The debt fund market has come a long way since the IL&FS-led crisis of 2018, followed by the Covid disruption. Manish Banthia, senior fund manager-fixed income, ICICI Prudential Mutual Fund, has been through all the challenges and is successfully managing 24 schemes that total Rs 1.47 lakh crore in assets under management (AUM), the second-highest in the industry, either independently or along with co-fund managers. Six of his funds have made it to the OLM 50 list under hybrid and debt categories. He shares his insights with Outlook Money’s Kundan Kishore on the funds he manages. Edited excerpts:
The broad idea for investment is to get risk-adjusted returns. How can one assess risk, especially in the debt space?
Every market will have periods when risk levels are very high. But there are times when risk levels may seem high but are not. For example, from the equity perspective, in April 2020, risk seemed very high, but it wasn’t. Similarly, during periods like 2007 or 2018, it seemed there was no risk (but that was not the case). Even now, people think there is no risk in equity, but the actual level of risk is high.
There are points in time when people become complacent and think that risks are low, but the underlying aspects are probably changing and, therefore, you need to assess the risk accordingly.
The IL&FS crisis was a big lesson for investors. How can investors avoid falling into such situations?
Before the IL&FS crisis, investors and distributors were looking only at (higher) yield-to-maturity (YTM), without questioning the portfolio quality. At that point of time, we thought we should not look at YTM but risk in the portfolio. It was a difficult period for us as we had to justify lower YTMs in the portfolio compared to our peers. When the tide turned, investors started to understand that risk is as important as return. This went on till 2020 when investors only talked about risk on credit; they did not understand then that there was a lot of money to be made. Investors were bothered about risk though it had come down substantially after the Reserve Bank of India (RBI) cut rates and infused liquidity. Risk had reduced significantly even globally, given ample fiscal stimulus. That was the period when risk could be taken on the credit side.
There are periods when you need to be in the first gear, and periods when you need to shift to second, third or fourth gears. Most people make mistakes on this aspect when it comes to investing. If you do this exercise properly, your risk-adjusted returns would be better than benchmark returns and that of peers.
Typically, investors look at higher returns, which comes with a higher degree of risk in debt funds. What is your take on this?
If you are looking for extraordinary returns from a debt fund, then, of course, you will have to take very high risk. If your benchmark return is, say, 6 or 7 per cent, you don’t need to take too much risk to get 8-9 per cent. But if you are aiming for 12-13 per cent, then the risk will be much higher. So, effectively, risk and return go together.
However, there are cycles when risk-free returns are higher, and vice-versa. In debt, unlike in equity, these cycles come after long periods but do not last long. The IL&FS crisis happened in 2018 but it was a smooth ride six to eight years before that.
All the funds you are managing have done well. How do you decide on duration and allocation when it comes to portfolio construction?
You have to be opportunistic in the market. By that I mean you need to have the right framework and thought process. We have created a lot of processes for many things in the last eight to 10 years. For instance, we created an investment risk department many years ago. We also created many macroeconomic frameworks, which have helped us take decisions in terms of duration risk, and when it should be higher or lower. We have come up with a framework for debt valuation risk too.
What is the investment strategy for the ICICI Prudential All Seasons Bond Fund?
This is a unique fund where we run a lot of strategies, which are outputs of the framework rather than being based on individual fund managers’ decisions. Some of these have helped achieve consistency. They help us maintain a balance even when things are wrong. The name itself suggests that there is no need to time the market. The idea to launch this fund came from the balanced advantage fund (BAF) category as investors need not time the market in those schemes.
What we have realised is that investors may choose the right fund but don’t know the right time to invest. If you look at past returns, it may look very healthy in a plain-vanilla long-only fund; the challenge is that the fund may generate returns but investors may not.
The All Seasons Bond Fund is extremely flexible. It can have (securities with) a duration as low as five years or as high as 10 years. Further, it can completely move to government securities, it can have AAA corporate bonds, and a large proportion of AA corporate bonds.
Does such flexibility increase the risk factor?
The framework for the fund gives us a perspective of where the opportunities lie, and we assign assets accordingly. We do not enter the market when there is momentum, but when there is deep value and margin of safety available. For example, in 2020, when the spread expanded, investors were worried. The risk perception was that one should invest only in AAA-rated securities. The market was completely dislocated but the framework told us to increase the AA-rated allocation to the fund in March to June 2020. Similarly, in 2017-18, the model pushed us towards high-duration securities as interest rates were headed south and so we ran a duration of seven-eight years.
Considering the dynamic nature of the market, how frequently do you review the framework?
We have a meeting every 15 days to review and take a call according to the changing nature of the market. We have been successfully tiding over market volatility in the last seven to eight years.
How is ICICI Prudential Balanced Advantage Fund different from others in the same category?
The last 10 years of managing the BAF has given us a lot of confidence. There were many instances when the market view and the way the BAF was managed was different. It is very difficult to run a large fund differently from what the broad market view is. Before Covid, BAFs had very low equity allocation and the general perception was that the market is likely to move up. Post Covid, nobody was willing to take equity risk but could increase equity exposure without making too much noise. Suddenly, BAFs’ exposure to equity went up. It was the framework that helped us do this; individuals couldn’t have done that. Fear and greed are the biggest enemies as far as markets are concerned. When the market is expensive, there is a lot of greed around; when it is cheap, there is a lot of fear. Considering that, it is difficult for individuals to do that (move differently from the market) on their own.
There is a general perception that only the equity component adds to the returns in a BAF and the debt component just provides a cushion. Is that true?
Though it appears that the debt component in BAFs is only 20-25 per cent, there are times when equity goes down to that level. So, at that point, the returns come from debt. It is important to understand that BAF is a hybrid fund.
The good part is that investors in BAF never ask questions. Whatever time you enter, the returns are pretty much consistent. If you look at long-only equity funds, the tendency is to invest more when the markets are hot. So, when the markets go down, the experience is really bad. BAF is more of a solution for investors.
What would be your advice for investors in the current economic scenario?
This is the year of asset allocation. We are almost at the end of the recovery phase and getting into the expansion phase of the economy. There are headwinds, such as economic cycles, especially in the US, commodity prices are higher than what they should be and higher leveraged market valuations compared to the earning cycles. Given this scenario, asset allocation is the key for investors.
As far as fixed income is concerned, the low interest rate regime is about to shift, as RBI has already indicated. In the next three to six months, rates will adjust, and fixed income will become attractive. This is a rising interest rate environment and one should invest in floating rate bond funds.
- 6 The number of schemes in OLM 50. Flagship fund: ICICI Prudential Balanced Advantage Fund
- Rs 39,478.67 cr Scheme’s Assets Under Management
- 12.31% 3-year returns (CAGR)