Informist, Thursday, May 2, 2024
--Nippon MF Tripathi: Not much pressure on Fed, RBI to cut rates
--CONTEXT: Comments by Nippon MF's Amit Tripathi in interview
--Nippon MF Tripathi: Mkts have no option but to delay rate cut view
--Nippon MF Tripathi: RBI could cut interest rates in Oct
--Nippon MF Tripathi: Still some juice left in long-term gilts
--Nippon MF Tripathi: 1-, 2-year OIS at good levels to receive
--Nippon MF Tripathi: Corp bond fund has artificial barriers to growth
--Nippon MF Tripathi: No spreads left in plain vanilla corp bonds
--Nippon MF Tripathi: Papers of fincl institutions offer good spread
--Nippon MF Tripathi: Fairly present in asset-backed securities
--Nippon MF Tripathi: Narrative for passive debt funds has gone cold
By Asmita Patil, Nishat Anjum, and Subhana Shaikh
MUMBAI – Mutual funds opting for long-term government bonds is a theme that has been playing out for around a year now, but Amit Tripathi, chief investment officer – fixed income, Nippon India Mutual Fund, doesn't feel that it is old yet. Although his core allocation will be in five- to seven-year bonds, longer-maturity papers are still worth the buy, Tripathi told Informist in an interview.
"Till about a month back, it was becoming difficult to figure out how much more space is left for the longer end to run, at least in the near term. There has been some correction in the last 20 days," he said.
"I don't want to specifically talk about levels but at and around current levels there is some juice left in longer bonds. At 7.30% or 7.40%, I would definitely want to have allocation. Our core allocation will be around the 5-7 year point though. A 70:30 intermediate and long allocation is what we would prefer right now."
Since April 2023, investors, including mutual funds, have been stocking up on longer-duration papers, in anticipation of interest rate cuts after the Monetary Policy Committee unexpectedly halted its rate hike cycle. Tripathi expects interest rates to be reduced by 50-75 basis points, starting October, alongside a pronounced slowdown in economic growth.
On current opportunities in spread instruments, Tripathi said that there is little opportunity in terms of spreads in the high-grade space beyond structured instruments, while he is fairly present in asset-backed securities.
In plain vanilla corporate bonds, especially in "AAA" rated papers and the quasi-sovereign space, Tripathi doesn't think that there is too much spread left, but the financial services space selectively continues to offer good spread.
Following are the edited excerpts from the wide-ranging interview that included subjects such as monetary policy, financial markets and the mutual fund industry:
Q. How do you see the interest rate trajectory in view of the global challenges including uncertain macro and geopolitical developments? Rate cuts in the US are being constantly pushed back. How likely do you think a rate cut is in India?
A. I think the issue is more around growth and not around inflation. As long as there is comfort around growth that RBI (Reserve Bank of India) has, the pressure to cut rates is that much lesser. Obviously, inflation has to be low and manageable, but it is the growth conditions that will drive the pressure, the magnitude, or the timing of rate cuts rather than inflation. Both domestically and globally, growth conditions remain at a level where the immediate pressure to cut rates is not significant...The market has no other option but to postpone its rate cut expectation in terms of the timing of the rate cuts and, to some extent, the quantum of rate cuts.
Q. So are you not expecting a rate cut in 2024?
A. I didn't say that. I said postpone and lastly, you are in an election year. I would like to believe that you may have a more pronounced slowdown as you move towards the fag-end of this calendar year and towards the beginning of the next calendar year. The markets might start taking cognisance of that and somewhere in the third quarter (Jul-Sep) of this calendar year, the central banks may react to that in the fourth quarter (Oct-Dec) of this calendar year. Maybe, what was August for the RBI (to cut rates) becomes October, and what was June for the US Fed becomes Sep-Oct. That can happen.
Q. What is the quantum of rate cut that you are expecting now?
A. Effective rate cut of 75-100 basis points and actual rate cuts of 50-75 bps. So, 15-20 bps has already happened and another 50-75 bps. The direction is established, the timing is and the work in progress, but the quantum can never be established with certainty beforehand.
Q. You did a very good job managing the corporate bond fund. Even though you are offering better returns against most of your peers in the corporate bond fund, the AUM of the fund is low against other players. Why is that?
A. So the genesis of a corporate bond fund is very funny. Corporate bond funds never existed as a category. In debt, there are only four categories--liquid, low duration, short-term fund, and gilt fund. These are the only four mother categories. Everything else is a derivation. Corporate bond is a derivation of short-term fund category. Why did corporate bond come? Because in 2017, SEBI (Securities and Exchange Board of India) came out with a categorisation of funds in which corporate bond funds were introduced. Nobody used to have a specialised corporate bond fund till then.
Why should I have a fund which comes with artificial barriers of not investing in G-sec and SDLs (state government securities) even in periods when G-sec and SDLs are far more attractive than corporate bonds? I am actually doing a disservice to my client, very frankly. So structurally speaking, short-term bond fund is better than a corporate bond fund or a banking PSU fund because the latter funds come with their own inefficiencies of asset allocation.
Because this came as a new category and because this came into being just around COVID-19 and you had a massive inflow of liquidity around that COVID-19 period, especially institutional money, you had a massive influx of money into this category as well and this is what made this category grow.
Obviously, once this category reached critical mass, then money attracts money kind of thing happened. So that is the story of corporate bond funds. Today, if you see corporate bond funds across the board, they look very similar. Apart from the duration aspect of it that is. Everyone runs almost similar 75-80% corporates. Everyone runs 100?A portfolios. Everyone runs, I don't know, almost similar names also in their portfolios. So, this is very difficult to differentiate. The only way you can outperform or underperform is through incremental asset allocation of the residual 20-25% of your portfolio and duration management.
Thankfully, possibly in our case, duration management was better than others in the last two to three years. We ran a low duration risk and better carry for one-and-a-half years when the competition was higher on duration. That's why through this period from mid of 2020 till the beginning of 2022, our duration profile in this fund was much lesser than others. That's why we outperformed.
Thankfully, we got the call right on the other side also, so, we increased the duration also at the right time. We increased duration somewhere towards the third quarter of 2022, and we could get the duration gains which everyone else also got to a reasonable extent. But because these two things came together, that's why I think the overall performance looks better.
Q. Will you be looking to increase the AUM in that fund?
A. Looking to increase? We never said no to money. So, maybe because the positioning with which we started running was not in line with the positioning that the market was running at that point in time. Primarily, institutional money came into corporate bond funds at that time, so some of the largest corporate bonds at that time either had 100?A portfolios or had a roll down strategy. Those were the two varieties that attracted money, and because we were neither, we could not attract that kind of money in spite of the performance.
But yes, we are focused, the team is focused, our business guys want to grow this fund. From a very small base, we have got 50% increase in AUM over the last one year. I am hoping that we will be able to do much better in the next two years.
Q. In the recent past, mutual funds have invested in longer-term papers, apart from the usual 3-7 year government bonds. Are duration bonds still looking lucrative?
A. Till about a month back, it was becoming difficult to figure out how much more space is left for the longer end to run, at least in near term. There has been some correction in the last 20 days. I don't want to specifically talk about levels, but at and around current levels there is some juice left in longer bonds. At 7.30% or 7.40%, I would definitely want to have allocation. Our core allocation will be around the 5-7 year point though. A 70:30 intermediate and long allocation is what we would prefer right now.
Q. Mutual funds have been quite active in the overnight indexed swap rates market. As the one-year swap rate doesn't reflect any rate cuts, are these good levels to be on the receiving side? Or do you still see the potential for the contract to rise more?
A. I think one- and two-year in general are very good levels to receive. The problem is that if I receive against cash it's an exposure for me. It's not a hedge. Generally, the way we would want to use swaps always is if we have existing floating rate positions, we would use swaps to lock in yields or in terms of swaps as a duration hedge.
Q. What opportunity do you see in spread instruments right now?
A. In the high-grade space, there is hardly any opportunity in terms of spread beyond structured high-grade. Asset-backed securities have been an area where we have been fairly present and that has worked very well, both in terms of capturing spreads as well as in terms of performance.
In plain vanilla corporate bonds, especially in the AAA space, in the quasi-sovereign space, I don't think there is too much spread left. The financial services space selectively continues to offer very good spread. The idea is to come in early when it is not overcrowded and you will get your choice of credit, your structure, your covenants, your term sheet with your rate.
Q. In your credit risk fund, you faced some defaults after COVID-19. The alpha of that fund looks good as compared to your peers, but the fund is not growing well. Why is that so? Are you looking to go down the credit curve?
A. So first, technically speaking, there was no default after COVID-19. For the last two years continuously, for every one downgrade, we have had 10 upgrades. That's also a benefit of the cycle.
I think we are not only interested in growing the fund, we are also interested in increasingly taking well researched credit risks. The regulatory framework around the credit risk fund has changed significantly in the last three-four years, which makes it much less risky. In addition, the concentration risk, which was one of the larger issues, both in the industry as well as for us, has been addressed meaningfully.
While it is going through a particular cycle right now, the credit category will come back. We are patient. We are not changing our team strengths based on AUMs. We know that the time will come for this.
Q. We are seeing a lot of interest in passive debt funds, ETF-related debt funds. Why has that happened? Has the interest in active debt funds died?
A. I don't think passive is ever going to replace active when it comes to fixed income. The right place for passives is either to manage investors' duration risk or for a very specific end purpose. For any core allocation to fixed income passives can never be the sole solution.
The market always goes through cycles, so we had a massive run in passives, and now the narrative has gone cold. You will again see a revival, and hopefully the revival will be for the right reasons.
Q. What do you think the regulator should do in order to make the mutual fund industry more efficient and for making your job easier?
A. The more efficiency and transparency the regulator brings into the industry, it will automatically help mutual funds grow. For example, there are two major reasons why the debt market has not developed. One, lack of refinancing, which SEBI has now tried to address through the corporate bond repo platform. It is still very early and it needs to be much more transparent, efficient. The second is valuations. The incentive or disincentive cannot be valuation and that can only be done once you make streamlining of valuations across the industry. This creates unnecessary inefficiencies; actually this creates illiquidity because the moment you have faulty valuations with one player versus the other player, they will not be able to transact. This is a continuous process.
Q. You have been with Nippon since 2003 and have been the chief investment officer for over 10 years now. What does the future hold for you?
A. One issue that happens when you work long enough is, if things remain repetitive or become repetitive, then you start losing interest because anyway the energy levels start coming down over a period of time. The only way out is for you is to laterally expand, which is to do more different things, look at more new product initiatives.
I am much more focused on policy and products within the AMC. I do much more interaction on the risk side and investor side now than what I used to do earlier. I am looking at various platforms within the AMC where we could come up with new offerings. For example, we have discussed what we can do on the PMS (portfolio management services) platform. End
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