21, Sep, 2019
Taking credit risks in liquid funds not the right thing to do

Taking credit risks in liquid funds not the right thing to do

BOI-Axa’s Credit Risk Fund was in the focus for all the wrong reasons. The recent fall in its net asset value after a credit event resulted in a 29 per cent loss on a one-year basis, placing the scheme at the bottom of the category. Many issuers are fighting the tight liquidity in the system. Despite the cuts in policy rates by the Reserve Bank of India and fall in benchmark bond yield, there is not much respite for debt investors. In this backdrop, Alok Singh, chief investment officer of BOI-Axa Asset Management Company shares his views on some of these issues.

 BOI Axa Credit Risk Fund’s NAV has declined 29 per cent over past one year and is at the bottom of the returns table. What went wrong and how do you plan to tide over the situation?

Since its inception in February 2015, BOI Axa Credit Risk Fund has been managed like a focussed fund. Though the concentration of issuers meant high risk, it also allowed effective monitoring. The fund did well till August 2018. In September 2018, the Infrastructure Leasing & Finance Services (IL&FS) default happened and since then the credit markets have been quite volatile. The yields in the financial markets went up and investments in our portfolios turned illiquid. The yield on our portfolio moved up from 11 per cent in the pre-crisis days to around 16 per cent by the end of May 2019. We saw redemptions in our scheme, as a result of which the exposure to Sintex BAPL was in excess of 20 per cent, while it was at 9 per cent of our portfolio earlier. At the same time, there was a credit event at Sintex Industries—a group company of Sintex BAPL. There is no direct link between the two and we are the senior secured debt holder in Sintex BAPL. We anticipated a contagion. We thought that it will certainly affect secondary market liquidity of our investments in Sintex BAPL. We wanted to factor in the illiquidity of the bond and hence opted for a haircut to the extent of 55 per cent.

We have not entered into any other agreement with the issuer. We hold the bonds and current NAV reflects the decreased market value of the bonds, though it may sound theoretical. We continue to hold the bond and as the issuer pays us back on the date of maturity or before, the NAV will be reinstated. The NAV will also be reinstated if there is a credit rating upgrade in this case.  We are monitoring the Sintex BAPL situation and ensuring that our interests are protected.

We have written off our exposure to worth Rs 105 crore and submitted our claims to the National Company Law Tribunal. Whatever we recover from IL&FS will also be given back to the residual investors as there is no side-pocketing. Our AUM has fallen from Rs 1700 crore to less than Rs 500 crore, which means even if we recover 30 per cent of the amount from IL&FS, it will mean full recovery for the remaining investors.

Investors are avoiding bond funds, fearing that there may be landmines in such investments. In FY-19, investors redeemed income funds worth Rs 1.21 lakh crore. Do you foresee more problems on the credit side? When will the situation change for the better for debt fund investors?

Credit events usually happen when the economy does not do well. We are not out of the problem fully. More trouble cannot be ruled out, though most of it is behind us. There are issuers who have committed to pay but have not paid yet. There are many issuers with large balance sheets. Liquidity is tight and business has deteriorated. Some more contagion will happen. The spiral may continue for some time. There are known cases of Zee and Dewan Housing Finance Corporation where the promoters are trying to pay. However if they fail to do so, then it will spread further. There may be a few more unknown names which may suffer. The situation will take time to improve.

Bond funds offer market linked returns and there is no return guarantee. Investors must keep this in mind and set the expectations right. There has been a tendency among investors to look at debt funds like a guaranteed return product. Fixed maturity plans (FMP) too were seen as assured return products like fixed deposits. But investors need to understand that if they are making more money in bond funds than returns earned on fixed deposit, then they are taking some extra risk. This is the first time widely spread credit events happened in fixed maturity plans. Though the event is not good, it will help in the long-term to set the expectations right. Mutual funds will offer investment options across risk spectrum. Investors need to understand their risk profile before investing. Given the level of portfolio disclosures and the scheme categorisation exercise, investors can take more informed calls.

Fund managers too must stick to investment mandates. Taking credit risks in liquid funds by investing in a low-rated bond is not the right thing to do.

The Reserve Bank of India (RBI) has announced cuts in policy rates and the global economy is seen decelerating. Are we in for a slow growth and falling interest rate regime? What is the risk-reward for investors?

RBI is trying to kick-start the economy. But it will take some time. RBI may have to go for some more rate cuts. I expect further about 50 basis points cut in policy rates by December 2019. Liquidity needs to be enhanced and banks need to start lending. Some of the business models which were not right, need to be changed. So, just rate cuts and infusing liquidity alone will not help bring back growth.

Having said that, there are two opportunities for investors. One can invest in gilt funds to benefit from the fall in interest rates. You may get decent returns closer to the long-term average of around 8 per cent. Do not expect high returns here because there is a possibility of increased bond issuances by the government.

Investors can also invest in corporate credit. Things are not looking good now. But they may not remain bad forever. As and when things change, there will be upgrades and investors may benefit.

Investors will be better off investing across asset classes. And within asset classes, you should remain invested in various baskets taking into account your risk profile and your financial goals.

Alok Quickies

Indices have been making new highs. But the broader markets are down and investors are running out of patience. What is your view on stocks? Should investors continue their investment plans in equity funds?

Stock markets are not linear. Investors have seen many phases of volatility in the past. Though the Indian markets are expected to deliver returns in the range of 12 per cent to 18 per cent , investors must be prepared to hold on to their investments in bad phases. The investor is better off investing in equity funds only after taking into account his/her risk profile and financial needs. If you want to take less risk by investing in large-cap portfolios, then you are likely to get 12 per cent and if you are in small-cap portfolios you may get 18 per cent.

Though the Indian economy has slowed down, it is still growing at 6 per cent and if we improve from here, investors will do well over longer time frames. If you have a long timeframe in mind, typically in excess of 10 years, then stay invested and keep adding regularly. Do not try to time the market.

Your schemes investing in equities, be it your tax saving scheme or your large and mid-cap schemes, have done worse than the category average over one-, three- and five-year time frames . Most of your schemes are at bottom of the performance charts. What should your investors expect going forward? What are you doing about it?

 Before September 2018, our schemes were doing well and we were the top performers. We were overweight non-bank finance companies in financials. The events after September 2018 hurt us. Frankly, we never thought that it will be such contagion. We have restructured our funds after that. Over the past quarter or two, we have done well and our performance is improving. The important part is that you acknowledge your mistakes and then take corrective actions. We have taken corrective actions. Over next six to eight months we should do well.