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Go for a mix of short and long term bond fund
Fri, Jul 05, 2013
Source : Jeni Shukla & Shoaib Zaman, Citrus Interactive

In a candid interview Lakshmi Iyer, Head of Fixed Income & Products, Kotak Mutual Fund, shares her view of the debt market with Team Citrus Interactive. She also shares her view on how to sub-categorize the income funds, a category that can confuse even the old hands of the mutual fund industry.

Iyer has been with Kotak Asset Management Company since November 1, 1999. From 1999-2006 Lakshmi was performing the role of a fund manager where she was responsible for credit research as well as deal execution, managing fund performance across all debt funds and assisting sales in client interaction where required. From September 2006 till September 2008 she was Heading Products where her primary responsibilities were product related initiatives, product pricing and coordinating with the funds management and sales team in the role of a portfolio specialist. From September 2008 till date she is heading the Fixed Income and Products team.

What is your expectation on the rate-cut?

We don’t see one in the near term. With the depreciating currency it becomes a little bit difficult to expect immediate rate-cuts. Our understanding is that the RBI would want to wait for the Rupee to stabilize, which at these levels we believe it should. Our house view on the dollar to rupee has been in the range of $54 to$ 59 . Currently it has breached that level and is on the higher side but we are not really expecting significant rout from these levels, unless there is renewed dollar strength across all currencies.

Recently debt market has seen a lot of activity what is your take on the debt market?

The recent rout on the rupee has triggered some pressure on the yield curve and we also see the FIIs selling in the debt market.  But our take is that once the Rupee stabilizes and other macro factors also fall into place like the inflation data remain on a subdued mode, the focus would shift back to monetary easing. This is not to infer that it would happen anytime soon as currency has become a big question mark in terms of when it will stabilize. We believe that bulk of the carnage is behind us but I think the markets would still want to wait for some sort of stability on INR front before deciding on the next course.

If you ask me, then the current yield curve pose attractive from an investors’ standpoint? Then I would say,‘Definitely’. We still remain positive on the yield curve, 40-50 basis points higher across the segment is according to us an investment opportunity with probably 12-24 month horizon.

What is your take on the Current Account Deficit (CAD)?

Gold and Crude are the two biggest component of our import bill, whether we like it or not but that’s the reality. The silver lining is that there is a lot of effort on curbing gold imports, but there is little that we can do in terms of crude. Crude demand for India is very inelastic, whether crude is at Rs 30 or even Rs 100 or Rs 200, we will still be using it. That is clearly not the case, gold demand is very elastic. Therefore, lower price point could see a bigger demand and vice-verse.

The government has taken various measures to address this demand for gold like the recent import duty hikes.  We believe that such measures on part of the government should go a long way in curbing the current account deficit to some extent. 

Currently the CAD is closer to about 5 per cent. The peak in the last quarter was close to around 6.7 per cent . We are unlikely to see a repeat of such a high number because curbing of gold import has become a national agenda.  The government is taking steps it deems necessary to curb the gold imports and we believe that it is extremely positive

I think the worst that we saw in terms of CAD is behind us. The good part is that with the appreciating dollar we are seeing a generally benign trend across all commodities including the commodities that India imports. That in a way is acting as an antidote to the depreciating currency. Once the currency stabilizes, at around 58-59 you should see a much better current account deficit number going forward.

RBI seems to be keen on managing liquidity through Open Market Operations instead of going for CRR. What will be the impact of such additional purchases of government securities on the liquidity?

The intent of OMO is clearly to provide liquidity to the system, and it has ancillary or secondary impact of supporting the yield so from both sense it is really positive. The OMO puts an upper lid in terms of the rising yield because the market knows there is a central bank waiting to support or buy back the bond.

Nonetheless, the primary object of OMO is to infuse liquidity and the RBI has managed to accomplish it. Liquidity deficit is right now around Rs 60,000-70,000 crore, which is broadly +/- 1 percent NDTL With some amount of government spending likely in weeks ahead, we expect the system liquidity deficit to further ease from current levels

So OMOs are achieving the desired objective.

Tell us about the different bond funds that you have? How are they actually placed?

We have the following funds in each category: Actively long duration fund, Short-duration fund and an accrual based strategy.

Kotak Bond Fund: This is an active long fund. It allocates money between government securities and corporate bonds. The duration part of the portfolio is managed through increasing and decreasing government securities, to that extent it is an actively managed strategy. We don’t really churn the corporate bond component very often, that’s more of a core portfolio.    We recommend this fund to investors with at least one-year of investment horizon.

KotakBond Short Term: In this fund we have the average maturity cap at three years in the current market scenarios. It’s a play pre-dominantly on corporate bonds and G-Sec is a very small component of the portfolio, maybe 5-10% of the portfolio.

Kotak Income Opportunities: This is an accrual based strategy, pre dominantly constructed of corporate bonds. We take gilt exposure only as a tactical call for the fund and under 5% at most times . The focus here is to build a quality accrual bond portfolio.

What is your suggestion on the classification of income funds?

One way to look at them is, short-term and long-term, and within that there are sub-sets for example an accrual based strategy is nothing but a sub-set of a short-term strategy. A dynamic fund is nothing but a sub-set of duration strategy.

Investors should therefore be guided by the investment strategy that is defined in the scheme information document and also how the fund manager is managing the fund in line with the strategy 

How big is your research team?

On the debt side we have one credit analyst and we also have a seven member research team in house here on the equity side which acts as a central repository of research for us. The debt fund management team relies a lot on the input that the sector analyst has to offer. For example, if we are evaluating an oil and gas company then we have an oil and gas sector analyst whom we engage with to get an in depth understanding on that credit

Debt evaluates the credit from a solvency perspective, while equity would tend to evaluate the balance sheet from a growth perspective. We try to sync in these two; solvency is clearly important, but it’s not that growth does not matter because we need to have a growth in the balance sheet as well to have sustainable cash flows going forward. 

What are the risk management processes that you have at Kotak AMC, besides whatever has been prescribed by SEBI?

Each of our funds is managed in line with the investment objective and strategy as articulated in the scheme investment document.  Over and above the limits prescribed by SEBI, we also have our own internal risk parameters which are monitored on a periodic basis. These limits could be with respect to ratings, average maturities, etc to name a few. The investment committee reviews these parameters from time to time and also suggests changes as and when deemed necessary.

 Which debt fund would you recommend investors from 12-18 months of horizon, since there are many investors with that time horizon on their mind?

The shorter-end of the yield curve has also gone up quite substantially as I said partly because of concerns for the FII as also muted expectations of a rate cut in the near future.  As far as the longer end is concerned we have already seen the yields go up, given that segment is quite sensitive to rate cuts or otherwise.

Therefore, at this juncture we have been recommending investors that you go in for a mix of short and long duration funds in the proportion of 50-50 per cent. For 50 per cent of the portfolio, we have been suggesting strategies like Kotak Bond Short-term and accrual strategies like Kotak Income opportunities Fund and the balance 50 per cent in favor of actively managed bond funds like the Kotak Bond Fund. That’s the current mix we are recommending.

In the previous quarters, we were suggesting the allocation of 65-70 per cent in the long term and the rest in the short term. We have changed this to 50-50 because the shorter-end of the yield curve has also seen a reasonable spike risk reward could potentially favor the shorter end as well.

In the equity space you have two schemes under each category -- large cap, mid cap and multi cap. As product head, do you think it is necessary?

Yes, I think it is.The reason is that it’s not similar in strategy. For example, if look at Kotak 50, then it’s a bottom-up stock picking with about 35-40 stocks, whereas if you see Kotak Classic offering then you will see it’s more of a macro based strategy.

Since, the strategy is different; the fund managers are also different. Similarly if you look at our multi-cap offerings,  Kotak Select Focus and Kotak Opportunities, Kotak Select Focus is equity diversified based on sectoral rotation as a theme, so usually around 8-12 sectors is what we invest in, where the sector is first decided and then the stock is picked. Whereas Kotak Opportunities is again a bottom-up fund, so there we can go any sector. , To that extent, the sectoral concentration you may find in Kotak Select focus is a tad more that Kotak Opportunities

Likewise, in our mid-cap strategies, Kotak Mid Cap fund is predominantly mid-cap, whereas, Kotak Emerging Equities is a blend of small and mid cap. Hence a clearly differentiated investment strategy is in place for each of our equity funds
 
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