'We have always believed in the concept of SLR: safety, liquidity, returns'

Exclusive interview with Devang Shah, Head-Fixed Income at Axis Mutual Fund

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Axis Mutual Fund recently appointed Devang Shah to lead its fixed-income team, succeeding R Sivakumar. Shah has been with the fund house for over 12 years. Of all the debt schemes that he oversees, the Axis Liquid Fund, Axis Treasury Advantage Fund and Axis Money Market Fund are rated four stars by Value Research.

In this interview, Shah explains his core investment principles and highlights the importance of internal risk mandates. He also shares his debt fund recommendations for different investors.

Below is the edited transcript of the interview.

You chose fixed income after completing your CA. What drew you to this field over equity?

I have always been fascinated to understand and learn macroeconomics. Joining the fixed income team allowed me to learn and understand macroeconomic factors like growth, inflation, and gross domestic product (GDP) and their impact on the economy and financial markets. It also gave me an insight on understanding companies and do their financial analysis. I liked this macro approach to fixed-income decision-making, and that is the reason I chose fixed income over equity or any other asset class.

Having begun your career in the mutual fund industry in 2006 and managing money by 2008, you've witnessed significant events like the global financial crisis and various credit crises. What key lessons have these experiences taught you?

I entered the mutual fund industry in 2006, and I was on the research side. My fund management journey began in the 2008 crisis. So, the first most important lesson that I learnt in fixed income, was that you have to manage the risks well. In equities, one can exit (from the stock), but in fixed income, it's illiquid and exit is almost impossible. If we choose the wrong company or the credit analysis is wrong, we can lose a lot of value. So, from that perspective, one of the important lessons for me has been to manage risks, maintain discipline, and have a flexible investing approach.

Could you describe your core investment strategy for selecting different debt instruments? Like, Axis equity funds have a strong focus on quality at any price—an extreme quality focus. Is there a similar guiding principle across all your debt funds?

We have always believed in the concept of SLR—safety, liquidity, and returns. We have been using this principle of investing since the inception of Axis AMC in 2008-09. The first important aspect of the strategy is safety, as investors coming into fixed-income funds need safe-stable investment returns and don't like too much volatility.

Liquidity is the second most important aspect in the bond market. So as a matter of discipline in the portfolio, even if we take some lower-rated company exposures, we try to build inherent liquidity structures in such instruments.

Finally, generating competitive returns to deliver a good investment experience to the investor. So, the principle is to work with safety along with high l­iquidity in the portfolio and providing competitive returns. In my personal capacity, I've been following this strategy for the last 16-17 years.

For how long did you work with R Sivakumar? How was your experience working with him, and what lessons did you learn along the way?

I joined Axis Mutual Fund in 2012 as a senior fund manager, got promoted to co-head of fixed income in 2020, and now to head of fixed income. I have been working closely with Siva since 2012. He is a great guy. We have both worked on the SLR concept for the last 12 years. All along my journey, we have put a lot of internal risk mandates within the fund house. For example, in 2022, the Securities and Exchange Board of India (SEBI) placed caps on how much active debt funds could park in a single company's debt instruments. However, we implemented a similar grading system that was significantly stricter than even the regulations and had been adhering to since 2009.

Axis Mutual Fund was born during the global financial crisis, and as a result, risk management and risk assessment have been the core philosophy for managing our debt funds which Siva and our management have ingrained in me.

As co-fund manager for 22 debt schemes, how do you distribute tasks and strategies across these funds?

I believe that there are three levers of generating alpha (additional return) in fixed income, they are duration, credit and liquidity. We have a very macro-oriented approach of investing, and a large part of my time is devoted to assessing the right macro environment and strategies for the fund.

At Axis Mutual Fund, we are a 10-member team for fixed income: four fund managers, four research analysts, one dealer, and one internal risk manager, and we have divided the tasks among each team member. Since fixed income investing is more of a top-down approach, we first decide where interest rates are headed, how are banking liquidity conditions, and the overall credit view and accordingly form core strategy which is implemented across funds.

We have co-fund managers for all our funds, and they help me and team cohesively to implement the top-down and core strategy. They also work on finding anomalies in spreads and different asset classes and decide asset allocation which can be used to enhance investor returns. Some part of my time goes into understanding companies, meeting investors, analysing credits, and overall assessing sectors.

With your recent promotion to head of fixed income at Axis Mutual Fund, what changes or improvements are you aiming to implement, especially in debt research or portfolio management?

Markets have ensured that we continue to learn every day. Since the global financial crisis in 2008, we have seen a lot of changes in regulations and how markets have evolved. From our perspective on changes, I don't think there is much. If you look at our universe, we look at more than 240 companies on the debt side. As I told you, we have always worked on a tighter investment risk policy, which ensures we don't take undue risk in our portfolios.

A good example that our risk management framework is working well is that in 2018, the mutual fund industry faced 23 accidents (credit issues), but at Axis Mutual Fund, we had only one issue. This demonstrates somewhere down the line that internal risk management was quite strong, so yes we will keep on learning. We will keep adding sectors and new companies, continue to work with the same or similar risk management philosophies, and try to deliver superior risk-adjusted returns to investors. So that's the goal.

Similar to all-weather funds in equities, which one or two versatile debt schemes would you recommend for investors?

Dynamic bond funds, managed dynamically based on prevailing interest rate situations can serve as an all-weather fund for fixed-income investors. Investors can also consider short-term debt funds as their second investment option. We did 15-20 years of back testing and found that short-term debt funds have given competitive returns over traditional investments. So, conservative investors can look at short-term debt funds. More informed investors may consider dynamic bond funds, which are designed to capture various cycles of interest rates.

Recently, the Fed, in its policy, continued to hold rates. When do you see interest rates falling?

Given the recent spike in US inflation trajectory and noise around strong US data, the market was expecting a hawkish FED policy. But the Fed commentary was a bit dovish. Looking at the trend in US inflation, it seems that in the next 6 to 12 months, we actually anticipate a softening of rates and a trend to be lower.

We anticipate a limited pace of rate cuts but directionally a lower trend for rates.

In the next 12 to 24 months, we expect the Fed to cut interest rates by 1-1.5 per cent. From the RBI's point of view, the rate-cut cycle will not be as aggressive as in other developed markets. In India, we have stable or falling inflation, stable external factors, and strong growth, so I think the RBI will not be in a hurry to cut rates. We believe that if inflation continues to track trend as envisaged by RBI we can expect 50 bps cut in next 12 months.

We expect the 10-year government bond yields to decrease to 6.75 per cent in the next 6-12 months, from around 7.20 per cent at present. With strong macro-fundamentals and favourable demand supply dynamics for the bond market (including the inclusion of Indian bonds in the JP Morgan index and the Bloomberg index), we think investors should be long at this point in time.

How should investors structure their asset allocation between fixed income and other assets in today's market?

Today, I think we are at the peak of the growth cycle. Over the past three to four years, central banks worldwide have infused liquidity into the economy to battle Covid. There was massive monetary easing (rate cuts), and huge fiscal expansion. However, since 2022, Central banks/governments for fear of inflation have started the reversal of liquidity, rate hikes, and a focus on fiscal consolidation.

During Covid, the fiscal deficit for the US reached approximately 10 per cent of its GDP, and now it is 6.5 per cent. Even in India, our fiscal deficit had gone to 7 per cent, and now we are at 5.1 per cent.

So tight liquidity, fiscal consolidation, and tighter financial conditions don't bode well for growth. Hence, we believe that being at the peak of the interest rate cycle and the peak of the growth and inflation cycle, macro suggests that one should have a higher allocation towards debt, and that's what we have been advising our clients.

Also read: Interview with SBI Mutual Fund'sHead of Equity Dinesh Balachandran

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