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Sashi Krishnan, Fund Manager, Chola Mutual Fund, speaks about his strategy for Chola Triple Ace

"Given the smaller size of Chola Triple Ace, Gilt exposure has been kept to the extent it does not make the fund volatile."

Chola Triple Ace is India's first rated mutual fund scheme with a 'AAAf' rating from Crisil. The fund invests only in AAA rated debt instruments, which provides strong protection against credit default. In the one year ended April 30, 2000, the fund has delivered a return of 13.26% and ranks 16 among 20 open-end debt funds. The fund's returns have been normally lower than its peers since AAA companies have been raising money at extremely fine coupons from the market. This has brought down the interest income for the fund. No wonder, the fund ranks last among 14 debt funds for a two-year period, with a return of 11.51% against a 14.82% return by the top-performing fund.

However, Chola Triple Ace fund manager, Sashi Krishnan believes that the investment universe of the fund is not a constraint. In an interview to Value Research, Sashi spells out his investment strategy and view on interest rates.

Q. What is your viewpoint on interest rates and going forward, what will be your investment strategy?
SK: We expect that interest rates may actually move up in the short run. This is mainly on account of rising inflation and high government borrowing. We have therefore kept the duration of the Chola Triple Ace portfolio at around 3.54 years and would look to reduce it to about 3 years in the next few months. We would look to make additional investments at the shorter end in view of the interest rate risk.

Q. How have the spreads moved between triple A and gilts in the last two months? Are they beginning to widen with corporate activity picking up?
SK: As regards the spreads between gilts and AAA, I have some data here

  Duration (in years) 1-2 2-3 3-5  >5
  25/3/00 0.6 0.75 0.95 0.9
  30/4/00 1 1.05 0.95 0.75
  17/5/00 1 1 0.85 0.65

I would tend to believe that the spreads at the shorter end have increased by about 25 basis points whereas at the longer-end, they have remained the same and could have marginally reduced over the last two months.

Q. You are already constrained by pre-defined investment universe of triple A paper and the falling interest rates compound the problem (except that there is a brief appreciation in the prices of your underlying securities). With corporate debt market largely concentrated in the medium and short term, what are the problems you face with the maturity profile of your portfolio?
SK: As regards your query on the investment constraints, I would like to say that there is a sufficient amount of AAA paper in the market and we are quite comfortable in terms of supply of paper at the moment. In fact, in a falling interest rate scenario it will the AAA corporates who will first access the market and that too with longer dated paper.

Q. Does your preamble allow you to take exposure to gilts? The fund has not taken exposure to gilts unlike its peers, which had heavily invested into gilts to maximize returns in the falling interest rate scenario?
SK: Triple Ace can invest in a portfolio of Government securities, Crisil AAA paper and short term P1+ instruments. We do have gilt exposure in the fund at present. As AAA prices mirror the movements in gilt prices to a large extent, we did not lose out on the rally. However, given the smaller size of the fund, we wanted keep the volatility low.