'GDP's slowing, so make cyclically insured bets'

Fund houses need to be extra careful about the kind of papers they buy as GDP slows, R Sivakumar, head of fixed income, Axis Mutual Fund, told Neelasri Barman & Yogini Joglekar in an interview. Excerpts:

Axis Mutual has done reasonably well despite being a newer entrant. How big is your team? How do you go about research?
We are very young in terms of organisation, but quite old in terms of people. We have two fund managers and one person who look after credit research. There is also one person on the support side. Our CEO Rajiv Anand has also been a former fixed income fund manager. We believe we are managing interest rates and not credit. We feel you can get good returns with, say, government and AAA bonds, so why go down the credit curve? Our philosophy on credit risk is: it is better to avoid the losers than try to pick the winners. We try to maintain portfolio quality with a view to avoid downgrades and defaults. On the interest rates, we spend our time looking at macroeconomic developments.

Your one-year returns on short-term and liquid funds are pretty good compared with peers. How have you managed that?
The focus has been very straight forward —- one is quality and the other has been the fact that in both these categories we have been relatively ahead of the curve in the interest rate cycle. When last year interest rates were climbing very sharply, we took a view to cut the duration dramatically. This helped us to protect value as rates were rising. And in the last few months, we have increased duration once again as rates have begun to soften.

And the sector you do not invest in?
We do not accept a sector on a yes or no basis because our credit decisions come out of what we see in companies. We may not be happy about a sector, but may be a company in that sector is very solid. There may even be a case where the sector is strong but there may be companies which are weak. In credit decisions, it is about investing in the company. It is not about taking a call on the sector.

What’s your outlook on GDP?
We have been significantly bearish since the start of this financial year. We believe that for the year as a whole the GDP average will probably be in the range of 7-7.25%. That means for the next two quarters also, we do not expect a bounceback. The trend though is not looking very good. What is worrisome is that private consumption expenditure is the lowest since the GDP series began in 2004-2005. If consumption is slowing down, then I think the medium-term outlook is going to deteriorate.

Considering the milieu, do you foresee fewer papers to invest in?
Yes. We will have to be more careful about what kind of papers we own. For example, within the companies that we own, we may have to move to companies which are less dependent on debt financing and companies which are not relying so much on capex. We will have to find companies which are more cyclically insured. We will also be careful while investing in non-banking finance companies, which may be lending to poor quality companies.

Will flows into mutual funds also get impacted?
I think we had good flows in the liquid fund category. We expect that to sustain. This is because there is a lot of savings in the economy and that savings is not going into any long-term asset.

Any new fund offerings?
We have been coming up with a lot of hybrid and capital protection oriented funds. We did three series of Axis Hybrid Fund starting August. I think these are a very powerful way for investors to get invested in slightly longer term savings. We will be doing one more series of Axis Capital Protection Oriented Fund in December.