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We Always Maintain A Very High Allocation To AAA Side Of The Market

Author: Kumar Shankar Roy/Wednesday, February 19, 2020/Categories: The Finapolis Conversation

We Always Maintain A Very High Allocation To AAA Side Of The Market

In this week’s Finapolis Conversation, let’s meet Gaurab Parija, head (sales and marketing) at IDFC Asset Management Company Ltd. With over two decades of experience in sales, marketing, business development and driving strategic initiatives, Parija is responsible for driving accelerated business growth working with seasoned sales and marketing team across India, focusing on building strong partnerships and enhancing value to clients. He brings in over two decades of mutual fund experience in retail sales and distribution and is amongst the most seasoned professionals in the Rs 28-lakh crore MF industry. Parija tells Kumar Shankar Roy about IDFC MF’s debt investing framework, shares achievements in 2019 and the outlook for 2020. Read on to know.

How had the 2019 year been for IDFC AMC?

We grew our assets by close to 60 per cent year-on-year in 2019. We were big beneficiaries of flows into fixed income schemes. This was due to the way we managed the fixed  income book. Our philosophy of maintaining a very high quality of AAA assets resonated very well given the issues in the fixed income market. This philosophy is not something new; it has been the hallmark of IDFC AMC for quite sometime.

Your AMC has a different approach to running the fixed income book. Tell us about it?

We have a 3-pronged approach. One, what is the philosophy of running the book as it is. Two, what is the positioning of the fund. Three, what is view. We believe that a mutual fund is a pass-through vehicle. This effectively means we take clients' money and put it in a security. If the client wants the money, then we should be able to give it back. This effectively requires us to be as liquid as possible in all our investments. Having seen the corporate bond market over the years, we believe that the most liquid part is the triple A or AAA rated securities. Hence, we have always maintained a very high allocation to AAA side of the market. That's where the least of the problems have happened.

How do you assess positioning of a fund?

Fixed income mutual fund schemes typically offer a solution for clients who are coming out of the fixed deposit market. Anyone who buys a fixed deposit, he/she considers two critical points. First is what is the safety. That is why you see most of the FDs go either to banks or post offices or some trusted companies. Two, by their nature FDs are typically for six months, one year, two years or five years, etc. So, in our view, the replica of fixed deposit has to be a mutual fund that has to control the quality of the portfolio and the duration of the portfolio. Most of our funds are positioned as per that mandate.

How does IDFC MF look at various debt funds?

We have a very stringent debt framework. We want every advisor and client to follow it. There are broadly three buckets of investments in the fixed income side. One, is the liquidity bucket where people need to invest for one day to six months. Two, we call the core or effectively FD bucket. Three, is the satellite bucket where if a client wants to dilute credit or duration, then they can take exposure there. We think most of an investor's money should be the liquid/core bucket. The satellite bucket dilutes one of the elements.

We have seen the roll-down strategy again being in vogue. Your thoughts?

IDFC MF actually has been the pioneers in launching the roll-down strategy. This has been highlighted by the recent Bharat Bond issue. That is in effect a roll-down structure. We pioneered that strategy as 2016 itself wherein you simply buy a debt paper and hold it till maturity. And, you buy only AAA rated papers. The concept of safety is absolutely critical here.

What is your business outlook for 2020?

Mutual fund business is a simple business. We aim to keep it as boring as possible! There is no need to get too fancy or too innovative. As an industry, we have a long way to go in as far as getting people's investible surpluses into funds. Statistics show that banks are 12-13 times bigger than mutual funds.

The endeavour of the fund managers, be it for funds on equity side or debt side, is to manage the fund as per the objective. Secondly, they endeavour to avoid mistakes like buying into companies with corporate governance issues, etc. Thirdly, give it your best shot in terms of the research perspective in picking the right securities. Obviously, some may work and some wont. The aim is not to be too flashy. That is what we intend doing.

Though it hasn't been highlighted much, but the fact is IDFC MF has been largely unaffected by the NBFC investment problems that have plagued debt funds ever since the IL&FS saga unfolded in 2018. How has IDFC MF achieved to stay out of harm's way?

The way we approach this business, and we call it the first principles of investing in debt, is that we must understand and appreciate what a mutual fund is. Mutual funds is about managing someone else's money which is at call. To give you an example, the Government Securities (G-Sec) market sees trades worth Rs 30,000 crore daily. The next in the hierarchy, which is AAA, trades worth Rs 750-1,000 crore on a normal day. When we go about creating a portfolio, we must look at how do we address the liquidity and pass-through structure requirements. It is not that we don't understand credit, but for a market like India where there are no credit rate swaps, there is little ability to get out in non AAA since the market is shallow, why take that undue risk for 100-200 bps and expose clients to the illiquid issue? It is not that we have done this for last 12-18 months. If you track our core portfolio stance, we have done this since 15 years. We are a house which is dominantly filled with AAA rated assets.

The question that arises then is that IL&FS and DHFL were both AAA. What then?

First of all, let us not make an exception the rule. These two are one of the many in AAA market and so it is not that AAA is bad. Secondly, from an advisor and a client's perspective the company's rating being AAA ends at rating agency's AAA call. That's where we come in with the next set of filters. Also, the market itself tells us whether a rating is getting  mispriced or the risk is getting mispriced when two AAA rated companies raise funds with one at 8% and another at 9.25%. This is where we have to come in and differentiate. If I just go by what the rating agency is saying, what expertise do I bring in? We believe in our debt investing framework. We remain stuck to our philosophy in a regimented manner by cutting out noise. Credit should go to our debt team lead by Suyash Choudhary, head (fixed income), IDFC AMC.

(The writer is a journalist with 14 years of experience)

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