Markets

Time in the market matters more in debt investing, too: Mahendra Jajoo

Aarati Krishnan Chennai | Updated on December 23, 2019 Published on December 23, 2019

 

Mirae AMC has stayed away from the recent mayhem in the debt markets thanks to its conservative positioning on duration and credit risks. Mahendra Jajoo, Head of Fixed Income, Mirae AMC, shares shared his views with BusinessLine. Excerpts:

 

Mirae MF currently has a short-duration fund, a cash management fund and a dynamic bond fund. Why not products such as gilt funds or constant maturity funds, which can exploit opportunities on the duration side?

Our Dynamic Bond Fund is well-suited to the current environment. In debt funds, we prefer to have products that offer stable returns, are long-term in nature and can perform in different phases of the market cycle. Gilt funds today do not fit the bill. We feel that a dynamic bond fund is a better fit. Constant maturity funds are a brilliant product, and we will consider them at an appropriate time.

 

Is Mirae mainly targeting retail investors rather than institutions in debt funds?

No, not at all. We would like to target all kinds of investors. It is just that timing calls have not worked very well in debt markets. It has been proven to a reasonable degree that in debt investing, as in equities, time in the market is more important than timing the market. If you meet different types of investors in the debt market, you find that each has a story to narrate on timing calls that have gone wrong. If you look back at history, people who have got in and out of debt to time the markets have often gone wrong.

Temperament matters in debt investing as in equity investing. So, we believe that investors should follow the principles of fixed asset allocation and long-term investing in debt, as they do in equities.

 

After an adverse incident a while ago, Mirae has been conservative in buying lower rated bonds. Is it because the credit environment is bad right now or is it a long-term philosophy?

Let me clarify that our bad experience was not on account of credit calls. It was more on account of the freezing of market liquidity. We didn’t hold paper of poor quality, nor did we face a default. In the current environment, our view is that rate risk is temporary but credit risk is permanent. If you have market volatility, you can wait out the phase and recover money in the long run. But when you have a credit issue, waiting doesn’t help and recovery can be very difficult. This is why we are conservative on credit risks. This does not mean that we completely avoid credit risks.

But our debt strategy relies on three pillars. We stick to companies that have cash flows from operations. We stick to those whose balance-sheets are in the public domain. And we avoid complicated instruments and like simple structures such as NCDs and commercial paper.

Our job is to invest, and not to give loans or structure debt. However, I think the credit market has gone through a lot of pain and the credit bubble has burst. So, I think today there is a lot of opportunity to look at issuers and see who has managed risks well and survived.

 

SEBI recently tightened regulations on where debt funds can invest. It has specified that listing is compulsory even for commercial papers. It has laid down a minimum security for loans against shares. Does this make investing more difficult for debt fund managers?

I think these regulations are very empowering for investors. The guidelines that have already been issued on the listing of commercial papers will make a big difference to the market. If you look at the kind of disclosure requirements in the new guidelines, there is so much information that companies will have to share in the public domain. This makes it easier for investors, advisers and others to more easily analyse debt portfolios. This will lead to more rational expectations, too. Then, there are single issuer limits and limits on structured products which are good for investors. I feel all the problems that debt investors have faced in the last 10-15 years have been comprehensively addressed in these guidelines. I think this should lead to a fresh surge of interest in debt funds.

 

What is your view on interest rates? After the CPI (Consumer Price Index) inflation reading for October, everyone thought the MPC (Monetary Policy Committee) should ‘look through’ the inflation and cut rates...

Well, yes, the market thought the RBI should look through the inflation reading because this is likely driven by seasonal price spikes in primary articles such as onions and tomatoes, which should cool off. We also have a big challenge on growth. But we should also remember that the MPC already had a 135-basis-point rate cut behind it. Given the fiscal deficit worries, I believe MPC will remain accommodative, but the pace of rate cuts will slow.

We also have to remember that though the RBI has been dovish, market interest rates have gone up. Today, the yield curve is very steep. Short-term yields are down because short-term liquidity in the system is good after large forex flows. But long-term rates are still high. Credit spreads are also high, corporates are still borrowing at high rates. So, the message from the market is that it is worried about the fiscal deficit and poor transmission.

Published on December 23, 2019
This article is closed for comments.
Please Email the Editor