"The beauty of fixed income is that there is no bear market" - Amandeep Chopra - President, Head of Fixed Income, UTI AMC

• We have demographics in our favour, we have low per capita consumption, and I think it’s an inherent desire among Indians to improve their current state of affairs, and that is a driving force.
• I would advise investors to stick to an asset allocation strategy. It becomes very difficult when you play one asset against the other. Don’t be too aggressive and don’t be swayed by rumours.
• We can expect to see a generic decline in interest rates in both maturity buckets and asset classes and that generic trend is expected to remain for the next two years.

Amandeep Chopra, Head – Fixed Income, UTI AMC, shares his experience in the fund management industry, in an interview with Shailendra Lotlikar, also giving insights on the fixed income markets while advising retail investors regarding the same.

How did you enter the fund management industry?

My basic interest was more on the analytical side. I enjoyed looking at companies closely in terms of their business models, how they generate revenues, how effective they are with delivering value to stakeholders– the typical financial and non-financial parameters. Every corporate and every sector was unique. So there was a lot of variety and analytical scope it offered. And the best way to explore that was through the capital markets.

In our time, one way to get such a comprehensive exposure to corporate sector and capital markets was to get into a project finance organisation, and the second way was to work with an investment bank or with an asset manager. Among these options, an asset management company looked the most versatile. So, I joined Unit Trust of India in 1994 and started as an equity analyst.

Was fixed income a conscious decision? Didn't you want to remain in equity?

Equity was where I learnt and honed early skill sets. When we were part of equity research, we also established our own credit rating cell in UTI. Those were the days when you could have your own rating cell internally, before regulators changed. So I had also spent some time with fixed income.

The switch to fixed income came essentially because I saw immense opportunity for UTI and the MF industry. UTI started out in 2003 in its new avatar as a mutual fund asset management company. At that point in time, we did not have fixed income asset base of funds so to speak, while we had a good reach of equity products that were pretty well known. I was given this opportunity, and I thought that this was a place or a space where I could make my presence felt and help UTI MF grow its assets meaningfully. That was when I moved into fixed income.

UTI had just around four products then and the total corpus was hardly about Rs 3000 crore in 2003. Today, fixed income constitutes almost two-thirds of the total corpus of UTI, which reached around Rs 60000 crore at its peak, and is currently about Rs 50000 crore. It required a different mindset, but the underlying foundations are the same – whether in fixed income or equity, ultimately you are either investing or giving money to an entity. To make sure that your money either grows or you get it back with interest, you have to be well aware of the business the company operates in, how the industry is faring, etc. The basics remain the same, this grounding helped a lot.

What are the distinguishing characteristics of a fixed income fund manager versus an equity fund manager? What are the advantages that an equity fund manager enjoys?

I think that this debate could go on and on. The entire attitude and aptitude that one needs for equity and fixed income are quite different in terms of your expectations and the criteria that you would follow. For instance, for an equity fund manager, it is a lot about hope and expectations. In fixed income, you have more certainty in what you are tracking. There are more definitive cash flows and numbers. In equity, you look at different parameters, basing your investment decisions on expected events and outcome. On the fixed income side, it’s more about the certainty of definitive cash flows.

Do you think equity management is more subjective and fixed income management more rigid?

Well, it would be too simplistic to say that one is only subjective and the other is more quantitative. I think there is a little bit of both in the two. Rather than saying it is subjective, which has negative connotations, I would say that we see a little bit more of intangibles on the equity side – there are a lot of expectations, hope and you have to forecast a lot into the future.

In India, the depth of the fixed income market is not as good as it should have been. Does that pose a challenge to you as a fixed income manager? What is required to increase that depth?

You are right. It is a big challenge. I think there are a couple of fundamental factors which constrain the fixed income market from growing in a big way. The biggest aspect is the fact that most of the funding for India’s corporate individuals comes from two key sources. Equity funding comes from the equity markets. Fixed income or debt funding largely comes from the banks. Having covered these two, there is very little incentive or effort from them to get into the capital markets to borrow the debt portion of the capital structure.

There is an urgent need to implement some of the pending recommendations of the committee set up to deepen and broaden the debt markets. The focus needs to be on addressing the structural issues related to trading and participation and encourage higher retailisation of alternate debt instruments by households.

One of the major problems is that retail investors do not understand the debt market much. What is your take on this?

Fixed income is actually not as difficult as is made out to be. It is just that people are comfortable in dealing with asset classes which are very vague in terms of valuation. I feel investors needs to venture out and explore the fixed income offerings as well. The IFAs also need to spend time in demystifying the debt instruments. Investors intuitively do look at fixed rate instruments like FDs, so they just need to be advised on alternatives and how it suits them.

How do you see the interest rate scenario panning out? How do you think we are placed in terms of the attractiveness of the debt market?

A good amount of bullishness has been seen in the fixed income space.  We are still somewhere in the middle of the entire cycle. We can thus expect to see a generic decline in interest rates in both maturity buckets and asset classes and that generic trend is expected to remain for the next two years. We, however, expect this trend to be asymmetrical. Considering there are a lot of other factors playing in the economy, the decline in interest rates may not be consistent across maturities and asset classes.

Do you expect the RBI to cut interest rates sooner than expected?

No, I think the RBI will continue to remain cautious. Our projections are a little short of the street, which has more of an aggressive view. The RBI would continue to remain relatively more cautious than the street would like it to be. Thus, compared to the streets’ expectations, fewer and more infrequent rate cuts are likely to happen.

How does that bode well for the fixed income category?

Yes, the broad outlook remains positive; we think a linear strategy may not work. Firstly, since our view is of asymmetric rate cuts, there will be pockets that will perform and some that will not. A fund which is open-ended and dynamic in its approach towards investing will do much better than a vanilla fund that would probably only invest in one particular category. Secondly, the duration view still holds. So, money will be made if you enter into a short-term income fund or bond fund, though the preference at this juncture is for bond funds.

The beauty of fixed income is that there is no bear market. You have a product for all the phases of the market. Unlike equities, where if the markets are falling, there is nothing to advise investors on. 

When the going gets good for equities, debt funds are normally sidelined. Equities have been moving up well in 2013 irrespective of short-term hiccups. Does that create any hurdles for debt instruments?

Broadly, even when equity markets are doing well, fixed income grows. During the boom of 2005-2007, fixed income assets grew for mutual funds. Broadly, if growth in economy is expected and if companies are expected to grow in terms of revenues and profits, funds will be needed. And that can’t all happen through equity. Borrowing is necessary and that gives an opportunity for the fixed income space. Thus, even if we think equity markets will do well, it’s not only about the consumption story. The capex cycle and the investment cycle have to begin. So the opportunity for debt lies there.

What’s your overall view on the long-term prospects of the Indian economy?

I am very optimistic. We have demographics in our favour, we have low per capita consumption, and I think it’s an inherent desire among Indians to improve their current state of affairs, and  there are tremendous opportunities so that is a strong driving force. Growth is, I think, a given though it will have all these typical peaks and troughs, which is true for any business or economic cycle. But if you were to look at India from a long-term perspective, we have to grow and the key drivers are all in our favour.

Coming back to your fund management skills, what would you typically look at before deploying your money into the markets?

It will depend on a lot of things. Two key issues which would be critical before anything else would be the business model and the quality of management.

Has it ever happened that you have gone wrong on a particular call that you would have taken?

Yes, we have. Quite a few times, rather than ignore and hide from it we take it as a learning exercise; we have not lost money thankfully mostly opportunities. There were times when we became a little too optimistic on the business model or we were driven by the business environment which made us more optimistic. Sometimes we did not read well into the outlook or management capabilities and were negatively surprised.

How do you, as a fund manager, cope with these situations?

Like I said, we recognise that we can make mistakes, and spend more time to learn from it. We ensure that we make a more robust system in the next cycle of fresh investments. There were times when the business model looked good but we were not able to figure out certain aspects, so we built additional collaterals. Secondly, there are times where you could have an investment where you try and build a stress test. So in the forthcoming investments, we try and build different aspects of stress test. For instance, in the 2008 credit crisis, we learnt a lot. We fared a lot better than other players. We were the only mutual fund in the industry which did not need a bail out from the parent/sponsors.

On the credit side, is it a seller’s market or a buyer’s market? How do you look at it?

Debt is currently a buyer’s market; I think the next two years’ view still remains very positive. You are going to be disappointed on growth and I think you will see inflation coming down. As, there are clearly signs of demand destruction. I think the Central Bank will have to focus on growth. It’s definitely a buyer’s market. But, it is not a generic buyer’s market.

What is your advice to investors today?

I think you have to go back to your basics. Don’t play one asset against another. For most generic investors who would largely read your magazine, I would advise them to stick to an asset allocation strategy. It becomes very difficult when you play one asset against the other. Also, having decided an investment strategy on amount allocation one needs to review and change marginally unless significant trend reversals take place. Don’t be too aggressive and don’t be swayed by rumours.