Simple mantra helped us sail through debt market turbulence

Mahendra Jajoo

Head – Fixed Income

Mirae Asset MF

  • “Market risk is temporary whereas credit risk is permanent” – this simple mantra drove Mahendra and his team to pay uncompromising attention where it ought to be given – credit risk – which in turn has enabled Mirae Asset to sail through and emerge much stronger from 2018’s turbulent debt markets.
  • Mahendra believes that the yield curve at the short end should steepen and corporate spreads in the 1-3 year segment should narrow going forward, making their Short Term Fund an appropriate investment choice in today’s market
  • Spurred by growing investor and distributor recognition of Mirae Asset’s prudent fixed income approach, the team is looking at a significant ramp up in fixed income business in the coming quarters, as it seeks to emulate the huge success the fund house has achieved in the equity space over the years.
  • FMPs which provide 4 year indexation benefit are the preferred choice now, as the fiscal year draws to a close.

WF: Fixed income markets have gone through a rough patch in the last 12 months – first on account of interest rate volatility, and then credit events that started with the IL&FS default and more recently, worries on promoter funding deals using retail investors’ debt fund money. Looking back, what are the biggest lessons for us in the industry to learn from events of the last 12 months?

Mahendra: One of our core philosophy that we have consistently been communicating is that “market risk is temporary whereas credit risk is permanent”. This core belief has helped us sail through rather smoothly during these turbulent times. Historically, Indian debt markets have not really been rewarding enough due to tight pricing of credits. Another aspect that stands out is the importance of internal credit assessment process rather than relying solely on the external rating agencies. While rating agencies have attracted some criticism off-late, in the fast changing dynamics of current markets, a constant independent monitoring of credits is very important. Finally, robust instrument structure and transparency of portfolio to allow investors to assess inherent risks more easily is another critical factor. Major part of surprise on account of Loan against shares would be not there but for a more transparent structure. As far as interest rate volatility, while that is unavoidable, being an integral part of investing in markets, a clear segregation and categorization of products that are more sensitive to and affected by such volatility always equips investors to better deal with it. For example, our dynamic bond fund is one such fund which has high sensitivity to interest rate risk. And even as in the face of high volatility, it has done rather well, investor disappointment is rather low due to a clear cut communication of effect of volatility. To sum up, strong risk management, internal credit risk evaluation process, transparency and clear communications are issues that stand out as learning from recent events.

WF: How have you navigated your debt funds through this trying period? Where is it, if any that you would have wanted to do things differently, with the benefit of hindsight?

Mahendra: As mentioned above, due thanks to our high quality portfolio and clear communication on varying interest rate sensitivity of different products, we have been largely unaffected by the recent events. If at all, we are witnessing improved traction with investors as our funds were largely stood well in the face of recent turbulence. We noted that the single issuer exposure need be diversified more. On this we worked hard and today our funds are much more highly diversified.

WF: What is your outlook on inflation and interest rates for FY 19-20? What do you see as key drivers going forward?

Mahendra: 2018 has been a rough year for debt markets but as we enter 2019 we have gradually seen headwinds of 2018 turning into tailwinds. While in last year, Fed’s hawkish stance, hardening oil prices and fiscal deficit were major concern, the situation is much improved now. Fed has turned dovish following which other major central banks have also softened their stance and oil prices are largely stabilized amidst the fear of global slowdown. RBI has also already delivered one rate cut and more are expected in forthcoming policies as RBI turns focus to support growth as the presently low inflation allows that headroom. However, the excess supply of government securities will remain a concern on fiscal front. So we expect yield curve to bull steepen implying short term rates may ease in line with RBI rate cuts and liquidity injection but longer tenure rates may be range bound until clarity emerges on where the demand will come from for fresh supplies in new fiscal year.

WF: What is the portfolio composition of your Short Term Fund and how are you positioning it in today’s market context?

Mahendra: In line with our view short term portfolio is largely focused on investing in 1-3 years bucket. Of late, yield curve has steepened at near end and corporate spreads have widened. With RBI cutting rates and aggressively injecting durable liquidity through OMO purchases, we expect the spreads to narrow and the yield curve to flatten. Therefore in our view, Short Term fund is the most appropriate product in the current market environment.

WF: How does your Savings Fund differ from your Dynamic Bond Fund? How should distributors position these products in client portfolios?

Mahendra: Savings Fund is a low duration fund as per regulatory categorization while Dynamic Bond Funds is a dynamic fund as name suggests. The savings funds is primarily to cater to the investors who intend to invest for duration of 3-6 months, while that of dynamic fund is to serve long term investors with time horizon that of 3-5 years. An investor should understand that a dynamic bond fund is an asset allocation product and may have high volatility and should invest after analysing one’s investment objective.

WF: What are your plans to augment your fixed income product portfolio and enhance market share in the fixed income space in FY19-20?

Mahendra: Thankfully, our funds have stood out well in the recent set of market events and interest rate volatility and that has provided traction to our portfolios. We have come off strong in this situation and that has drawn attention of many investors. We believe that if we continue to work hard with sincerity, investors will take notice and that will be a great trigger for growth of our fixed income business.

We have launched Mirae Asset Fixed Maturity Plan – Series III – 1122 days (NFO from 8th March to 15th March 2019). The fund shall invest in corporate bonds and money market instruments which mature on or before the date of maturity of the plan, and seeks to provide investment options at current prevailing yields. The fund intends to invest predominantly in AAA rated NCDs and money market instruments. We believe in the current uncertain market scenario and considering the recent yields, this FMP, which provides 4 year indexation benefit, will be a suitable debt investment option moderate risk profile investors.

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