“Our primary focus is on the safety of our portfolio”
We have developed an investment philosophy based on InQuBe, a proprietary framework that integrates behavioural finance with informational and quantitative inputs. This approach aims to eliminate behavioural biases in investment decision-making and, as Siddharth Chaudhary, Senior Fund Manager (Fixed Income), Bajaj Finserv AMC states, it helps generate alpha over the long term.
What is your investment philosophy when managing fixed-income funds, and how do you approach portfolio construction?
Our philosophy in managing fixed-income portfolios is about optimising risk-adjusted returns for the investor by managing, among others, the three main risks in a portfolio, namely, credit risk, interest rate risk and liquidity risk within the strict mandate of the fund. The interest rates in an economy are determined by the interaction of multiple forces which affect the demand-supply and price of money. Since a combination of economic and non-economic factors are involved in setting up an economy's interest rate expectation, our framework considers some particular factors.
These include fundamental macro-economic research, data analytics and quantitative analysis. All such data is put together to arrive at the right investment philosophy. In fixed-income funds, the most important aspect is the quality of the asset. Our primary focus is on the safety of the portfolio and so we do not compromise on the quality of assets for higher returns. The selection of security and duration profile of the funds seeks to provide the investors reasonable returns without taking disproportionate risk.
What current market opportunities are you focusing on and how are you positioning your funds to capitalise on them?
Indian government bonds have had quite a run in the last one year. The 10-year government securities yield has rallied from 7.38 per cent to 6.72 per cent and the longer end of the curve has benefited even more due to demand-supply dynamics. Clearly, longer duration funds have delivered in a goldilocks kind of environment along with FPI inflows post bond index inclusion. Our view has remained the same for more than a year now. We had expected a longer duration to perform due to FPI flows, fiscal consolidation and resultant favourable demand-supply dynamics for Indian government bonds.
On the global front, we had expected a turnaround in the interest rate cycle in the second half of 2024 as high real rates were creating multiple mini crises even in economies where growth was higher than the long-term averages. Further, we have always pointed out that rate cuts in India will largely depend on the evolving growth-inflation matrix and also on the start of the rate cut cycle by the Federal Reserve. We believe there is still a case for a wider interest rate differential with the Federal Reserve rate from a macroeconomic stability point of view even when there are unprecedented foreign inflows. All of this has fallen into place.
Our funds are positioned with the above view in mind. We believe that the longer end of the yield curve still stands to gain in a bigger way from possibly a shallow rate cut cycle in the coming quarters. However, we are also cognizant of the fact that a lot of positives discussed above are already priced in and the government securities spread from policy rates have contracted much more than the past averages. In this environment, the current G-spread (corporate bonds yield – G-sec yield) are looking attractive, especially for investors with lesser risk appetite.
How will the recent U.S. Federal Reserve interest rate cut influence India’s fixed-income market?
The FOMC in the U.S. has started easing by cutting rates by 50 basis points in line with market expectations. So, it is clear now that the worse-than-expected July employment data was the turning point. The dot plot indicates an additional 50 bps of cut by the year end. The focus is clearly back to the maximum employment mandate of the Federal Reserve. This looks like an apt decision from a risk-management perspective.
The economic cost of this pre-emptive 50 bps cut is lower than the cost of waiting and then being forced into a bigger cut later if the incoming data suggests further deterioration in the labour market. Also, it is usually too late to cut rates by the time the evidence of labour market deterioration is clear. In India, policymakers have been focusing on macroeconomic and financial stability as well as a balanced growth-inflation matrix.
So, any weakness in high-frequency data domestically or even expectations of sharper policy recalibration in the U.S. has not moved the central bank view, which is still maintaining hawkish guidance for food inflation risks along with steady growth expectations. Yet, in India, the benchmark 10-year G-sec rates have moved downwards very sharply in line with the recent global cues, softer inflation prints and the demand-supply dynamics of government borrowing.
Otherwise, the reasons supporting the easing of the monetary policy in India are stacking up, such as the expectation of a slowdown in the global economy, low core inflation, expected fall in food prices post-monsoon and high real rates possibly restricting growth. These are all indicating a change in policy stance soon. In the coming quarters, as slackness in growth becomes more visible, we expect policy priority to shift from restraining inflation to supporting growth.
What role do you see government initiatives like G-Sec auctions and sovereign green bonds play in fixed-income mutual funds?
Sovereign green bonds have seen a tepid response if measured by green premium or even liquidity in these bonds. We are in the early stages of exploring this avenue of financing climate change needs. One must also note that in developed economies the focus of financing climate change is through private finance.
How do you assess the credit quality and potential of PSU and corporate bonds in light of recent fiscal policies and government reforms?
The last decade has been transitional for the PSUs and corporate India. The government’s focus on infrastructure spending on roads, railways and defence, promoting digitalisation, policies for better financial system governance and new power reforms in 2023 has had a far-reaching effect, with lower debt levels for corporates and better efficiency for the PSU companies. Corporate India is experiencing swifter collections through better debt and working capital management. CMIE’s report has revealed that the working capital cycle has shrunk from 90 days in FY 2000 to about 48 in FY 2024.
Improving the working capital cycle has helped the companies to post higher profitability during the good years and experience less distress during the down cycle. From a credit perspective, we follow a detailed internal evaluation for all corporates and PSUs. So, there is no change in our evaluation process. We see more companies scoring better within our internal credit framework. But we are conscious of the fact that the last two or three years were exceptional for many sectors and have started taking a conservative view on certain sectors.
Can you elaborate on how the fixed-income schemes at Bajaj Finserv AMC differentiate themselves from other players in the market?
We have developed an investment philosophy based on InQuBe, our proprietary framework that integrates behavioural finance with informational and quantitative inputs. Our approach aims to eliminate behavioural biases in investment decision-making, and we believe it can consistently generate alpha over the long term.
How do you incorporate technology and data analytics in fixed-income portfolio management and decision-making at Bajaj Finserv AMC?
As mentioned above, analytics and quantitative tools are part of our proprietary investment framework InQuBe. For fixed-income decisions, this framework works as an ensemble method where we combine fundamental, quantitative and behavioural inputs in decision-making.
What advice would you give retail investors looking to invest in fixed-income mutual funds?
Our advice to retail investors would be to focus on quantifying portfolio risk in an equal manner rather than just the return part of the equation to understand potential outcomes better and adhere to a strategic asset allocation plan. In fixed-income funds, the outcomes are more predictable than other asset classes. Even in times of exuberance, a retail investor must, like many institutions who conduct policy-driven rebalancing, rebalance the portfolio. Fixed-income schemes offer a source of stable return and income, diversification and liquidity.
These characteristics can complement your allocations to other asset classes and allow you to seek higher-return opportunities elsewhere in your overall portfolio. Currently, we recommend investors with a holding period of at least one year to consider investing in longer-duration funds. The 10-15-year segment and longer end of the yield curve stand to gain from any possible rate cuts in the future. For investors with a lesser appetite for duration risk, they can consider funds like banking and PSU or corporate bond funds with a moderate duration of 3-5 years.
Disclaimer: The opinions expressed above are personal and may not reflect the views of Dalal Street Investment Journal.