Manager Speak: K Ramanathan, fund manager, Birla Income Plus
What are the factors that helped the fund outperform during the past one year?
There are four main factors that have helped us outperform during the year: (i) active duration management, (ii) timely switching between G-Secs and corporates, (iii) timely switching between AAA and AA papers, (iv) credit calls.
To elaborate, our higher cash levels in May helped us to cushion the fall and also pick up both government securities and corporates papers at attractive levels. At one point of time, we had about 65 per cent exposure to corporates and about 13-14 per cent exposure to AA papers.
The portfolio benefited from the contraction in corporate spreads. When spreads contracted, we switched to G-Secs and benefited not only from the drop in yields but also from the significant flattening of the curve. We also gained from the credit upgrades of some corporate papers we had invested in - like Reliance Petroleum and ACC.
What is your strategy going to be for this year? Where do you see the gains coming from?
Given that corporate spreads have fallen considerably, we have increased our exposure to government securities to around 48 per cent of our portfolio. We have reduced our exposure to corporate paper to about 46 per cent. This year, our gains are going to come from active duration management and good credit calls. If the economy recovers, we could see some credit upgrades. We have invested in medium term papers of IPCL, Tata Engineering and Ashok Leyland with this view.
What's your outlook on interest rates?
It's really difficult to take a long-term view on the markets with certainty as there are a lot of dynamic variables. The possibility of war between US and Iraq is a major concern due to its associated uncertainties, but you have sufficient forex reserves to absorb oil shocks. We would also continue to watch for signs of a revival in the global economy.
We feel interest rates will remain soft in the next three to six months. While fundamentally there is scope for further fall in interest rates, high administered rates act as a barrier.
