A safe player

KNOW YOUR FUND MANAGER

A conservative attitude to investments has been the cornerstone of Ashish Nigam's debt management philosophy.

Safety first is the credo that Ashish Nigam employs to manage DBS Cholamandalam's portfolio of debt offerings. The 34-year old fund manager believes in settling for returns which are a few basis points lower rather than risk default.

Prudence in fund management, according to him will bring in stability and avoid unnecessary risk. While he keeps undue risk at an arm's length how does he take the calls that decide returns for investors?

Tracking rates
Nigam is on the lookout for changes on key macroeconomic variables on both domestic and international fronts. He believes that while international factors continue to be positive, domestic factors are not so favourable at present, and this could lead to a uncertainty in interest rates.

The stable interest rate scenario at the international level according to him is due to the easing of crude prices and the end of the interest rate hikes by central banks.

At the domestic level, if inflation worries and credit boom continues, RBI may have to hike rates. If that happens, or if there is a lack of liquidity then there will be a pressure on the short end of the curve.

While the call on rates are decided by macroeconomic factors, what are the areas that Nigam pays special attention to when deciding on the security to buy?

No compromise
For the finance management graduate who took a liking for fund management as a summer intern at HSBC ten years ago, the key criterion for choosing a security is its credit quality.

Says he, "I do not wish to compromise on this. My investments are AAA rated (of the highest quality)." The second decision variable relates to liquidity. The security should be such that it can be disposed off quickly.

He cites the example of certificates of deposits of SBI and its subsidiaries as a security that finds ready buyers.

Finally, Nigam looks for consistency in returns. For him it is important that all securities fall within in a band of returns and there is no dramatic variance in returns for instruments in his portfolio.

To achieve consistent returns, Nigam has divided his portfolio into two parts""core and trading. The core consists of higher yielding assets, while the trading portfolio is used for portfolio churning. In case of a distress sale which could result in a loss, he tries to counter that with a parallel trade which offsets the loss.

Says Nigam, "This strategy ensures that there is no excess volatility in returns and helps control the standard deviation of the returns resulting in consistent performance." 
 

NIGAM'S PERFORMANCE Scheme returns (in %) as on Nov 16
	1 year	Category
Liquid	6.47	6.10
Triple Ace	2.55	4.45
Freedom Income	5.84	5.92
MIP	8.00	9.99

Churn, churn, churn
In addition to this, he tries to maximise returns by actively churning his portfolio and managing duration.

During the liquidity crunch following the redemption of India Millennium Deposits between November 2005 and March 2006, Nigam reduced the tenure of his funds to 90 days and brought it back to 130 days after the liquidity situation improved.

In the current volatile interest rate scenario active churning helps capture the volatility more efficiently. To achieve this, Nigam relies on buying papers with a staggered maturity which ensures maturity at certain intervals.

The cash realised is deployed at the then prevailing interest rates. Says he, "This helps in ensuring that the interest rate volatility is captured by the portfolio more efficiently."

Some right, others wrong
Positioning the portfolio based on future expectation of central bank moves and movement of key macro-economic variables comes with a debt fund manager's job.

And how has Nigam's record been when it comes to getting the rate call right? Like his peers he too has had a mixed record. In his successes he counts the July 26, 2005 mid-term policy review of RBI in which there was no change in rates which was similar to his view.

The market had expected a 25 basis point hike in the reverse repo rate. This was on the back of the rupee appreciating to 43.18 a dollar, and the Chinese currency being revalued.

Nigam increased portfolio duration from 130 days to 190 days, while the market was trying to get into shorter duration papers. Nigam has had his share of blushes as well. He failed to catch the April and October rate hikes in 2004, and was left holding paper which was giving him lower returns than those with an adjusted return.

The next step
Nigam advises investors to look at funds that buy tenures of less than a year, have a minimal mark to market (MTM) component and a mix of floating and fixed papers.

His justification: there could still be some more volatility and uncertainty in interest rates with an upward pressure on the yield curve and having an MTM asset could lead to valuation/actual losses to the portfolio due to rising rates. His short term schemes""-be it Liquid, Short-Term Floating rate or Short-Term Income-""do not hold MTM assets.

In the current scenario of uncertainty and volatility in interest rates, not having MTM assets immunises the portfolio from interest rate volatility. MTM assets, believes Nigam, should be taken in the portfolio when the interest rates are easing as they help in improving returns. While these are some pointers, when does Nigam press the panic button.

"My selling signals are the hike in rates, the shooting up of oil prices, higher projected inflation numbers and an alarming rate of credit growth."

On the courts
When Nigam is done with the dealing room, he heads to the squash courts. He likens the court to the regulatory framework within which you have to play and score.

Over the years, the markets have taught him a few lessons. The most important among them: don't give your ego a free rein or the consequences will be disastrous and have a positive attitude to maintain your sanity in the chaotic world of fund management.