“Have debt allocation in both duration and accrual strategy”

August 9, 2016 . Vidya Bala

Even as there is no rate cut from the RBI in the just ended Monetary Policy meet, what is the opportunity in the debt space? Ritesh Nambiar, Debt fund manager at UTI AMC, talks to on his views on interest rate and credit risk and where the opportunity lies.

What is UTI Mutual’s view on the opportunity in the yield curve now?

The short term part of the curve seems quite supported as our view on liquidity is favourable in the immediate future where we expect surplus liquidity to peak by first week of September 2016. Last month’s rally in the long part of the curve is more of a function of expectation of surplus liquidity for good, beyond FCNR maturity and a likely change in monetary policy stance with the appointment of new RBI Governor amidst rally in global yields. Our view would be much more data dependent based on evolving changes in global and domestic macroeconomic indicators.

Do you think for long-term debt investors an income accrual strategy is better than playing a duration game? If so why?

A long term investor needs to have some allocation in both duration and income accruing strategy depending upon one’s risk profile. One who prefers steady stream of income over volatile return needs to invest more in income accruing strategy.
Within the accrual category there are funds with relatively low credit risk (ultra short term and short term funds) and funds with medium to high credit risk (income & credit opportunities fund);  investor needs to filter schemes depending on one’s return expectation. Unlike accrual strategy, for maximising returns in long duration schemes investor needs to time his entry and exit correctly.

IMG_20160801_175015_01What is your view on the current credit risk scenario?

The credit risk scenario is progressively improving as RBI/lenders have compelled stressed promoters/ wilful defaulters to deleverage by selling assets/ profitable businesses and revive viable businesses/projects with adequate backing from the government.
Though in the near term banking sector may face high credit costs but in the medium to long term all of these measures may yield fruit and improve risk based pricing of credits. Post Amtek and JSPL default in mutual fund industry all players have been cautious in taking any fresh exposure in highly levered group.

How should investors ideally react to situations where the NAV is hit by downgrades, defaults or mark downs?

A long term investor is less impacted by downgrade in credit ratings (up to investment grade) and mark-up on yields of issuers as these exposures are mostly held to maturity in nature i.e. over the tenor there is no loss on the security.
Defaults with no subsequent recovery or stressed sell-off could have a permanent impact on return; despite that long term returns in these stress driven funds would still be positive. Hence before investing into accrual products investor needs to be comfortable with the portfolio composition.

How does UTI Mutual assess credit risk beyond the rating of instruments?

UTI MF believes in independent credit risk assessment where primary research is done by in house credit research team who arrives at an unbiased credit rating which may vary from external credit rating agency ratings. Hence we are able to shortlist and price our credit risk exposures correctly. Feedback from external credit rating agency is just one of the inputs used in assessing credits.

As interest rates fall and credit situation improves will there be fewer quality opportunities in the accrual space that offer good coupon rates? Where will the opportunities come from?

Credit situation could see an improvement only when stress in banking system becomes manageable which may take some more time. Moreover the extend of rally which we have seen in AAA/AA+ bond yields is not seen in accrual category, hence there is further scope of easing on the same. Clearly big overhang for this category is lack of evidence of a global recovery supporting domestic growth where upgrade to downgrade ratio improves as risk of Brexit contagion, China slowdown and US recovery continues.

In the above scenario, will UTI Income Opportunities be able to maintain its current yield to maturity?

As predominant alpha in this category comes from higher accrual hence risk of reinvestment would continue to weigh on the YTMs going ahead. But the other part of the argument is the level of penetration of MFs in low rated securities is very low hence scope of first mover advantage would continue as seen the past. Also note that the accrual category also invests in high rated mispriced issuers’ where capital gains could be made hence maintaining YTM is not just the sole purpose.


Views mentioned are that of the fund manager. Past performance may or may not be sustained in the future. The portfolio of the schemes is subject to changes within the provisions of the Scheme Information document of the schemes. Please refer to the SID for investment pattern, strategy and risk factors.


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