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Money is moving into longer term funds: Amandeep Chopra

Vishal Chhabria/Mumbai 21 Nov 12 | 07:50 PM

With interest rate cycle expected to ease further, investors can get good upside from longer duration funds with returns in the range of 9.5-10%, says Amandeep Chopra, Group President & Head – Fixed Income, UTI Mutual Fund in an interview to Vishal Chhabria. Edited excerpts:

You have seen a lot of flows coming into debt side or equity side?

We have seen flows largely on the debt side. Unlike a few quarters ago when most of the money was coming in low risk funds like liquid and FMP’s, now those have started coming in the longer term funds. So, long term bond funds, short term income funds and dynamic bond funds have seen good amount of inflows.

So there has been some kind of increase in risk appetite?

Yes, but it’s not as much about risk appetite as is about people willing to invest for a longer term, and I think they are looking at adding duration rather than just sitting on pure accrual.

Funds like FMPs, which were very safe, secure, traditional products till the last June end quarter, are now winding down.  Last year, we were pretty bullish on interest rates declining, so that has kind of played out. There is still some more steam left, so that should be positive for long term debt funds. Investors, who invested early in this cycle, have made a good upside. Investors who are coming in now still have some upside to capture, but maybe not as much as those who came in pre-March.

From the start of this year, what kind of returns have you seen and what kind of returns could be generated?

In the last one year, UTI Bond fund gave a return of 11 odd%, short term income fund gave about 10.5%. That’s been the band of about 10.5 to 11.5%. Going ahead, I think you can see double digit returns, but maybe not those levels, maybe just about high single digits to just about double digits say about 9.5 to 10.5. But then, we as fund managers are always a little conservative in our outlook. The best FMP return was 10.4%. So, we really outperformed.

Going ahead, I think a good upside will come essentially from the longer term funds, because the next phase which we see panning out is in the rate cuts. So, in terms of risk return, from a one year plus perspective, maybe bond funds, then you could have those interim dynamic bond funds, and then the short term income funds, in that order.

How do you see the 10-year bond yield moving? And, what’s your call on liquidity given that the government may fall short of its fiscal and revenue targets?

The 10 year bond is largely going to be influenced by the announcement of OMO’s and expectation of rate cuts by RBI.  While the overhang of slippage in the fiscal deficit will remain a worry for the markets, all eyes will be on the RBI to see its action (s) in stabilizing the nervousness in the markets. The commitment of the Government to address the issue of fiscal deficit and RBI in ensuring adequate liquidity in the system should floor any extreme market moves due to concerns on these issues.

What’s your take on inflation?

You will see inflation remain at 7.6-7.8% levels for a month. Hopefully, December is when we will see some of the base effect coming in and inflation trending down, assuming we don’t see another big petrol or diesel price hike. So, I think to that extent, you will have some bit of cooling off. Secondly I think globally commodity prices are trending down, barring crude, so I think that is also a little positive. Our year-end target is at least 7.6% which is still pretty high. But the fact that a lot of this will be driven more by primary articles and not by core inflation is a positive. So this will be positive from RBI’s perspective. But right now we have not revised our targets as we are building in a view that you may see some more fuel price hikes going ahead.

But, if you look at the next financial year, inflation will be much lower, because if you recall, most of the first 6 months period, we had average rates of inflation closer to 8.5%. So, this will statistically help you in the first half of the next financial year. I think the trend will be closer to 6%.

Do you think RBI will wait for the numbers to start trending down?

Central banks will always sort of anticipate and see the trends and then act, because they always have to be a little bit more pro-active, so if they have to cut rates, they will have to cut rates, before the data actually starts trending down and there will be enough early indicators.

They will seriously start looking from December onwards. The January-March 2013 quarter could see rate cuts, which will be more driven by growth slowing down.

So, how are you positioning your portfolio?

In all funds we have increased duration. If you look at bond funds, we would be sitting on duration of almost close to 7 years, in a shorter income fund we will have duration of 3- 3.5 years. These same funds, if you ask me, about 6-9 months ago, the duration would be less than half of what they are today.

In the interim period, we do trade a little, because we have seen the markets offer trading opportunities and the markets have often become too exuberant or too optimistic, only to be disappointed. So, there will be some trading opportunities which we will be doing as well. Also, if you look at our bond fund and short term income fund, some of the alpha has been generated because of capturing the credit spread decline. That has given a much higher return in the funds.

Corporate bond rally has also been fairly consistent and stable. That has been one good move to capture in the funds, as in the case of UTI Dynamic Bond Fund. Second, we were looking at steepening of the curve that has helped. We also believe, going ahead, there will be improvement in terms of the rating profile of Corporates. So far focus has only been only AAA’s, lot of interest will come in the next tiers, which will be AA plus, AA and AA minus category, bonds. And we think that is where there is good opportunity, so we are launching a fund now, to try and capture that, because the credit cycle seems to be bottoming out, which is evident from the corporate profitability trends. With that bottoming out process taking place even on the credit, the next move will be hopefully on corporate performance improving as and when RBI also initiates steps to propel growth. So, that should bring growth back and improve corporate profitability. That would be better for some of these corporate who are perceived to be low rated. It will lead to ratings upgrade for such papers, which means higher prices of such papers. Such a trend should play out in the next 12-18 months.

But, we are taking a more fundamental view rather than a technical view. We are playing more on the fundamental story of recovery as far as corporate balance sheets are concerned, improvements in their profitability, EBITDA margins, sort of stabilizing.

Looking at the sectoral or large corporate point of view, where do you see the debt problem easing soon?

Any cyclical industry, where we see the cycle is bottomed down, some of the companies which are consuming imported commodities, which now hopefully with the price declining, will ease some of that burden, so their EBITDA margins should expand, that would be useful. So, one can look at some of the cyclical industries.

Other than that, one has to be very wary of over leveraged companies, because even today it would be very difficult for them to reduce leverage. Thirdly, you also need to see any industry which is prone to regulatory risk (like iron ore mining). One should avoid these and look at larger well run companies.

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