Bottom-up approach pays dividends

A contrarian call also helped when the RBI shifted its focus and increased the cost of funds to stem the rupee's fall

Sachin Padwal-Desai says he would have been a software engineer if he wasn’t a fund manager. His partner Umesh Sharma probably would have been a chartered accountant.

Instead of crunching code or calculating taxes, the two manage over Rs 11,000 crore in assets at Franklin Templeton Investments, and importantly, stand out in their job. The two fund managers have managed to beat their benchmark indices in the last one year in four out of the five funds that they manage.

The widest outperformance is in the ‘Templeton India Income Builder Account’ or Templeton India IBA, a scheme that focuses on corporate and public sector debt opportunities, which has outperformed the Crisil Composite Bond Fund by over three percentage points.

Their ability to beat the market is largely driven by a focus on bottom-up analysis, according to them.  

“Whilst most of the industry only focuses on top-down and active management of duration, we focus on finding mispriced securities across the yield curve (in line with the fund’s objectives). The latter is based on a thorough bottom-up analysis of a company along with independent in-depth credit research. We believe such an approach helps us in being flexible in identifying opportunities irrespective of the stage of the interest rate cycle,” they said in an emailed response to Business Standard queries.

This doesn’t mean that they completely ignore the macro-picture either. For their top-down analysis, they rely on inputs from corporate sources in addition to watching the traditional fundamental parameters.

“Apart from the macro parameters, we also interact with company managements and external agencies to validate our hypothesis about the economic environment. This helps us in forming independent views about the monetary policy direction. For example, notwithstanding the rate cuts earlier in the year, we remained quite cautious about the environment due to our concerns about CAD (Current Account Deficit) and rupee,” they said.

The fund house says that it follows a team-based investing style that reflects the inputs of all individuals. The final decision is taken, following a discussion and exchange of ideas and perspectives between the portfolio managers and the credit research team. They believe that having more than one manager helps provide continuity as well as a ‘more wholesome approach to investing.’

  This and perhaps, the tolerance for a different path helped the duo adopt a contrarian stance which paid off when the central bank shifted its focus (it increased the cost of funds) to stem the rupee fall.

“…based on our independent research we were able to take a contrarian approach compared to the market, as we were not comfortable with the macroeconomic parameters. We had positioned our portfolios not just for downside risk in growth but also currency, by keeping the maturities relatively low. This was in contrast to the industry trend that had focused only on monetary easing and went long to take advantage of potential capital appreciation. This helped us when RBI (Reserve bank of India) changed its stance to defend the rupee,” the two fund managers said.

This has helped the funds outperform in a market where most of the industry players seem to have been caught on the wrong foot when reading the RBI’s signals.  

For now, the two are adopting a cautious stance with global central bankers likely to have a significant impact on Indian monetary policy. The stronger US economic data has again raised the spectre of the Fed scaling back its $85 billion-a-month liquidity injections.

The duo believe that the longer end of the curve will remain volatile and that concerns over fiscal targets ahead of elections could push up yields even further. They expect more of a slowdown and further pressure on the rupee. The growth environment will look up over the next few years, they said.

They also believe there is no shortage of opportunities in the market even now, and that there is a case to be made for looking beyond traditional credit ratings when evaluating investment options.

“We believe that there are investment opportunities in all types of markets and one can pick up good papers by going beyond traditional credit ratings. Our approach to investing is predicated on finding these attractive investment opportunities without taking undue risk and this is reflected in our consistent performance across various funds,” they said.

Their advice to investors? For the moment, the two believe that there is money to be made from investing in corporate debt.

“We believe that investors should look at corporate bond funds that can take advantage of the high yields being offered on corporate securities,” they said.