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WF: There are a lot of concerns among distributors on corporate bond funds after the couple of default incidents we saw recently. In that context, what is the current portfolio composition of RRSF - Debt in terms of credit profile?
Prashant: The investment philosophy of this fund is to generate alpha by investment into credit assets at absolute high yields and attractive spreads in the 2-3 years horizon without carrying high duration (not above 2 years) in the fund. The portfolio is well diversified on issuer, rating and maturity parameters so as to manage credit risk and illiquidity risk in the portfolio.Currently the portfolio is well diversified with total of close to 50 - 60 issuers broadly allocated into ~ 40% invested into bonds with rating profile of AA and better than AA (AAA and AA+ , A1+, cash & other rec), around 35% in AA- and close to 25% in A+/A/A- rated papers and unrated paper.
WF: Which of your holdings have seen ratings downgrades in the last 12 months and what is your outlook on these companies?
Prashant: Four of our following issuer holdings have seen rating downgrades in the last one year:
Magma Fincorp Ltd Vedanta Limited. Bharat Aluminium Co. Ltd (Balco) JSW Steel Limited
Magma Fincorp is a NBFC with good capital adequacy and asset liability maturity profile. Its asset quality is expected tostabilize over the next one year. We are comfortable with its credit worthiness.The other three companies are in the metal sector. Balco is the subsidiary of Vedanta Ltd. These companies are highly efficient in their operations and have financial flexibility on which we draw comfort from. Having mentioned about the downgrades,I would also like to mention that we have had 10 issuer upgrades during the same period.The higher upgrade to downgraderatio reflects the resilience ofthe portfolio and superiorcredit performance of the scheme.
WF: Your portfolio includes exposure to the Jindal Group which is seeing cash flow problems, to metals and minerals businesses like Vedanta that are experiencing near term issues and to some unrated papers and a couple of structured obligations. How can you give comfort to distributors on these holdings, especially in the current challenging environment?
Prashant: Majority of our exposure is to companies which are highly efficient in operation / capital structure in their respective industry. As of now because of the downturn in the Chinese economy, metal prices have come down significantly resulting in lower profitability for some of the companies in which we have invested. However, we believe that over the medium term, the prices will improve reasonably which will enable these companies to service their debt comfortably. Further, these companies are elongating their debt maturity profile which will help them in their debt servicing. We have observed that during times of downturn all the stakeholders including the bankers support relatively stronger companies within a sector as these are the companies which recover the fastest when the sector eventually recovers.We believe that majority of our holdings will beamong those which will recover the fastest when the economy turns around. These companies are also able to access funds from banking sector. We are comfortable with our exposure in the metalcompanies.Our credit team is amongst the strongest in the capital market, with experience of tracking these issuers since long.
WF: Is the credit picture in the country broadly deteriorating or improving? How has the ratio of ratings upgrades to downgrades moved in the last 12-18 months?
Prashant: Overall, credit scenario is improving in the country. Govt of India has taken many policy related decisions which are getting implemented. Once the execution picks up, economic scenario will improve further and confidence in the system will go up higher. The ratio of rating upgrades to downgrades in the scheme is 2.5 which means we have had2.5 upgrades for every one downgrade. The same number for the overall market is around one. By that measure, the fund has performed much better than the market.
WF: There is a view that increasing pressure on PSU banks to clean up NPAs also means that an important source of funding for businesses facing near term pressures has been cut off, pushing them closer to defaults than would otherwise have happened. Is this a reasonable view? How does this impact your own credit assessment and your outlook on your portfolio holdings?
Prashant: Whenever the credit system tightens, weaker credit normally faces challenges for accessing funds. However, bankers take negative view mainly on those issuers facing long term pressures than near term pressures. Tightening of credit system affects refinancing assumptions in credit assessment. Hence, companies with stronger refinancing capacities will have higher credit worthiness. We believe our portfolio holdings are inherently strong on multiple counts which can be either operating / financial / group related factors. We don't see material impact on our portfolio holdings.
WF: Corporate bond funds can face significant liquidity challenges if inflows fall well short of outflows, given that vast portions of these portfolios are relatively less liquid. How have flows into this segment been in the last 6 months? How do you plan to mitigate this risk?
Prashant: We have not seen any significant outflows in last 6 months in the fund. Infact, we have been getting consistent flows over a period of time, which has helped us build a healthy portfolio.As I had mentioned earlier, the portfolio is well diversified on issuer, rating and maturity parameters so as to manage credit risk and illiquidity risk in the portfolio.In order to manage the illiquidity risk of underlying bonds in the portfolio, we have adopted a strategy of laddering the maturity of the portfolio which has created a self liquidating structure for the portfolio. At least 10% of the portfolio matures every six months thereby giving us periodic liquidity typically useful in scenarios like the current one.Currently around 30% - 35% of the portfolio is in the maturity bucket of <= 1 yr which is fairly liquid in domestic corporate segment. Moreover, if one were to evaluate from rating point of view, around 40% of the portfolio is rated AA and above which is a mix of fairly liquid and semi liquid assets that can be easily liquidated in the debt market. Also the disciplined approach to duration management by maintaining duration in the range of 1.50 yrs to 1.70 yrs helps the fund to be less volatile.
WF: Some observers believe that the risk-return trade-off for corporate bond funds is no longer favourable especially for retail savers, given the recent turn of events, and that this category should be recommended only to experienced investors who can take a considered view on risk. Would you agree with this assessment?
Prashant: On the contrary, with the current cut in the small savings rates, expected fall in deposit rates and RBI's move in the Policy to make long term liquidity positive, which will lead to systemic rates going down, the need for carry increases. Products like RRSF - Debt should be a natural choice for retail investors.
The Fund with ~10.5% of Gross yield (as on 31.03.16) becomes an attractive and a good alternative for investments in this asset class for all kinds of investors, including retail investors.
WF: What in your view is the investment argument for RRSF - Debt and who is this product suitable for?
Prashant: The Fund is ideal for investors who have a low appetite for interest rate volatility and seeking accrual returns with moderate duration. With the objective to generate tax efficient consistent returnsover an investment holding period of 3 years & above, the fund is suitably placed for those investors who are looking for a superior alternative to traditional investments like Fixed Deposits.
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