NFO: Mirae Asset Dynamic Bond Fund

Fund wohi - soch nayi

Mahendra Kumar Jajoo, Head - Fixed Income, Mirae Asset

1st March 2017

In a nutshell

Mirae Asset's new Dynamic Bond Fund's initial portfolio is likely to be conservative, with a duration of 3-4 years, and is likely to be primarily constructed with CD/CPs, 3-5 years PSU bonds and some portion in govt bonds.

Mahendra reiterates his stance that performance in fixed income funds this year is likely to be backended. His outlook on global markets is currently negative while remaining neutral on Indian outlook.

His approach to managing the new fund will be "Fund wohi - soch nayi" - suggesting that while the objectives will remain the same as others, the process and portfolio positioning methodology is where he aims to build differentiation and create value.

WF: What do you see as the potential differentiation of your Dynamic Bond Fund?

Mahendra: At conceptual level, our approach of "Fund wohi-Soch Nayi" suggesting objective of maximizing returns in debt fund while accepting volatility - is the key differentiator. At operating level, our well laid out investment process and portfolio positioning methodology, we believe is key differentitor.

WF: Some experts believe the bonds bull run is over after RBI's change in stance from accommodative to neutral. Do you agree with this assessment?

Mahendra: It depends on whether one is evaluating short term or long term outlook. Recall that as recently as in October'16, RBI surprised the experts with a rate cut. And in the run up to the last policy, some pink newspapers ran screaming headlines on how a rate cut is expected . One will do well to check Mirae's assessment on both these occasions. Currently there are headwinds from global markets. We are very constructive on Indian fixed income space in long term. Incidentally, in our market outlook for 2017, we had suggested that performance in fixed income funds is likely to be backended in current year.

WF: What is your outlook on interest rates, inflation and the currency and what do you see as key drivers going forward?

Mahendra: In term of investment process framework for our DBF, global outlook is currently negative. Fed has currently guided for expected further hike in rates in 2017 due to tight labor markets, expectation of higher inflation in coming month and an expansionary fiscal policy in US. Other global central banks also seem towards end of an extra ordinarily loose monetary of recent years. Even as domestic environment in India, especially post demonetization remains broadly supportive for fixed income, global headwinds have caused RBI to shift the monetary policy stance to neutral in February policy. Primary concerns mainly remain sticky core inflation, rising commodity prices and volatility in global exchange rates. Even as current environment remains somewhat bearish, we expect inflation to ease in later half of the year and global outlook to stabilize. Bond yields having risen sharply in recent times and with indications of further rise in near term, may after the recent rise in yields, ease in second half after the global situation stabilizes. As such we feel in the current year, return in dynamic funds may be back ended

WF: When you cast your initial portfolio, will you be looking more at accrual based or duration based strategies to deliver returns? What will be your likely portfolio composition and key characteristics?

Mahendra: As we approach the construction of initial portfolio after the NFO, current outlook is negative for global markets and neutral for Indian market. Accordingly, in line with our investment process, initial portfolio is likely to be a conservative one with duration of 3-4 year or slightly lower. Further, given that system is currently flushed with excess liquidity and there are headwinds to long bond yields, initial portfolio is likely to be primarily constructed with CD/CPs, 3-5 years PSU bonds and some portion in govt bonds. While we don't expect any disuptive event in the intervening period, but should any such event take place, there will be corresponding change in portfolio in line with our assessment thereupon.

WF: Demonetization is seen as a big driver for retail debt funds, but the recent bout of volatility has dampened distributor enthusiasm to some extent. What are the appropriate retail fixed income products that investors should now consider for money that has come into the system?

Mahendra: Volatility is always going to be an integral and inescapable part of markets and investment process. We are not investment advisors but portfolio managers. Investors need to consult their respective advisors on appropraite funds for their respective investment objectives and risk tolerance. We firmly believe though that for those with long term investment horizon and patience with volatility, Dynamic Bond funds offer a very competitive and attarctive proposition.

WF: How would you suggest your dynamic bond fund be positioned in investor portfolios?

Mahendra: We believe investors should focus on maximizing returns in debt funds and accept volatility as part of the bargain. We also believe there is no significant compromise with safety of capital for long term investors in Dynamic funds with high quality portfolio. While there is scope for Dynamic funds to marginally underperform other categories in case of sustained negative markets, the upside remains meaningful in case of favoarable markets. As such, those with long term investment horizon and the ability to weather out volatility should favorably consider Dynamic Bond Funds as the first choice.

WF: Dynamic bond funds came under some harsh scrutiny in recent weeks as most of them were caught on the wrong foot when RBI unexpectedly changed its stance from accommodative to neutral. Their ability to protect downside came under some attack. What lessons can we learn about managing this category of funds and/or managing communications about this category from this incident?

Mahendra: It is not appropriate for us to comment on other funds or "expert observers" in the absence of detailed information. As a general observation, in difficult times like this, when the returns suffer in near term, it is not unusual for such an sentiment to be prevalent. The euphoria and high returns of recent past is quickly forgotten. Our belief remains one of being constructive and posiitve for long term and stick to our core investment philosophy. To get distracted with negtivity is an easy way to let go the incomimg opportunity. In our view, such situations have happened in past also, as in August 2013 for example. And its easy to see how the funds performed subsequent to that. In so far as the question on ability to protect downside, one should evaluate outcomes over longer periods and not very short period of months. Finally, having said this, if one continues to drive at full speed ignoring the turns ahead, some turbulence is only to be expected. That is where, the importance of a well defined investment process is highlighted.

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