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It is only a matter of time that bank rate is brought down

While markets may wobble in the short-term, we see interest rates move lower from current levels in the medium-term

In just over a year, Standard chartered Asset Management Company has grown to become Rs 2,600 crore-fund house. A dedicated debt fund family, the AMC offers a range of debt funds and fixed maturity plans with varying maturity profiles. The bulk of the assets are managed under its medium-term debt fund, Grindlays Super Saver Income (GSSIF). In an interview with Value Research, Stanchart AMC's head of investments, Rajiv Anand shares his investment philosophy, future plans and outlook for bond markets.

In a short span of time, Grindlay SSI has emerged as one of the largest open-ended debt funds. What are the benefits and problems faced in managing a large asset base?
Clearly a large corpus with a diversified set of investors is of great comfort to investors for many reasons. One as a large portion of our corpus is primarily retail you will not see large fluctuations in the corpus. Secondly, our top 10 investors are not a significant portion of the corpus. Hence, even if all these investors leave the fund we will be able to easily meet any redemption pressures.

As a large fund we are able to speak to debt arrangers from a position of strength and able to demand better pricing on the assets that we purchase. Whether you look at it from the assets or the liability side of the scheme size does matter!

Is a large asset base now a constraint in aggressive management of assets?
Our assets under management as at December 31, 2000 was about Rs 300 crores. GSSIF has grown to over Rs 2000 crores currently. Despite this rapid growth our performance over various parameters continues to be in the upper quartile of our peer group. This has been possible primarily because of our disciplined approach to interest rate management through the 3D-factor process. I am confident that we will be in a position to deliver upper quartile returns in the years to come.

GSSIF lost 1.52 per cent for the week ended September 21, 2001. What has been the reason behind the fund's underperformance in the recent volatility?
I feel it is inappropriate to look at the performance of an income fund on a point to point basis for such a short period of time. Income funds are investment instruments ideally suited for holding periods of over 6 months and hence performance should be judged accordingly.

Do you have an internal limit for exposure to gilts and portfolio maturity in GSSIF?
The overall portfolio maturity is driven by the weekly 3D-factor process, which indicates the portfolio maturity on a week on week basis. Typically, we do not buy into gilts with greater than 10-year maturity into the core portfolio and we do not buy into corporate debentures with maturity over 5 years.

What is your outlook on interest rates?
To my mind we have seen the worst as far the market reaction to the September 11 event is concerned. The markets will start focussing on the fundamentals once again. We believe that the event has weakened an already tottering global economy. This will only force a lowering of interest rates globally. We have already seen that happen in USA and Euroland. It is only matter of time that bank rate and CRR are brought down in India. Hence in the medium term we see interest rates move lower from current levels. In the short term, we may see markets wobble when the actual retaliation (from US) fructifies.

There has been a steady increase in your exposure to below Triple A paper in GSSIF, which peaked at 17% in July. Apart from aggressive interest rate risk management, are you also looking at adding to returns (from interest income) with a moderate allocation to lower rated bonds?
We bought into two AA+ papers - RPL and TISCO as we believe that these are strong companies with good management. The other AA+ on our portfolio is IDBI, which was recently downgraded from AAA. In a weak economy, we believe that only the best will survive this downturn in the economy. Hence we will stay focussed only on AAA companies for our incremental purchases. We believe that the chances of a rating downgrade increase sharply for credits lower than say AA.

Apart from aggressive management, GSSIF was lucky with its launch that coincided with falling interest rates. Thus, the fund delivered a stupendous performance with a one-year return of 15.9% (category average 14.39%). However, going forward, an encore is unlikely. Have you been able to communicate to your investors that returns may slow down going forward?
It is ironical that you call us lucky. When we launched people were saying that we were very unlucky. Soon after we closed our IPO on July 7, RBI pushed CRR and bank rate up 100 basis points. Our performance has been on the back of a disciplined process: the 3D-factor process, which has helped us better manage interest rate risk without compromising the quality of the portfolio.

Over the last 3 months we have been indicating in all our investor communications that realistic expectations for 6 month returns from income funds should be around (annualised) 9%. The other thing that we communicate to our investors is that there is no point trying to time the market. Pick an appropriate scheme based on your holding period: 15 day money should go into our cash fund, 1 to 3 month money should be invested in our short term fund and long term (6 month and beyond) money goes into the long term fund. This becomes important because each scheme is actively managed to deliver optimum returns for the relevant holding period.

The AMC launched a short-term variant of GSSIF, which is an attempt to juxtapose a fund between cash and medium-term debt funds. How has the market received the product? What percentage of the corpus in the fund is marked-to-market?
The market has received GSSIF (short-term) very well with assets currently in the region of Rs 450 crore. The fund is positioned for those investors, who plan to stay for 1-3 months but do not want to invest in a cash fund, which offers sub-optimal returns. Typically, the short-term fund offers 50-100 basis points higher returns than cash fund, which will not vary dramatically over a period of time. Further, these returns come with minimal downside. For instance, while GSSIF lost 24 paise in a single day during the recent volatility, the short-term fund shed only 1 paise.

In the short-term fund, around 25-40 per cent of the corpus is marked-to-market. Here, we buy assets with a maturity of 6 months to one year but do not invest in sovereign bonds including T-bills since these securities tend to be more volatile. The maturity of the fund varies between 4-6 months.

What are the other funds, which you plan to offer? Being a dedicated debt fund house, are you also looking at certain specialised products?
We launched the third series of Grindlays Fixed Savings scheme, a closed-ended tax efficient debt fund on September 24. The scheme has 2 plans of 12 months and 18 months maturity, ideally suited to avail single and double indexation benefits. We plan to launch a dedicated gilt fund in the next couple of months.