"Amongst the three factors- liquidity, safety and return, safety is the bedrock of our strategy for Alliance Liquid Income, and next emphasis is on liquidity."
22-Sep-2000 •Aabhas Pandya
Launched in March 1997, Alliance Liquid Income is known for its penchant for safe returns, high credit quality and its ever-increasing size. With a 12 per cent annualized return since launch, the fund falls in the middle of the performance ladder.
Vineet Udeshie, the Fund Manager talks about the Fund in an interview with Value Research.
Q. How would you describe your investment strategy?
Vineet: At Alliance our fund management strategy for debt revolves around an understanding on the tradeoff between liquidity, safety and return, with the highest emphasis being placed on safety. Very clearly safety of assets has and will be the bedrock of our strategy for fund management. Having said that and given the open-end nature of our funds and the fixed income market we continue to place strong emphasis on the overall liquidity of the Fund. Last but not the least we look for returns commensurate with our focus on safely and liquidity by identifying undervalued sectors and securities.
Looking at the strategy from a different angle we would manage duration/interest rate risk through the more liquid market viz. government securities and try and use the corporate allocation to enhance return by additional yield pick up and by enhancement of credit ratings.
Q. Going further, what is your outlook on interest rates?
Vineet: We are cautiously optimistic in the near term about interest rates and believe in a rally in the short and medium term segments. Currently, the positive factors are the government borrowing program being 80% complete, the stabilising factor of the IMD on the rupee and on domestic liquidity, expected shift in bias in US interest rates. However we continue to remain concerned about high oil prices, higher inflation and the fiscal situation (due to failure of PSU dis-investment and a question mark on revenues in view of the economic slowdown)
Q. Alliance Liquid Income has maintained a conservative stance, particularly with respect to interest rate risk, especially in comparison to Alliance MIP. Why is it so?
Vineet: Our view on interest rate risk is in line with our view that given the enhanced volatility in our fixed income markets we should maintain lower interest rate risk in our portfolios, especially at times when the domestic interest rates scenario, the foreign exchange situation or the external environment is unstable. We continue to review the situation and, as and when we are comfortable with the same we enhance the maturity/increase interest rate risk. Our stance with both funds has been the same with regard to interest rate risk, which has been conservative, as you have suggested. We continue to manage the debt component of AMI in line with our views on ALI. A slight difference is however induced by the fact that AMI has an equity component thereby increasing the effective duration of the fund and making it more interest rate sensitive as a whole.
Q. While Alliance Liquid has gradually scaled down the exposure to AA & below and unrated papers, it still accounts for 16% of the corpus as on October 2000. How liquid are these? What has been the impact on these papers in the context of the new valuation norms?
Vineet: Under normal market conditions, liquidity exists in the market in even AA companies and unrated papers though admittedly it is lower than an AAA credit. However in the AA companies and unrated papers, which we hold we find significant demand especially in view of their upgrade potential and as such we are comfortable with the same. Moreover liquidity must be viewed in the context of the overall portfolio.
Regarding valuation, there was no impact on the portfolio from the new valuation norms especially in the below AA and unrated papers. This can be seen from the NAV, which is declared daily. As you may be aware return of the bond funds come from 2 sources current/coupon income and capital gains. The second component of capital gains arises from taking views on interest rates and from changes in credits. We continue to believe that we as Investment Managers should buy credits with upside potential in ratings as this would over a period of time provide enhanced returns to investors by enhancing the capital gains component. Just buying AAA does not mean that we are using our full range of skill for the benefit of the investors, as there is no scope for upgradation (only own grades).
Having said that we also take into account the lower liquidity of the AA and lower credits in estimating the overall liquidity of the portfolio and keeping portfolio illiquidity within reasonable limits.