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"Safety Comes First"

Saravana Kumar, Head, Fixed Income, SBI Mutual, discusses the investment process, the strategy he follows for the fixed income funds and above all the benefits of having the largest public sector bank as its parent, with Mutual Fund Insight

Saravana Kumar heads the Fixed Income Department at SBI Mutual--one of the largest public sector AMCs. After having a more than five years experience of managing funds at UTI, Saravana took charge at SBI Mutual around two years back. A conservative focus on safety coupled with aggressive maturity management is what marks his style of managing the bouquet of fixed income funds. This and lot more is what he shares in an interview with Mutual Fund Insight in January, this year.

Tell us about your career
I started my career as a software engineer in the late eighties. In 1991, I joined IIM Bangalore for an MBA in finance as financial services excited me more. After I finished my MBA in 1993, I joined UTI. The mutual fund industry was just beginning to open at the time. Foreign funds were beginning to come in and things were looking very exciting. That was the time the potential growth really excited me.

In the initial years, around 1993-94, I managed equity but later shifted to debt. I was managing the UTI Bond Fund and some balanced funds. Later, I was managing the debt side of US-64. I then shifted to SBI Mutual Fund and have been here for the last two years, managing the debt funds. I manage a total of four funds, which have debt portfolios worth Rs 1,847 crore currently.

What is the investment process like at the SBI Mutual Fund?
At the top of the structure we have the Board of Trustees of the fund and also the Board of Directors. Many of the directors are from our parent organisation, the State Bank of India. We have the SBI chairman, the SBI Managing Director and the SBI Mutual Fund Managing Director. These people have rich knowledge and experience that we draw upon. They have been in the banking industry for a very long time and are seasoned bankers. They understand the risks and the returns of the business very well. Plus we also have the Board of Trustees, who are eminent people from the industry.

Are these people involved in the day-to-day investment process?
No, the directors basically formulate the policies, the risk management policies, and the investment policies. They normally meet once a month and specify the broad policies. The policies they formulate are passed on to the fund management group. Their task is really to set up the guidelines on behalf of the investors. This is important. Today, unfortunately, many investors are looking only at absolute returns. They fail to understand the risk involved in generating those returns. For example, a fund could be putting 10 per cent of its assets into an NBFC and generating returns but that is not a comfortable thing to do. Risk in investments is one factor that is very well understood and highly appreciated by our board. We certainly do not see this as a constraint. These guidelines are a support for the fund management process, not a hindrance.

Are these guidelines specific to specific investments. For example, does the board lay down which companies to invest in?
No, they are not. Let me give you an example. According to the SEBI guidelines, any investment made in corporate bonds must be in instruments that are at least rated as investment grade by the rating agencies. This means that they must be BBB+. For us, the guideline by our board is more strict. For manufacturing companies, the bonds must be at least AA, for NBFCs, they must be at least AA+. Also, SEBI says that investment in a single issue could be up to 15 per cent. For us, the limit is 10 per cent.

What is the structure like at the actual fund management level?
After the board, we have a chief investment officer. After that I head the debt side and there is a person heading the equity side. There are two fund managers on the debt side, including me. I manage the liquid fund (Magnum InstaCash), the income fund (Magnum Income), the children's fund (Magnum Children's Benefit Plan) and the gilt fund (Magnum Gilt Short-term). There is another debt fund manager who looks after the other fixed income funds. Similarly, there are three fund managers on the equity side. There are also analysts. I have two whole time credit analysts to help with the research.

What kind of research or thinking do you do on interest rate movements?
We do a lot of research, we closely monitor the RBI's policies, its weekly statistical reports, the credit growth, the foreign exchange inflows and other factors. Plus we interact with a number of bank treasuries and find out about how much credit growth there is, how much demand for money is there in the system. We do a lot of number crunching on this data.

How much advantage do you derive from the largest bank in the country being your parent?
Well, there is a Chinese Wall between the treasury operations of the SBI Mutual Fund and those of the bank. As mandated, there is no interaction of information between the two. We have no idea about what Gsec they are buying or selling or what else they are doing. We find out about that from the newspapers or from the market. We are operating like any other AMC. There is this Chinese Wall and SBI is just the promoter of our fund, that's all. There is no operational linkage between their treasury and our treasury.

Is there any great marketing advantage that you derive from SBI being your parent?
Definitely. Our parent has about 15 local head offices around the country. They help us in marketing our products to their major corporate clients, to NGOs, trusts, public sector and others. There is great deal of value addition in being part of the SBI family.

Are there any kinds of investors who prefer you because your are SBI rather than a foreign AMC?
There are some type of investors who are looking primarily for safety. And safety-wise, SBI has a very good brand name. But it's not just safety. I'd like to point out that we are able to compete with any other foreign or Indian brand name in the market as far as returns and services are concerned.

The point is that while we do have that 'Swadeshi' image, we are as good as any one else. And definitely there are investors who prefer us. Today, even MNCs like ITC are investing in our fund. Major Indian corporates like Hero Honda, state-promoted companies, state-owned and private banks are also there. In my experience, most corporates have board guidelines on investments from the safety point of view. We are meeting both safety and returns parameters.

We have observed that many corporates that are foreign joint ventures themselves started out investing in foreign joint venture AMCs only because they were a little apprehensive about the servicing aspect because of SBI being a public sector bank. It took time to break this mental block. We had to show them that we were as good as anyone, both returns-wise and safety-wise. Most of these have turned big investors with us now. You won't find any PSU atmosphere in any of our offices. All our marketing people are from the market, so are the fund managers. Only the top three positions are from the bank. These are the managing director, the CIO, and the executive vice-president. Our fresh hiring is all from the market and we have complete flexibility in terms of salary levels in order to hire the best people. There's a sea change between what you saw at SBI Mutual Fund two years ago and what you see today.

What has brought about this change? Nothing has changed in your management or ownership structure?
There is realisation now that if you have to be in a business you have to compete with the best in the private sector. This is evident in SBI's other businesses like credit cards or insurance too. SBI Cards is the largest card business in India in terms of the number of cards. SBI Life Insurance is number two in terms of premium.

And if you look at the mutual funds' business, we have had a net inflow of Rs 1,300 crore since April. This, despite over Rs 300 crore being redeemed in closed-ended schemes which were due to for redemption. Today, we are more than Rs 4,300 crore in all.

Tell us specifically about your approach to the medium-term bond fund?
We are very aggressive in duration management in this fund. Our basic positioning is to offer higher risk and returns compared both to the short-term fund and the liquid fund. This is our largest fund at about Rs 1,180 crore.

About three months ago, our average maturity was about 4.5 to 5 years. And 30 per cent of our portfolio was Gsecs. We then concluded through our research that the credit policy was in for a kind of a turnaround and that interest rates might be eased up. Therefore, we started building up the Gsec position. From 30 per cent, we took it up to around 45 per cent, and that too mainly the longer segments—the 2017, 2018 and 2021. We managed to capture the rally. You can see that around October 29, it was 7.13 and later, it touched 6.95.

We then started wondering whether we should book profits, whether we should harvest. But we observed from a variety of signals that interest rates were probably in for a bigger fall. So we did some trading but we held our positions. Then the market had another rally—from 6.95 it touched 6.45 in just a week. So, while we are aggressive with maturity management in Gsecs, in corporate bonds we prefer to trade.

Is there enough liquidity in corporate bonds to do active trading?
Yes, there is, and since we are positioning our product as a high quality product, most of our investments are also high quality manufacturing kind of investments. I might get slightly less returns but these are very good investments. For example, today Hindalco five-year paper is available at 6.45, while something like GE Capital five-year paper is available at 7.6. But our main focus is on manufacturing assets. We have less emphasis on the high-yield NBFC kind of paper.

We classify AAA paper into three kinds. High quality manufacturing paper like Hindalco is available at around 6.4 or so. NBFCs fetch you another 0.8 per cent and some other kind of paper, like Noida Toll Bridge for example, may fetch you 1.2 per cent more. But we prefer manufacturing paper. One reason is that we can do a lot of trading and be prepared for moving assets from one asset type to another.

I do buy NBFCs but I allocate less to them. The reasons are both that they are less liquid and that my board guidelines enable me to buy more AAA manufacturing. The liquidity also helps in duration management. I can convert 50 or 100 crore of Grasim to Gsecs in two hours but converting an NBFC may take five days and I might miss a rally.

How does your strategy allow for future volatility in interest rates?
We have a core portfolio for our income funds. This has medium maturity Gsecs, 2010 to 2014. Whereas some part of the portfolio is our trading portfolio. We take positions in this based on our view on short-term issues like our view on interest rates. Our trading portfolio is about 25 to 30 per cent of the total. During the last three months, most of our long-term Gsec holdings were limited to our trading portfolio.

What is it like being a bond fund manager? Don't equity managers get to be heroes while you work quietly?
Well, you have to talk less and deliver more.