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‘Invest in funds which have the maximum duration’

While equity markets continue to be volatile,the falling interest rate environment has improved the attractiveness of debt funds

Written by Sandeep Singh |
May 6, 2013 12:30:25 am

While equity markets continue to be volatile,the falling interest rate environment has improved the attractiveness of debt funds. Nimesh Shah,MD and CEO,ICICI Prudential AMC,in an interview to Sandeep Singh said that the time is ripe to get into long duration debt funds in order to register attractive returns.He also shared insights on what made funds outperform and the need to focus on the promoter’s credibility at the time of picking a stock. Excerpts:

What is your view on interest rates and what debt products would you suggest now. What should be the investment strategy?

The three main variables,namely growth,inflation and trade deficit numbers,currently indicate that there is now room for the RBI to cut interest rates further. We expect the RBI to cut rates by about 100-150 bps over the next 12-15 months. Keeping this in mind,investors should invest in funds that have the maximum possible duration; like income funds: gilt funds or dynamic bond funds. Historically,long-term debt funds have given superior returns in a falling interest rate scenario,as rates and bond prices are inversely correlated. However,the quantum of returns generated will depend on the pace and degree of rate cuts. It has been observed that investors who invested early in the interest rate cycle have generally gained more than those who invested later,when the cycle has matured. We recommend that investors invest in debt funds now and remain invested for at least a year.

Why is there such stress on debt?

We have reached a stage in the interest rate cycle where people can achieve potentially higher returns if they put in their money in debt products. We believe that this phase of falling interest rates is not going to end in a month or two and is likely continue for a year or so. After that,rates are expected to gradually go down. Naturally,your returns will be higher if you get in now at the early stage of the cycle.

What makes you so optimistic about rate cuts?

There is a certain macroeconomic environment that is conducive for the RBI to cut rates and you cannot hope for a better environment than now. Every condition that RBI desired for a rate cut,like the current account deficit and inflation coming under control,crude prices are softening and so rates should,ideally,come down.

When do you see equities coming back into favour?

Unfortunately,the biggest problem with equity markets is,if one is interested in making real good money,he would have to invest when times are really bad for the market. Today,we are in such bad times. But sadly,people like to wait for the good news to come before investing. Historically,the maximum return that investors have made on their equity investments has been when the economic environment was bad and the market sentiments were negative. In the last 20 years,whenever the environment was bad,investors have generally made good returns,be it 1992,1994,1999,2002-03 or 2009. So now is the time to put money into equities for potentially higher long term returns.

So would you advise investors to get into equities now?

I think that if one wants to make money in equities in 2014-15 or 15-16,one would need to invest over the course of the next 12-18 months. Market volatility is likely to remain for the next six months or so. So I cannot say when the right time to invest is. But it would make sense to invest in equities in the next one year to make good money over the next three years or so.

The government has taken all the right steps over the last 6 months. With just another year to go for elections,there is a limit to what they can really do. However,whichever party comes to power in 2014,I think it will get an environment which is reasonably sanitised. It will get a favorable environment which gives growth a push.

What do you think helped fund managers to perform better than peers?

As a fund house we have tried to develop contrarian thinking and we genuinely believe in it too. While corporate governance standards are of utmost importance for investment,what we have really benefited from,over the last five years ,is the process centricity that we have brought into our investments. We always stick to the investment mandate as defined for our schemes. I think that as long as our stock picking in a sector is better,we will beat the benchmark. We consistently try to beat the benchmark rather than trying to do something extraordinary.

Is there any impact on the inflow into your overseas fund advisory portfolio?

Our overseas fund advisory portfolio is as big as our domestic equity AUM now. Actually six months ago,we were asking investors in Europe to slowdown their investments into India as we were waiting for crude to fall below the $100 per barrel mark. Our call then was that if crude falls below $100,India once again becomes a great investment opportunity. We guide overseas investors not only on equities but also on dollar-rupee dynamics. If the current account deficit is high,then there is no point investing in the country and losing money on adverse currency movement. Now that the tupee is moving up,we will advise them to invest here.

How much of a risk do you see coming from the corporate governance practices in our country?

We have to watch corporate behaviour and the top management’s corporate governance standards,especially at the time of business problems and down cycles. We need to observe how they share the profits with the minority shareholders in those bad times. When we talk to foreigners,we tell them that we may sometimes possibly go wrong on valuation but we try our best not to go wrong about people. Nothing much can be done about greed except being vigilant. Moreover,we also have to see the data before trusting anybody.

Would you let an opportunity to make quick returns go if you are not confident of the promoter?

As a fund,one of our weaknesses is that we do not make money on concept stocks. Sometimes a stock might go from Rs 20 to Rs 120,but we may miss that opportunity because we are clear that we should see the numbers before investing. Are the numbers coming in as expected,do we believe the company straight away,or should we wait and watch for three more months etc. So no doubt we might have missed certain opportunities,but on the whole we are happy with such an approach.

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