 "Don't rely on credit ratings, do your homework: Rahul Bhuskute")
What lessons do MFs need to learn from the Amtek Auto episode?
The episode was specific to an investment manager. In general, credit fund managers should do their own homework on the company they are thinking of investing in, rather than rely only a rating agency. Investors and distributors should spend time in understanding how returns are being generated. Apart from interest rate risk, fixed income funds are primarily subject to three others — credit, concentration (aggregate exposure to one promoter) and liquidity. Investors should not be tempted by only the yields or past performance. They should also look at portfolio quality.
One needs to also look at the overall picture. There has been a lot of news generated around downgrades of credit ratings of some companies. However, the number of upgrades vastly outnumber the downgrades. The number of sectors seeing upgrades is also very diverse as compared to the downgrades that are happening in specific sectors. Investors should, therefore, keep their own counsel, rather than only go by what is being reported.
How well prepared is ICICI Prudential AMC to escape/deal with any such eventuality?
We are well prepared, with strong systems and processes. Any investment being made needs to be reviewed independently by the risk department and the investment committee. Second, we keep an eye on the amount of risk we are taking against any single promoter. Exposures taken on all companies of any particular promoter are added at the AMC (asset management company) level, not only considered at the individual and scheme-level exposure. Measured exposures are taken at both fund and AMC levels. In terms of disclosure, our fact sheets have been publishing overall promoter-level exposure since 2007, across all schemes. Finally, adequate liquidity is maintained to ensure any redemptions that arise are duly taken care.
Are credit investments getting a bad name among investors?
Credit investments (i.e in corporate bonds) are the largest asset class in the world and if it has worked everywhere else, there is no reason why it shouldn’t in India. There are almost 400 credit (i.e non-government security) exposures in the MF (mutual fund) sector and if an event has happened in one of these, it should not colour investor perceptions about all the others.
Having said that, what is good about these episodes is that it has made everyone appreciate the risks associated with these investments, the other side of the coin. Credit as an asset class is relatively new as compared to equity and gilt. Therefore, it will have its own learning curve. Such episodes will make sure that investors, distributors, AMCs and all other stakeholders appreciate both the risk and return aspects.
Market experts say the Amtek development could be the 'tip of the iceberg'. Do you agree? Where from (sectors) can we expect similar pains to emanate, going forward?
The sector has been having hundreds of credit exposures for the past four-five years. An isolated episode should not colour our view. Having said that, people should be aware that credit upgrades and downgrades and the odd default are part and parcel of corporate bond investments. Credit, concentration and liquidity risks should be managed well and return expectations from the product should be reasonable.
What are your structured products offering to investors?
We have three different accrual funds. ICICI Prudential Regular Savings Fund(RSF) is our largest accrual fund, with a size of Rs 5,717 crore (end-November). It invests typically in companies rated A+ and above. ICICI Prudential Corporate Bond Fund has a very different positioning. It invests in only companies rated in the AA and AAA bands and in that sense is a unique offering in the accrual space. It also maintains a higher duration than RSF. The AUM (assets under management) at Rs 4,034 crore (end-November).
Our third fund, ICICI Prudential Regular Income Fund, stands at Rs 930 crore (end-November). It is a complete accrual product and maintains a very short duration, due to which the short duration volatility on account of interest rate movements is low.
All the three products have different risk-return propositions. The idea of having multiple products is to leave the investment choice with the investor and their advisor.
Is India and its investors ready for junk bonds?Not yet. I think the security enforcement mechanisms need to be first strengthened. Junks bonds, by definition, are junk and the probability of default is much higher. If a default happens, the investor would look to sell the collateral quickly, for recovery of dues. Unless we have strong and time-bound enforcement mechanisms available for such investors, junk bonds would not be attractive.
What’s your outlook for credit-centric debt MFs, say in the coming one or two years? And, why should investors look for such schemes?
I think credit funds if managed well have a potential of delivering consistent and reasonable return. They deliver returns predominantly from accrual i.e. from the yields of the underlying investments. They do not need any events (rate cuts, corporate earnings improvement, etc) to deliver returns. On the other hand, these are unlikely to be multi-bagger funds. If the investor and their advisor are confident that an accrual fund is likely to deliver reasonable returns consistently, they should invest in it. The fund manager should ensure the consistency of returns in such a fund is not compromised by taking outsized exposure or by exposing the fund too much to interest rate risk.