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We are Disciplined and Intelligent Risk Takers

Says Prashant Jain, CIO, Zurich India AMC says intelligent risk taking implies understanding the risk, pricing it and taking it within limits. Read more to know his investment style and outlook on debt markets.

Zurich India High Interest Fund (ZIHI) has been a tortoise among intermediate-term debt fund. Launched in April 1997, the fund has charted its steady course to deliver annualised 13.32 percent return and crossed an asset base of Rs 1000 crore.

Prashant Jain, Chief Investment Officer, Zurich India AMC details his strategy.

Any change in investment style with a new fund manager At Zurich, we have evolved an investment process, which while giving a meaningful role to the individuals does not make any of the funds overly dependent on an individual. The same is the case for this fund as well. While there have been some changes with the change in individuals managing this fund, the core remains the same.

Change in the investment strategy for the fund in recent times Some of the elements of the present strategy being followed are: Gilts exposure is determined by liquidity needs and spreads outlook. For example recently when the spreads of corporate paper had widened, we had reduced exposure to gilts. We are consciously limiting exposure to finance companies. Exposure to AA is taken primarily when we believe that there is potential for upgrade or when the gap in yields is attractive. A case in point is Ashok leyland on which we feel that the chances of an upgrade are high in the medium term. We actively look out for mispricing opportunities. A case in point is IOC PTC. This is the single largest holding in non-gilts. Given the medium maturity and the excellent credit quality, this paper at nearly 10% YTM was very attractive in our opinion. Hence we have high exposure to this. In fact given the fact that the basic security here is a loan to IOC, this in a way is not a receivables securitisation, hence in our opinion should be valued more like an IOC bond. We expect the spreads to compress over time on this. Though I am mentioning it the end, the first decision point is the view on interest rates. portfolio maturity is linked to the prevailing and future view on interest rates. This is the single most important decision, though one is constrained to a small extent by the availability and liquidity in corporate securities.

On impact of growing asset base on his fund performance. The fund is now better placed to enjoy economies of scale. The portfolio has already been aligned to take advantage of this. We are reducing all marginal holdings and have increased the target minimum holding in any security. This should result in economies in purchase/ sale.

Will a large asset base now will mean lower expense and boost performance Given the fact that bulk of the expenses is variable in nature, benefit should be limited. However, some benefit cannot be ruled out.

Rationale for an ultra-conservative approach. I would think ultra conservative is not a very accurate description. We are disciplined and intelligent risk takers. Intelligent risk taking implies that we understand the risk, price it and take it within limits. We are not averse to risk as long as the risk is in line with the fund objectives and positioning and we get adequate compensation for the risk that we take.

In an environment of economic stress and slowing growth, chances of credit downgrades are higher. Secondly, in the event of any volatility in interest rates, the spreads tend to widen and the lower rated paper becomes less liquid. A real risk, we need to guard against.

Nevertheless, we are open to purchasing AA securities which in our opinion are either candidates for upgrades or which actually do not warrant a AA rating. Ashok Leyland is one such case where we expect an upgrade and where we have taken a reasonable exposure. Needless to say, overall exposure to AA securities will always be controlled and within limits.

His comments on ZIHI maintaining the longest maturity among its peers We believe that in the current environment where corporate demand for credit is very subdued for a number of reasons (excess manufacturing capacities, improving capital and working capital efficiencies, healthy internal funds generation from good corporates, slow demand etc), inflation is low and is likely to remain low. It is a borrowers market and the GOI is the predominant borrower. They are thus in a strong position to influence interest rates. This has led us to maintain a view of easing bias in interest rates in the past.

However, after the recent fall, we believe that the rates are at a level where a further significant fall in the short term is unlikely. This is because rates on RBI relief bonds, small savings are relatively high and will provide resistance to even lower rates. If these rates are indeed brought down in line with market conditions, further fall cannot be ruled out. After all, GOI is still paying a fairly high real interest rate. In light of these facts, though we maintained a relatively high maturity of the portfolio in the past, we are reviewing the situation and are likely to take appropriate action.

On the fund's internal guidelines for limits on gilt exposure and portfolio maturity In my opinion no such limit is warranted. After all Gilts are the most secure and most liquid fixed income securities available. The notion that Gilts are more volatile than bonds is also a misnomer. The fact is that gilts trade actively and therefore the visibility is higher. Corporate bond prices are closely linked to gilt prices and are by and large equally volatile.

On his outlook on interest rates and his investment strategy As of now after the recent fall in interest rates, we feel that any significant fall in interest rates in near future is unlikely. This is because the controlled interest rates on small savings, RBI relief bonds etc are high and will provide resistance to lower rates by making it difficult for the banks to lower deposit rates further. In our opinion, deposit rates are still very high, for example SBI is offering 9% on 3-year deposits which compares with similar yields on 10 year GOI security.

In view of these enunciated views of stable interest rates in the short term, presently the strategy is to improve the running yield on the portfolio without compromising the asset quality.

Statutory Disclosure:
Mr. Prashant Jain does not hold any of the securities mentioned in the above conversation.