The past year has been a tough one for debt fund managers. Since March 2010, the central bank has raised interest rates 11 times, making rate calls difficult. However, ICICI Prudential Mutual Fund’s Chaitanya Pande has been able to outperform the category averages and post good returns. “Inflation was high for a significantly longer period of time and RBI has taken an aggressive hiking stance. Globally as well, volatility has been very high with some commodity prices, except in the recent past, going through the roof and this was a tough environment for debt,” he says.
The three funds that he piloted during this period – long term, medium term and Banking and PSU Debt Fund have given returns of 5.27, 5.52 per cent and 5.69, respectively which bested category returns year-to-date. Put together, these funds had an average corpus of Rs 2,946 crore for the year ended March 31, 2011.
While Pande, who runs the largest debt fund house in the country, managed to beat peers, his investing philosophy, given the rising interest rate environment, was conservative. “We have been more conservative than we normally are predominantly because the rate environment is difficult,” he says. His investment philosophy revolves around ICICI Prudential’s own version of SLR – safety, liquidity and returns in that order. If you manage the first two well, returns will come, he says. While the fund house might have a more conservative philosophy, given the economic environment, hasn’t the credit risk gone up? This especially when the fund has had exposures to real estate or loans against shares and NBFCs. “When we do take these calls, we monitor the situation closely,” says the man who has been managing debt funds for ICICI Prudential over the last nine years.
In fact, in terms of credit calls, the biggest successes came in 2008 as the fund house had the largest real estate exposures among all the mutual funds in India. “We never had a sleepless night because of our real estate exposure. We have had cases where some promoters paid a premium because they wanted to release the underlying asset,” he says. The BS Debt Fund manager of the year stresses the fact that the credit model has to build in all the scenarios that are playing out. While there is always an element of risk, you live with that, he says.
| FUND STATS | |||
| Banking & PSU Debt Fund | Long - Term Plan Cum. | Medium Term Plan Reg. | |
| Corpus (Rs cr) | 1,297.0 | 308.9 | 26.5 |
| Returns (%) for | |||
| YE March 31,2011 | -- | 4.1 | 6.4 |
| YE August 31,2011 | -- | 6.0 | 7.6 |
| Sharpe Ratio* | 9.1 | 1.5 | 4.9 |
| *Risk free rate for debt is 0.00% Source: ICRA | |||
| Top 5 Holdings | |||
| BANKING & PSU DEBT FUND | |||
| Uco Bank, Central Bank of India, Allahabad Bank, | |||
| Bank of India, Axis Bank | |||
| LONG TERM PLAN - REGULAR - CUMULATIVE | |||
| LIC Housing Finance, HDFC, SIDBI | |||
| Vodafone Essar, HPCL | |||
| MEDIUM TERM PLAN - REGULAR | |||
| HDFC Bank, IDBI, State Bank of Travancore | |||
| Punjab National Bank, Federal Bank | |||
| Holdings as on August 31, 2011 | |||
Things, however, have not always moved according to plan. Last year in the June-July period, the fund house was more aggressive in duration calls (longer tenure). The fund house underestimated the extent of impact of SEBIs mark-to-market rule for maturities beyond 90 days on investor behaviour. For 6-8 months, market would not buy anything more than 3 months. “We never expected the impact to be so much and the result was that some of our funds saw underperformance during that time,” he says.
The major lesson Pande has learnt from his 15-year stint as a debt fund manager is not to chase fads. “Fads come and fads go, if you can’t make sense of it (such as the interest rate derivatives craze in 2006), don’t do it,” he says. Giving another example, he says that while some players took securities that had personal loans in their portfolios during 2006-2008, his fund stayed clear of them. “When the problem occurred it was not a surprise to us. There is always a fad or popular thing people are doing, it is not necessary that you jump on to the same bandwagon,” he says. While one can never be 100 per cent sure about investments, there should not be negative surprises or shocks, says Pande.
To avoid pitfalls, Pande devises the minimum threshold of scenario building. If the scenario works, he sticks to it. “Just because the market is getting excited about something, don’t change the scenario. Investment discipline is key,” says this MBA from IMI Delhi who preferred number crunching to a marketing vocation.
While the year has been tough, the conditions are likely to ease going ahead. Rates have already started to come down over the last three months with certificate of deposit rates at 9.5 per cent as compared to 10.25 per cent in March. “Over the last 3-4 months we have been saying that the rate environment is looking more positive and we have become more aggressive than many others. We believe that rates have more or less peaked.” Given the situation, should investors wait or invest now? Investors should not time the market and instead look at a portfolio approach (a combination of short, medium and long-term plans). “If you are holding for a longer period, the volatility eases off,” says this self-confessed foodie who loves to travel and sample local cuisine.
