"The risk appetite and the investment goal of the investor should drive his/her investment decisions." - Sanjay Shah, Senior VP and Head of Fixed Income, HSBC Global Asset Management

Today, with 40-plus participants, we have come a long way from the initial days of the asset management industry in terms of maturity. Sanjay Shah, Senior Vice President and Head of Fixed Income, HSBC Global Asset Management, in an interview with Saikat Mitra, tells us about his journey and investment philosophy and about the overall scenario in the fixed income markets.

“The risk appetite and the investment goal of the investor should drive his/her investment decisions. So, allocations cannot be completely return centric, it should be more investors’ personal need/goal-centric.”

Says-
Sanjay Shah
Senior Vice President & Head of Fixed Income
HSBC Global Asset Management

With respect to the Indian markets and Indian investors, how challenging do you find the fund management industry?

The fund management industry has been quite challenging. There are various reasons for that, the primary one being the dynamic nature of the industry, especially since the 2008 meltdown. In India, the understanding of mutual funds as an investment option is still quite low. An important step for the industry to grow will be to communicate and apprise prospective investors on the benefits of mutual funds and the risks associated. The media also has to play a very important role in educating investors, especially beyond the top cities. The key idea is to help investors take an informed decision whilst investing their hard-earned money. There have also been a few significant regulatory changes which have been game-changers as far as the industry is concerned.

As a Fund Manager and as an organisation, we have always tried to do right by the investor and at the same time, abide by the regulations, both in letter and spirit.

Please take us through your journey in the fund management industry.

I started my professional career in the mutual fund industry with SBI in the year 1999. I worked with them on the fixed income side and on credit. I have come to realise that you learn more about the fund management industry with the passage of time. I have worked with a couple of banks after SBI Mutual Fund, and the stints helped me understand more on credits.

I joined HSBC in 2008 and am currently managing funds both on the long end as well as the short end. At HSBC Global Asset Management, we also run an advisory business where we advise various clients ranging from insurance companies to FIIs. HSBC Global Asset Management is also one of the four asset management companies that manage the EPFO money.

There is a difference between managing funds on the debt side and on the equity side. What is the difference that you find while managing a debt fund?

The fundamental difference is in terms of the nature of securities, and hence, there are significant differences in how you manage a debt fund as compared to an equity fund. Then, there is a difference in terms of markets. Fixed income markets are really illiquid, and especially on the corporate bond side, the number of investors is very limited. To that extent, where the markets become illiquid, it is difficult to discover a price. Take a slightly longer-term perspective.

In equity, if something is not working you can sell off the position, but in fixed income it is difficult as you have to look for both bid and ask – a two-way price quotation that indicates the best price at which a security can be 
sold and bought at a given point in time.

Debt funds are not that popular among retail investors. So, as a fund management house, what are you doing to popularise debt funds?

Debt funds are compared to fixed rate instruments, especially fixed deposits. That is where the understanding of an average investor is lacking. We need to understand the concept of mark-to-market funds and the fact that they are volatile in nature. The NAVs can move both up and down, depending on the markets. Hence, it is important for investors to be aware of both the benefits as well as the risks associated with mutual fund investments.

Mutual funds are great investment options and can provide better returns as compared to other traditional investment options, but there are associated risks which investors need to be aware of before they take an investment decision. We have been trying to convey this message through our various distribution channels as well as communicate directly with investors. We have taken significant steps towards training our key distributors such that they understand the products well and convey the same to their set of investors. Having said this, I think there is still a significant amount of work to be done in ensuring that debt mutual funds are properly understood and as a result, become an option of choice for retail investors.
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Do you follow any particular investment philosophy when you talk about HSBC as a fund house?

On the fixed income side, we have a top-down approach as far as duration and credit are concerned. We, however, couple it with a bottom-up approach while considering individual securities. So, it is essentially a combination of both the approaches. Another very important guideline for us is that we always follow a right by the investor principle, with a risk-adjusted approach.

There have been many rounds of talks about the interest rates. What is your take on the interest front, and how do you see it panning out going forward?

We are expecting the repo rate to come down in 2013 and see around 75 basis points cut in calendar year 2013. Basically, growth and inflation are precariously balanced right now. Growth has trended downwards and inflation has started softening. We believe that this enables the RBI to try and help promote growth by softening the interest rates.

What is the impact that you see on the debt markets when the rates cool off?

When the interest rates soften, the long duration papers will gain. So, income funds and dynamic funds with a relatively longer duration of four to six years will gain. The yield curve will become steeper and the shorter end rates will start moving downward, thereby benefitting investors in the shorter end as well.

So, do you think that going forward there will be a pull between the debt and the equity markets for investors to decide on which to invest in?

Actually, we have a slightly different take on this point. We need to abide by a fundamental principle of investments that the risk appetite and the investment goal of the investor should drive his/her investment decisions. So, allocations cannot be completely return centric, it should be more investors’ personal need/goal-centric.

Do you think that there are more limitations to a debt fund manager as compared to an equity fund manager?

As a debt fund manager, one limitation that I find is that the debt markets are relatively illiquid in the Indian context. Another aspect to note is that in the debt markets, we see a lot of skimming of the credits at the top. These are the primary limitations that we have to deal with as debt fund managers.

With global developments in the US as well as in the Euro zone, what is your take on the crude oil prices and on the gold prices panning out?

On the global markets, it is our global research team who takes the call. In terms of the fiscal cliff as well as the liquidity coming in, we have to understand that the liquidity scenario and lower interest rate scenario will prevail for a longer time now. There was a time-bound approach to that, and now with the unemployment rate coming down, it is going to be a difficult to predict when the turnaround will take place. On the commodity prices, we feel that there will be some upside, however the movement will be range-bound.

How fast do you think the government will be able to dissipate the twin deficit gap?

It is really a tough one. But on the fiscal deficit front, there are ongoing efforts and it is heartening to note some positive steps being taken. If we are able to keep the fiscal deficit gap at 5.1 per cent as the Finance Ministry had projected in the budget, despite the lower telecom auction revenues, the fiscal deficit projections for the next three years progressively may come down. If these are achieved, it will be good for the economy and the markets.

Is this the right time to invest in debt funds?

We believe that it is a good time to invest in debt funds because we are looking at rate cuts in the next calendar year. If that happens, it could have a positive impact on the income funds.
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What is your advice to investors in the Indian markets at this juncture?

As I mentioned earlier, we need to abide by a fundamental principle of investments that the risk appetite and the investment goal of the investor should drive his/her investment decisions. As far as fixed income funds are concerned, there could be value derived out of income/dynamic funds over the next year if interest rates come down as expected.

The bond market has not developed as expected. What, according to you, has gone wrong and what steps should the government or the RBI take to develop it?

I agree that the bond market has not developed significantly and I have already mentioned about the illiquid nature being a key challenge. The solutions to these have already been discussed in various forums. More FII participation and clear recovery as well as a definite bankruptcy mechanism need to be looked at. Typically, the bankruptcy issue takes its own sweet time before resolution. These are the key issues that need quick redressal.

What is your take on the maturity level of the Indian fund management industry?

We have come a long way from the initial days of the asset management industry. Today, we have 40-plus participants in the industry. There are fund managers in insurance companies as well. So, it is a big community now. We have seen very experienced people driving positive change in the industry. I think we have come a long way in terms of maturity. We also have a proactive regulator who has nudged the industry to take steps towards investor awareness of mutual funds as a product category as well as steps specific to the way liquid funds are managed, and provides guidelines on products such as fixed maturity plans.

Overall, I believe that the industry is gradually moving in the right direction. In the near future, a lot of the disconcerting questions which are being asked now will get addressed.