Credit worthy

KNOW YOUR FUND MANAGER

Ramanathan K

New debt instruments are a must if investors are to be offered higher returns, says the 33-year old Ramanathan K, the fixed income head at ING Vysya Mutual Fund.

An exposure to the world of credit research was the perfect foundation for Ramanathan K, the head of fixed income at ING Vysya. For a greenhorn who wished to take his first steps in understanding debt in 1995, there were only two choices""project finance institutions and rating agencies.

He believes that research and the rating process at Credit Analysis and Research (CARE), his first employer, gave him a 'ground-level exposure' to the debt cycle of companies in various sectors.

"In project finance, I would be stuck with one vertical and be branded as a specialist in that area whereas a rating agency ensured cross-sectoral exposure," he says.

A three-year stint with CARE and Ramanathan was ready to take a more active role in managing money and risk and became a credit analyst at Birla Mutual Fund.

The art of fund management
Ramanathan was responsible for assessing the credit exposure of corporate debt that the mutual fund was interested in.

"Unlike my previous assignment, I had to put money where my mouth was," he says. Ratings given by him were the starting point for decisions on buying and selling of debt of various maturities. After three years of judging bonds, Ramanathan moved on to managing money.

"With a credit appraisal background, I was comfortable in my role as a fund manager and was confident of the processes I followed," he says adding that in this space, there are but a few managers who have a background in research and ratings.

"In fund management, the devil is in the details and my exposure to credit analysis turned me into a perfectionist," says Ramanathan.

"Before arriving at a decision it is important to speak to the management, other lenders, auditors, suppliers and competitors," he adds.

In addition to feedback, Ramanathan also lays stress on business and financial analysis. "It is vital to understand the business cycle and the sector a company is operating in, its strengths and weaknesses, sustainability, competition and the demand supply situation.

On the financial side, one needs to understand whether a company is overstretching, is there cash flow and liquidity for business growth through the year instead of being seasonal and the question of leverage during expansions," he says.

He believes that even if the company has a high debt on its books, if the EBIDTA margins are high and sustainable, the steady stream of cash flows can neutralise high leverage. Analysis done, decision taken, so what's difficult about all this?

"The art is still about taking a call on those critical, returns-affecting investments in debt," says Ramanathan who is also a visiting faculty at the S P Jain Institute of Management and Research. And did he get the calls right?

Hits and misses
For someone with over a decade in the markets, the results as you would expect, are mixed. He remembers the credit calls he took on IPCL paper in 1998. The industry was going through a downturn and the paper which was bought at AA+ was sold before it was downgraded to AA-.

Similarly he sold Telco paper in 2002 before the paper was downgraded to AA, following apprehensions on its Indica project.

More recently in May at ING, he had suggested short term funds to investors in addition to Fixed Maturity Plans (FMPs) and liquid funds because of the steep corporate credit curve and good one year corporate bond levels.

The ING Vysya Income Portfolio ST has been in the top quartile in the last three months and has given an annualised return of 7.7 per cent.

At Birla Sunlife Mutual Fund, he regrets having gone negative on the markets in 2004 and stayed away from extending duration when the 10-year government paper sharply dropped to 6.75 per cent, pulling down the one year performance of his fund.

Though the trading call did not go as expected the medium term interest rate call was right with the 10-year yield touching a recent high of around 8.35 per cent. But is handling debt in India all about managing interest rates? 
 

RAMANATHAN'S PERFORMANCE Scheme Performance s on August 30, 2006
	3 Months	Benchmark
ING Liquid Regular	1.56%	1.34%
ING Short Term	1.94%	1.62%
	2000- 2005
Birla Income Plus	9.20

The future of debt
"The Indian debt market is underdeveloped and will take between three to five years to come anywhere close to the variety of fixed income instruments and options in international markets," says Ramanathan.

Fund managers do not have the flexibility to short or take positions in interest rate futures.

"In a rising interest rates scenario, all you can do is sell and sit tight," he says. Thus, if you have a negative view on a credit you can't make money on it. You need a credit default swap market for that.

Another area where there is good potential, according to him, is high yield funds which would bring into sharp focus the need for various types of bonds in the capital structure.

Ramanathan, who was exposed to these instruments during stints with Masachussets Financial Services in Boston (April 2002) and Lehman Brothers in London (October 2005), believes that we have to move from the conventional AAA-rated bonds to low-grade or subordinate corporate paper.

"While they are risky, the challenge is in managing such funds as they have the ability to generate higher returns compared to conventional debt funds," he says.

These types of debt will not only increase the options for fund managers but also returns for the investor. Ramanathan plumps for Monthly Income Plans which come with a dash of equity, followed by FMPs, short term plans, capital protected funds and, finally, liquid and floating rate funds.

He asks investors to avoid income and gilt funds where returns would continue to be low. When he is not predicting interest rate movement or planning the launch of an improvised debt instrument, Ramanathan heads home where he is kept on his toes by his hyperactive three year old son, Rahul.