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Focus on retail investors
Mon, Jul 29, 2013
Source : Shoaib Zaman, Citrus Interactive

Bekxy Kuriakose, Head- Fixed Income at Principal PNB Asset Management Company (AMC) is an avid reader of fiction and non-fiction books. With a warm smile and simplifying the intricacies of the fund management on the debt side she shared her views with Citrus Interactive on many topics including: Why dynamic bond funds are not dynamic in India? What are the unique debt offerings from the Principal PNB AMC?

Kuriakose has over 13 years of experience in dealing, research and fund management. In her previous assignments she has worked with L&T Mutual Fund as AVP (Fixed Income) handling all fixed income funds , Reliance Life Insurance as Fund Manager (Fixed Income) and SBI Mutual as Fund Manager for debt schemes. She holds a Post Graduate Diploma in Management from The Indian Institute of Management, Bangalore and holds a Hons. degree in Economics from Lady Shri Ram College, Delhi University.

Which debt fund would you recommend investors for 1-2 year investment horizon?

Currently the funds I would suggest are a combination of Income fund and Short-term fund. After the continuous rally we have had in the past six-months, we are now seeing some correction has come. Compared to over month back, we have had 50-200 bps upward move in yields basis-points (bps), possibly there might be some more corrections. So this would be a good time for those investors to invest between short-term funds and income funds.

When building a debt investment portfolio how important is the rating?

Credit Rating is a hygiene factor and that’s only one factor in evaluating a company. It’s just a cut-off we, like in short-term all CPs which come for us for investment purpose are all rated A1+, so just on the basis of that you cannot make any distinction. So you have to do a lot of in-depth credit research.

We have a dedicated credit analyst, who does the credit research. Then we discuss it in our Investment Committee which takes the final call. There are many processes in place, one is monitoring of existing credit and the other is when you are taking any new issuer exposure for the first time.

For monitoring of existing portfolio we track the company results on a quarterly basis and any corporate actions which come out on these companies. The holdings that we have, if they are listed, we also track their stock prices on a daily basis because sometimes equity market may have news that we don’t; then our analyst also attends the conference calls on a regular basis. Many of these companies have management meets

If there is a new credit then there is a different process. We talk to the rating agency and then we talk to the company, we evaluate the financials; credit note is prepared and it goes to the investment committee.

As far as long-term credits are concerned we have an additional review process, whereby the credits have to be reviewed by our parent company in U.S., Principal Financial Group (PFG). They have a large team of dedicated analysts.

Please tell us about some of the unique debt products that you are offering?

We have our Principal Debt Savings Plus which is a debt savings product where as per the offer document only individuals can invest. So, it is for people who in fact are looking for alternative for bank FDs or you know who have investments for more than one year. It has exit load upto one year so this is the fund where we specifically try to beat the FDs’ of nationalized banks, try to give better returns. For this product, in terms of average maturity, duration we try to run it like a short to medium fund not a long term income fund.

Then we have three specialized products.

Principal Bank CD fund which invest only in banks CD’s. In the industry there are three or four players that provide this kind of products, there are few funds that have launched banking debt funds but they also invest in bank bonds. Principal Bank CD invests only in CD’s so if at any time CD rates rise, typically what happens in the quarter end and at that point if you have a view that you have to invest and take an exposure, then you can come into this fund. Typically we see inflows in this fund around quarter ends, when CD rates spike up. Also CDs are relatively safer from credit point of view and if investors who don’t want high credit risk or exposure to CPs, they can look to invest here.

Then, we have Principle Debt Opportunities Corporate Bond fund which invest in corporate bonds, again this is a specialized fund, as per the mandate it should invest minimum 70 per cent in corporate papers and corporate bonds so we have a mix of bonds and CPs in this fund. The load is up to 15 months, it targets long term investors.

Other than our flagship liquid category fund, Principal Cash Management Fund, we have one more liquid fund called as Principle Money Manager Fund, that has a load of up to one month and that accepts inflows only from retail / individuals’. It is an alternative liquid fund. Our normal liquid fund has substantial daily inflows/outflow where you get a lot of corporates banks who come in on average daily basis. Somebody who is looking for the extra return and who wants to be invested in a very low risk product like liquid fund can look at this fund. This is also one of our focus funds for the Principal PRA business which has started recently.

How many dedicated research analyst do you have to support debt fund managers?

We pool the resources. We have a dedicated credit analyst and we have the equity research analysts’ who give us their views on listed companies they are tracking. We have the resources of PFG for long term credit because they tell us what we are supposed to look at or they have questions they come back to us, they also review it so we have that whole support system in place for evaluating credit.

How do you evaluate the Fund Managers performance?

I think this is very clear cut based on couple of factors, the most important is the peer group performance so for every fund that the FM is managing the peer group has been designed, put in place.

The incentive that the fund manager gets is linked to the performance of the funds. The top management has put in place some standard deviation measures to take care of the risk part to ensure that there is low volatility, so the lower the stander deviation the better. We track both the peer group as well as the respective benchmarks.

You don’t have a dynamic fund?

No we don’t have a dynamic fund.

Do you plan to launch one?

See that would be based depending on the feedback of the product, sales team and if required we can always launch.

The main issue that I have with dynamic bond funds is that you end up telling the investor that “whether interest rates go up or down, we will manage it dynamically and change asset allocation rapidly” but in reality it doesn’t happen.

Now you see what has happened in the last one month the dynamic bond funds have given similar returns as compared to long term income funds.  If you are running dynamic you have to really run it as a dynamic. In a bearish time you should sell everything move to CDs run your fund like a liquid fund but in reality that doesn’t happen. The fund manager cannot turn his portfolio so fast and especially if the dynamic bond funds become very large.  It only sounds fancy to sell to the investor when the investors are buying it. We have seen that most of the dynamic bond funds perform similar to long term income funds so they do very well in bullish time and during bearish time they do equally badly.

And if you really want to run a dynamic strategy I think it’s much better done through a FoF (fund of fund). Because there you are not having underline security, you are investing a fund into somebody else’s fund. Suppose if you have invested in a corporate debt fund and you are negative on a corporate fund you can put a redemption and come out so that. According to me, that is a good option provided it’s managed well.

What are the unique risk management processes that you follow at Principal other than whatever has been prescribed by SEBI? SEBI has already enforced many processes but other than that do you have anything in specific?

See we have our own internal limits in place. Some of the limits are in relation to the mark to market that you can take.

If I break it down fund wise category wise, liquid funds, there is no need for extra risk management because already the risk has been curtained because of SEBI’s guidelines. The only thing that we do in addition is the kind of internal limit on the CP per issuer. SEBI has put a limit of 30 per cent per issuer but ours is far lower than that. Sector exposure norms have already come so that again is the SEBI norm which has come so anyway you would be within that again certain high risk sectors like broking and NBFC we have internal limits. Again certain issuers whom we perceive maybe little higher risk, we have put absolute limits in place, this is done with the credit analyst in consultation with the investment committee. When the fund manager invests he has to look at that. We also try to have maturities in all buckets and have developed in-house laddering report to monitor the same. This would help in meeting redemptions smoothly. We also monitor the bank investors in the fund as also the top 10/50 clients on a daily basis.

Coming to ultra-short term category, MTM component and average maturity of the fund is important. So there are two-to-three things that we do. We do sensitivity analysis on a weekly basis which is presented in the Investment Committee meeting. The fund’s PV01 is also tracked.

We also do volatility analysis every week whereby we monitor the standard deviation of our fund vis-à-vis the peers, the average return on our fund vis-à-vis the peers and the excess return over standard deviation which basically says for per unit of risk how much extra return has been generated. If there is excess risk then the fund manager has to explain why he has taken and what he will do to meet it or do it so these are two things in place for the ultra-short term fund.

As far as the short term income and gilt funds are concerned these are mark to mark everyday so the securities are anyway mark to market. So the fact that you have to remain top two quartiles while maintaining low standard deviation ensures that the fund manager will try to control the risk as much as possible.

Other than that most of the things are related to credit risk or in terms of the liquid, liquid plus related to volatility and overall exposure not too much exposure to a certain sector or certain company. So these are some of the risk metrics which we have in place from the investment point of view.
 
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