The Mutual Fund Show: What Investors Of Bank And PSU Funds Can Do
When a series of defaults in 2018-19 sparked concerns about debt funds, schemes investing in the paper of banks and public sector companies fared much better.
The high quality of borrowers means the risk of default is less for such mutual funds, according to Amit Bivalkar, managing director and chief executive officer at Sapient Wealth Advisors. However, they do get affected if interest rates in the economy go up, he said.
Bivalkar, speaking on this week’s The Mutual Fund Show, cited the possibility of higher rates in 2021 and that may lead to some correction in these funds. “The returns over the last three years for these funds have been very good,” he said. People who may have invested in these funds should take money off them, he said.
Among the themes that investors can consider, he suggests the global consumption basket.
For the fund options available in this category...
...Watch the full show here:
Here are the edited excerpts from the interview:
Can I just have a bit of a perspective on Franklin because today some people received messages about processing of the part payment. So, what happens?
BIVALKAR: So I think the court was very much in favour of the investors and even Franklin wanted to give back the money to investors as early as possible. I think out of six funds, five funds have turned cash positive and people have started getting the redemptions directly in their bank account. I think income opportunities fund is yet to turn cash positive, but I think that also will turn cash positive in the next month or two months. An interesting commentary which also came from SBI is that after payouts of the SBI mutual fund who is now being entrusted as the liquidator for this, they also said that out of the balance I think 60% of the portfolio can be liquidated in a couple of weeks’ time. So, I think the wait was worth it. If you try to look at all the NAVs as on April 25 when the schemes got shut and today, I think they are far higher than what they were when the schemes got wound up. I think investors’ patience probably would have paid because they are getting their monies back and I think it would be a good ride at the end of it for all the Franklin investors.
So, net-net, how much has an average investor lost if at all, forget the returns, but is there a large damage or has it been manageable? Any back of the envelope calculation?
BIVALKAR: I think as of now what we could see is that on the ultra-short, on the low duration and one of more funds, I don’t think that there will be a hit on the portfolios and even on the credit risk and the larger funds which have a larger maturity or duration, I think SBI and Templeton put together will not do a slump sale but instead try to recover maximum capital for the customer. So, I don’t think that you will have a larger drawdown which will come for the investor. I think it will be more to do with, since you have the TLTROs for NBFCs for banks and for everyone, I think maximum money will come back in all of these funds.
Amit, a particular fund which either has done really well or not done too well and then a view on that category as well. I presume you’ve chosen a fund and the category of the PSU banking funds. So, can you talk a bit about this category, the fund that you definitely want to speak about and what should investors do?
BIVALKAR: So, banking PSU funds three years ago when the FMPs actually started not getting subscribed to, suddenly in debt there was a vacuum as to where should my three-year money go. This category actually came in very handy for people because the YTMs were good, the modified durations were at 3-3.5 years and proof of the pudding is that you have got the three-year return, five-year return on such funds at 8.5-9%. So, ideally for a three-year period if you had invested three years back, you must have got an 8.5% return, plus since you’re investing in banking or PSU bonds and CPs, I think a lot of credit risk is also negated. So, you end up buying AAA funds. So, all of these funds if you try to look at it, be it Aditya Birla or Axis, DSP, Franklin IDFC, ICICI and Nippon, you’ve got returns about 8.5% on a three-year basis and above 8% on a five-year basis. But as we all see that retail investors or any investor for that matter; they look at returns for the last three years, five years, one year and they come and invest their money into such kind of funds. You have seen the 10-year and the 30-year Gilts in the U.S. actually going up 4-5% yesterday. That’s because you’re getting inflation back and how many dollars can you print at all. Similarly, in India, when you will see interest rates actually moving up and you will see inflation coming back, whether the RBI does an interest rate move or the market does that move, the impact on these kinds of funds is going to be large. In fact, if you look at the last one month return after the budget, if you try to look at what the impact of one-month returns is, currently the yield to maturities of all these funds is between 4.25% and 5%. They run a modified duration of about 1.5 to 2.8 or 3 years. Even if there is a movement of 0.5% or 50 basis point as they call in such kind of an interest rate scenario, you’re going to probably lose 1.4% absolute mark to market impact on these funds.
So, what we are of the opinion here is that if you have got good returns on your banking PSU funds between now and maybe March-end when the yields keep on rising, we feel that one needs to come out of these funds and move to a category which is known as a floater category where even if the interest rate moves up, you actually do not lose money but you make money.
I think losing money in debt is more criminal than losing money in equity. If you’re looking at past returns and getting into the category known as banking PSU, I think this is the time where you need to be cautious and probably look at some of the floater funds or the ultra-short category rather than putting money into banking PSU funds going forward. That’s my take.
As advisers you’re taking a call out here that rates might go up and therefore these funds need to be gotten out of. That call may change if rates don’t go up.
BIVALKAR: Yes, I think it’s more to do with liquidity in the system and when your permanent liquidity changes to durable liquidity, I think the availability of money and the cost of money, both were cheap. There was a huge liquidity surplus in the system, you have seen already Rs 2 lakh crore being taken away. You have seen another Rs 4 lakh crore worth of spending programme by the government and you will see probably the rates moving up. Reverse repo, if I may say, we feel that the reverse repo rate may inch up to 3.60, 3.70 or 3.80.
So, if you see the short-term rates going up, you will see an impact on these funds and therefore we are of the opinion that one needs to go out and go into a floater or probably a money market kind of fund. Now, why will rates move up? Clearly you have got an availability of money and cost of money both cheap today. My guess is that availability of money is going to be somewhat scarce and therefore you will see interest rates moving up. Plus, you will have the oil impact where your inflation will inch up and once inflation goes up, the RBI has no other tool to raise interest rates. So... we believe your oil is where it is and if interest rate moves up, clearly you will see an impact on your debt holding portfolio today.
Amit, can you recommend one fund category? This is not bound to a specific age, you can choose the kind of investor and then tell us why you are recommending that fund?
BIVALKAR: Interestingly through March till now—March of 2020 when the lockdown started till now—my kid has been glued to his mobile either for education or for gaming or for probably looking at YouTube videos. Even my mom is on the mobile looking at probably some of the YouTube classical music videos or maybe she is probably playing Solitaire or Bridge with somebody in her group. What I’m hinting at is that there is a massive shift from content on the PC to the handhelds. If you are bored, you watch Netflix. If you want to go somewhere, you hire an Uber. If you want to check on your friends, you look at Facebook. If you want to order something for your household, you look at Amazon and if you want to play games on the TV, then you have something like a Sony PlayStation or something else.
All of that what I’m trying to say is that, we have to invest our money where consumers are either spending their time or their money. So be it hotels—they call it the revenge spend. You must have seen that, that all the Goa hotels are full because once the lockdown is off, many people are actually going and staying out in Goa. If you look at Maldives, Dubai where Indians are allowed, flights are full to the core. So, when we are looking at investments, how can I benefit from investing in companies who are there, rather than if I’m not traveling to those places? Then you have some fund which I have in mind which is a global consumption fund. This fund actually is from the fund house Invesco.
If you look at the Invesco Global Consumption Fund, then clearly you are investing in companies either that are not available in India/not listed in India, so I cannot invest there, or these are companies which are not available to Indian investors.
The mobile advertising and gaming if you try to look at the newspaper readership in the U.S. has fallen to 3% and while the online newspaper have gone to 28%. If you try to look at all of this, then clearly this is a trend of consumers where they’re spending maximum time and maximum money.
Another important aspect what we need to look at clearly is in the Indian context, everybody is saying that we are at a higher price to earnings multiple. We are at a lifetime high, whether earnings will come through or not next year we don’t know.
This fund actually has a P/E which is 25% less than the Nifty. It gives you a diversification in terms of the currency as well as the country. It has a very low correlation with your Indian markets and as the estimate suggests from Invesco, they are saying that they expect a 22% EPS growth into all the companies what they have.
So, they have a Facebook, they have a Netflix, they have a company who owns the brand of Hushpuppies. They’ve got Sony too. If you look at all of these companies which form a part of these portfolios, you definitely want to go and buy the top-notch companies who are into consumptions today and if you have that, you have an Uber, you have a Lyft, which is available in this portfolio. If you can get such kind of companies, that too at a 25% discount to the P/E compared to Nifty, plus, you have a different currency to buy into—so you can invest in rupees but these companies are listed in the U.S. and they supply to the entire world. Hence, you are truly diversified in that sense and I think consumption as a theme is here to stay. You are working from home and suppose this becomes a trend, then you will be probably shifting to a place like Igatpuri or Manas resorts where you will work. So, whether from urban to suburban, is that kind of a theme which is going to play in the next decade. I think all of these makes the global consumption fund an ideal opportunity to get into and that’s why we have chosen the Invesco Global Consumption Fund wherein we are advising our clients to allocate some of the monies into this fund.
Any standard disclaimer, any benefits that the fund house gives you for recommending this fund?
BIVALKAR: I think SEBI has been very fair and no distributor actually gets any favours from any of the fund houses for recommendations.