In a recent face-to-face with industry experts, Mr Vikrant Mehta, Head – Fixed Income at ITI Mutual Fund was interviewed by Vivek Chaurasia, the Head of Research at PersonalFN. Here are the excerpts of the conversation between the two.
Mr. Vikrant Mehta is Head – Fixed Income at ITI Asset Management Ltd. and joined the AMC in January 2021. He brings with him more than 25 years of extensive experience in Fixed Income Markets. Vikrant holds a master’s degree in engineering from Kiev Polytechnical Institute, Ukraine and he is also a Chartered Financial Analyst (CFA) from ICFAI.
Prior to this he worked with Indiabulls Asset Management Co. Limited and has spent more than a decade at PineBridge Investments where he was the Head of Fixed Income and subsequently was the Asia sovereign analyst for PineBridge. He has also held executive positions in organisations like NVS Brokerage Private Ltd and JM Morgan Stanley Fixed Income Securities Pvt. Ltd.
The central banks worldwide have increased interest rates, some by up to 3%, considering higher inflationary trends and concerns about the looming recession next year. The UK has already announced that they are in a recession. How do you read these conditions and what is your outlook on the same?
Vikrant: Central Banks globally have been increasing interest rates to curb inflation, which is at a multi-decade high in advanced economies. However, recent commentary and forecasts from these economies indicate that with policy interest rates currently in the restrictive territory, future rate increases are likely to be few and at a slower pace.
The RBI has increased the policy repo rates by 190 basis points to control inflation. Do you see further upside? How long do you think will it take for the interest rates to peak and start easing?
Vikrant: India seems to be at fag end of the policy rate tightening cycle. Unless there is a significant geo-political upheaval, the policy repo rate is likely to peak between 6.25% – 6.50% from the current 5.90%. Post that, we expect the RBI to broadly follow global central banks and keep policy rates on a pause mode till late 2023 or early 2024.
How do you see Indian bond markets placed currently vis-a-vis global bond markets?
Vikrant: Indian bond markets this year have not fared as badly as those in advanced economies. With the expected peak policy rate not too far from the current level, the worst seems to be over for Indian bonds.
Should investors be concerned about the credit risk that might pile up on corporate debts once the interest rate peaks out and start easing, in case there is an impact of recession next year? We have seen similar trends in the past when the economy starts eyeing a depressing phase and falling interest rates.
Vikrant: As interest rates headed higher this year, spreads of lower-rated companies have expanded globally, and India can’t be an outlier in this regard. India’s secondary bond markets are predominantly a domain of highly rated borrowers and debt funds in all likelihood take this into cognizance. Furthermore, post the credit events of April 2018, there seems to be an investor aversion toward credit risk and preference for top-rated debt, which in our opinion should continue.
Your take on the depreciating INR? And how is it impacting the bond markets right now?
Vikrant: The US Dollar (USD) has strengthened against all major currencies and thus the Indian Rupee’s (INR) depreciation has mirrored the global trend. Markets anticipate the USD to weaken in the second half of 2023 and this should allow the INR to strengthen in line with global peer currencies.
Post the rate increases in 2022 and potentially a few more over the medium term, policy rates in advanced economies will remain attractive for global investors. Foreign Portfolio Investors (FPI) exposure to Indian bond markets has remained low for a considerable amount of time and that is unlikely to change at least till late 2023.
What macroeconomic indicators do you currently have an eye on? And what measures are you taking from a risk management point of view to reduce the negative impact of these macroeconomic factors on the fixed-income funds you manage?
Vikrant: Our investment management approach is broadly driven by macro fundamentals, market valuations and technical positioning, and the Safety, Quality, Liquidity (SQL) framework remains paramount for portfolio construction. Disciplined adherence to this approach allowed us to not only modulate the duration of our debt funds on a timely basis but also helped considerably mitigate the negative impact of the macro and geo-political headwinds of the last 2 years.
Among the debt funds at ITI Mutual Fund, you also manage the ITI Dynamic Bond Fund which holds the flexibility to invest across the maturity curve and ITI Banking & PSU Debt Fund which focuses more on top-rated instruments issued by banks, PSUs, and PFIs. How are these portfolios positioned in the current upside interest rate phase?
Vikrant: We are not credit players and all our debt funds are rated “A” – this is the highest credit quality which a debt fund can have as per SEBI guidelines.
We follow an active portfolio management approach and aim to realize returns by dynamically managing duration across portfolios. For a considerable period since Feb 2022, the above funds maintained a significantly low duration and thus managed to substantially mitigate the headwinds from the current higher interest rate regime.
As India seems to be reaching the end of the interest rate cycle, the portfolios are looking at maintaining a higher duration as compared to the Feb 2022 – May 2022 period. We see strategic value in the short end (up to 1 to 1.5 years) of the yield curve and see tactical opportunities in benchmark government bonds.
Also, what is your take on the passively managed target maturity funds that are being launched now? Are they worth considering?
Vikrant: All solution-based products have pros and cons, but we would like to take this opportunity to highlight 2 case studies in the last 10 years when Indian debt markets were facing challenging times such as today:
1) Taper tantrum period – April 2013 to March 2014; and
2) Oil price spike and IL&FS credit default period – April 2018 to March 2019.
Historical data indicates that during the above time intervals, the average 3-year return of an active management strategy (ex post Crisil Dynamic Debt AII Index return) was at least 1.5% higher as compared to a passive management approach (Generic yield on a 3-year AAA rated public sector unit bond).
If the past is any indication of the future, we feel that actively managed dynamic bond funds are better suited as compared to passively managed target maturity funds in the current environment.
What strategy would you like to suggest to our readers in current conditions for the debt allocation in their portfolios? Which category of funds they should consider and which funds should they ignore? And Why?
Vikrant: We feel that dynamic debt funds are underappreciated. While the historical outperformance of actively managed dynamic bond funds over passive strategies (as explained above) may be easy to fathom, these funds also hold well against riskier asset classes like equities. e.g., over the 2015 till YTD Oct 2022 period, the NIFTY 50 Index has delivered only about 3.25% higher average return as compared to the Crisil Dynamic Debt Fund AIII Index – and this in an era of massive quantitative easing which benefits riskier asset classes like equities. On a risk adjusted basis, the dynamic debt index may in fact have outperformed the NIFTY 50 Index.
Vikrant’s take on active v/s passive debate and hopefully an eye opener on dynamically managed debt funds can be accessed at the below link.
Thank you, Mr Mehta, for your valuable time and insights. I am sure our readers will immensely benefit from your views.
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