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WF: SBI Corporate Bond Fund in its new avatar completes 2 years this month. This product category has a diverse set of funds in the industry - some which focus majorly on the AAA segment and others that go opportunistically into higher yielding lower rated papers. Where in this spectrum would you place your fund?
Dinesh: SBI Corporate Bond Fund attempts to maintain a core illiquid portion of 40 to 75% in lower rated high yielding opportunities. Balance portion is in higher rated debt instruments for liquidity and duration balancing purposes.
WF: What is the proportion of AAA rated papers in your fund today and how has this proportion moved over the last 2 years?
Dinesh: As on June 30, 2015, the proportion of AAA rated papers (excluding cash) in the fund was 73%. As on June 30,2016, the proportion of AAA rated papers (excluding cash) in the fund lies at 23%. The fund has largely been able to deploy as per intended strategy of holding a core illiquid portion in lower rated papers.
WF: What are the opportunities and challenges in going down the rating curve in today's environment, which is widely seen as an economic recovery phase?
Dinesh: The current credit environment has been mixed with pockets of improvement in sectors like retail finance, commercial vehicles, power especially renewable power and roads. However deterioration has been witnessed in some sectors like metals.
Huge increase in NPAs of the banking system, defaults in debt instruments held by MFs ensure higher due diligence, and adequate credit risk premium in pricing. However as more MFs vie for scarce number of quality corporate debt, instances of covenant light and mispricing are increasing.
WF: What is the modified duration of the fund now and how has it moved over the last 2 years? Is this a time to go cautious or aggressive on duration?
Dinesh: SBI Corporate Bond Fund follows a passive duration strategy by attempting to maintain average maturity in the band of 2.5 to 3.5 years. It does not take active calls on duration. However if found appropriate by the fund house, in a scenario of increasing rates, the average maturity band may be shifted lower. As on June 30, 2015 the fund had modified duration of 2.29 years while the same is 2.61 years as on June 30, 2016.
WF: What besides current yield are the opportunities you see today in the corporate bonds space? Is there a spread compression opportunity? Is there an opportunity to roll down the yield curve?
Dinesh: Opening up of the Pass Thru Certifcate Space thru clarity on taxation in the Finance Act 2016 represents a significant disintermediation opportunity. Also significant opportunities lie in the space of financial inclusion especially Micro Finance Institutions and other retail NBFCs. Similarly partially guaranteed bonds by banks offer scope for yield enhancement and risk mitigation. Entities engaged in stressed assets financing are also likely to be in business in the wake of the Bankruptcy Code.
As significant reduction in interest rates are not expected from current levels, a carry and roll down strategy looks attractive from a risk-return perspective.
WF: It is believed that disintermediation is going to exponentially grow the corporate bonds space and thus herald a huge potential for corporate bond funds. Can you please elaborate on this trend and its implications for the product category?
Dinesh: Most banks especially PSU banks which occupy two thirds of the financing of the corporate sector are reeling under pressures of asset quality and lack of capital. Consequently single digit credit growth and even lower for the corporate sector throws huge scope for disintermediation. Similarly increase in Merger and Acquisition activity shall offer deals in corporate bonds where the end purpose is non-bankable. The Bankruptcy code passed shall enable bond holders to seek faster redressal for defaults and increasingly disintermediate in lower rated bonds.
We should incrementally see a large proportion of lower rated bonds being invested by the MF industry.
WF: What in your view are the lessons we must learn from the scares caused in the industry by the recent credit events that impacted a couple of funds?
Dinesh: A key lesson to be learnt is that each MF must conduct its own due diligence before investment and not simply rely on the headline credit rating given by a credit rating agency.
Investments in credit should be backed by a sound philosophy, due diligence process and adequate number of experienced and qualified people. Sufficient consideration should be given to portfolio diversification as well as liability diversification for credit schemes. Background checks on promoter also assume importance.
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