 "Santosh Kamath (left) and Kunal Agrawal of Franklin Templeton Investments, India")
One of the characteristics that differentiates Santosh Kamath and Kunal Agrawal at Franklin Templeton Investments, India is their ability to read macroeconomic variables, especially global events and their impact on rates. In July 2013 when all the macros were negative and repo rate at 7.25 per cent, the Street did not give much importance to this and was expecting further rate cuts. Rates had come down by 50 basis points from 7.75 per cent earlier in the year.
What people missed out was the impact of weakening currencies which did not give the Reserve Bank of India leeway to cut rates. Given the weak macros, the duo went for shorter maturity papers in the Income Builder Account which helped them reap the gains when RBI started the rate hike cycle to stem the currency crisis. During mid- to late-2013, the rupee had tanked to almost 70 a dollar levels. Things improved last year on the fiscal, current account, oil and currency fronts which were indicating a benign interest rate story.
"Yields had come down and the view was that rates will be cut continuously, but we realised that within the macro economy, the currency part was changing. We realised that currency was the key," says Kamath. Within the macroeconomic view, ability to gauge the global changes especially on the currency front helped the fund get a better handle on how rates could move.
"We kept maturities very low because when currency depreciates, RBI's headroom will be limited," Kamath adds. Subsequently, the central bank gave the signal that it was not happy cutting rates, and yields started going up.
On the corporate bond side, there was not much competition and hence the schemes could get better spreads. Instead of focusing on duration and government securities and with the expectation that rates may not move much, the focus was on corporate bonds with maturities ranging from two to four years. The typical yield in a corporate bond would be about 10-11 per cent which is 200-300 basis points higher than the current g-sec rate.
"The mistake people make is that they think the corporate bond yield should move in line with g-sec yields which is not the case," says Kamath. Thus, investing in corporate bonds not only helped them get additional yield but also capital gains as they got the spread compression call correct. So, anybody who was overweight on government securities started underperforming and those who were bullish on corporate bonds like the fund house benefitted. Returns in the schemes were in the range of 10.3-11 per cent.
One of the key risks given recent incidents is the credit risk. The fund house says that it shortlists companies based on promoter track record and inputs from rating agencies, private equity players, analysts as well as financial statements before forming a view. "We want to lend to a fundamentally good company, rating is one of the key parameters but not the only one," says Kamath.
The fund house is looking at undervalued corporate bonds which are at their trough and are moving up. In fixed income, not many people do this, he adds. Given their judgements on the bonds, they are ahead of the curve considering they have subscribed to the corporate bonds, their portfolio over the last one year had 13 upgrades as against three downgrades.
While the fund managers were not comfortable spelling out names with respect to recent calls, among the biggest calls the fund managers got right was the investment in Tata Motors Finance non-convertible debentures during the credit crisis in 2008-09. Not many were convinced due to the large borrowings of Tata Motors post the purchase of JLR. But the fund house decided to subscribe as the margins for Tata Motors Finance was fixed and the company was in a relatively strong position than perceived.
While they got the debentures at an yield of 12.5-13 per cent, the rate is much lower today at around 9 per cent. "When spreads start compressing, either we sell off or it matures. Then we exit and put it in a new bet," says Kamath.
Going ahead, the duo expect one more rate cut from RBI and corporate spreads to come down as the economy is slowing. The two things to watch out for, according to Kamath, are the movement of currency and oil which will make it difficult for RBI to go in for deeper rate cuts. Given the recent credit related issues, if there are sellers or if people want to raise money immediately, Kamath and Agarwal are ready to take advantage of the trend, without falling into the liquidity trap.
The fund house expects the corporate bond market to throw up good opportunities in the next 6-12 months. Given that Kamath subscribes to Warren Buffett's classic rule of being greedy when others are fearful and vice-versa, expect the funds to reap the bond harvest in the coming year as well.
With inputs from Sheetal Agarwal
