A few weeks ago JSPL got downgraded from BBB+ to BB+. Crisil (no, I never had too much respect for bankers who outsourced credit appraisal) did not want to have egg on its face. Most of us could hear it loud and clear that it meant ‘D’ and not BB+. Once you are in junk grade, it does not matter, except for the investment managers. Investment managers have to immediately revalue the asset (mark to market does not happen in an illiquid market like Indian bonds).
Let us take the case of an equity fund manager – why do we go to him? For his research and portfolio management skills. We expect him to create alpha by getting the sector, choice of company, weightage, timing – right and out performing the index. Even good fund managers like Prashant Jain and Ramdeo Agarwal did go wrong with the valuation of Indigo, right? You need to remember that these are the same guys who bought Page Industries, Eicher, Hero Honda, Infosys in big large quantity to get you 18, 20, 24% CAGR over long periods of time.
Now come to the debt fund manager. If I wanted 8% taxable return all I had to do was to go to State Bank of India and make a long term fixed deposit. Guaranteed by the GoI and money in a well run bank.
If I am a little more savvy I can go to a regular income fund (or liquid fund) and get a slightly superior result along with the benefits of indexation. Clearly here I will want an almost zero credit risk and would largely play the duration. I need to trust the fund manager and his ability to call the interest velocity right. The problem here is that I KNOW that the fund manager does not get too much of good paper which will give me total security and good interest rates. Afterall Hdfc, Icici, Tata Motors, Tata steel will not pay me interest rates too far away from the gilt – remember they have access to the international markets too.
However, I go to a fund like a Franklin Templeton Opportunities (debt) fund where I expect the fund manager to take a call on credit risk, lend against shares, create securities against the promoter holding, take homes as mortgages, and earn a HIGHER rate of return. I KNOW (or should know) that the word ‘opportunities’ comes with some attendant risk. My friends, clients, etc. who have invested in this fund SHOULD expect volatility in this fund. Actually, since I trust Mr. Kamath the fund manager this is EXACTLY WHAT I WANT HIM to do. That is his mandate. As a unit holder I know that his credit calls can go wrong – and there can be a downgrade and also that there could be a default. I leave it to Mr. Fund manager to take a call on how to deal with the downgrade / default. Should he sell off the bonds at a discount or BUY MORE, or sell the debt to an ARC, or sell it to some other distress asset buyer or take whatever is repaid with a touch of glory. I would be very happy to invest in a fund that is willing to buy distressed corporate debt listed abroad – Vedanta, Tata Steel, Jspl – are all available at a discount. I did consider them for one fleeting second, then ignored the thought. These papers will surely yield 11% or more if held to redemption.
What should the investor do? stay calm. Franklin has employed Mr. Kamath and let him do what is to be done. If you redeem now, you are just adding to the cacophony of idiotic advisers and bloggers.
This is like a cricket commentator saying ‘Yuvraj should not have played that risky shot’. Actually the commentator has no clue about how many runs did Yuvi score playing such risky shots. If I wanted a player who would not touch a ball outside the off stump, I would have sent Rahul Dravid, not Yuvraj,
Make your choices sensibly…
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