBFC commercial papers down 40 per cent, says a Credit Suisse report.