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BW Businessworld

'I Am Putting My Money On Equities'

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Attractive valuation has seen Maneesh Dangi, co-CIO at Birla SunLife Mutual Fund, going overweight on equity for the past 2-3 months, having invested around 65-70 per cent of his personal investable surplus in equity and the rest in short-term bond funds. Talking to Businessworld he feels the long-term refinancing operation (LTRO) in the Euro-zone has been the game changer eliminating credit risk and in turn will see equity market rallying for some more time. For the star fixed income fund manager, equity buzz is not getting any louder, however. He understands that growth (particularly EPS growth) is getting difficult for companies, but the valuation parameters still look good. In his debt funds, in the last one month, he has been moving out of government securities (G-Sec) and corporate bonds and is buying certificate of deposits (CDs) and 1 to 3 years of corporate bonds, as he sees them rallying in the coming days. 

Excerpts from the conversation: 

Was the CRR cut by RBI, a surprise and why? Were you ready for this surprise? Were you completely invested? If not, how much of a hit have you incurred since the cut and if yes, how much have you gained?
It wasn't a surprise to us. We have been articulating for the past four months that RBI would be cutting cash reserve ratio (CRR) in January as inflation starts to appear lower and liquidity deficit begins to hurt growth. Interestingly, since we had a view on the CRR cut, we weren't under-invested in G-Secs in most of our flagship duration funds. CRR cut affects the G-Sec and corporate bond markets differently. Paradoxically, CRR cut is bad for G-Secs as it reduces the propensity of RBI to do open market operation (OMOs). It may be puzzling to some observers, but the ones in know of market dynamics would get it that most of the bullishness in G-Sec markets has been on account of OMOs (in which RBI buys back bonds from the markets). So as a fund house we had light positions in G-Sec and this paid off handsomely as yields moved up sharply after CRR cut. We had swapped out G-Sec positions in short term corporate bonds and that category of investment has done well for us.

We think RBI would cut CRR in March again by 50 bps (There's small chance of higher cut as well). 

What is your outlook for the bond market?
We expect RBI to cut interest rates by more than 100 bps over the next 9 -12 months which will cause a bull steepening of the curve, meaning short end rates will move down more than longer end rates. The rate cuts will benefit both corporate and government bonds. But we are more constructive on corporate bonds for two reasons. First, the uncertainty around the total pending borrowing of the government and second, because incremental CRR cuts are bad (marginally) for government bonds, as it reduces the propensity for OMOs. So we think, the current markets offer better opportunities for the corporate bonds, as easing liquidity creates better environment to own corporate bonds. 

Going ahead what would be the fund house strategy to invest?
At the broader asset allocation level, our big view is that worst is priced in the risk assets and the time has come to add equities in the portfolios. As for fixed income, we favour medium-term corporate bonds over G-Secs and long-term corporate bonds, as liquidity is likely to ease and RBI is likely to cut rates over the next few quarters. We are investing in one-year CDs and in corporate bonds with 1 to 3 years' maturity. One year CD rates — currently trading at near 9.9 per cent — should get priced 100-125 bps lower over the second and the third quarter of 2012. While 2-3 year should get priced lower by 50-75 bps. 

What has been the impact on the fund house due to the new RBI guidelines on the liquid fund and liquid plus fund? How are you tackling the outflow?
RBI guidelines have resulted in bank money drying from out liquid funds. MF industry has lost more than Rs 50,000 crore due to the RBI's guidelines on banks' investments in ultra short-term funds. Since the transition has happened over a long period of time, as RBI had intimated the industry about it long ago, mutual fund industry could tackle the outflow in a non disruptive manner. I remember last year you made good money for investors by keeping the money in short-dated securities.

In current market condition where will you advice investors to invest? Currently where are you personally investing your own money and why?
Investors will make money by investing in medium term corporate bonds as rates are likely to ease substantially over there. All my investments are split between some short term fund and equity funds. I am overweight on equity now. Today 65-70 per cent of my money is in equities, while the rest is in short-term bonds. I am not investing in gold. I see gold as insurance, investing during uncertainty and today will not like to pay heavy price to buy insurance. 

What is your take on the 10-year G-Sec yields and why?
We are keeping away from G-Sec as the 10 year G-Sec will average at 8 per cent through the year, but it's likely to see some very low levels during the year. (This one is the most difficult to predict, but may be closer to 7.5 per cent during second and third quarter of the year, unfortunately it will not be a permanent adobe for it given the state of our profligate government). There are two levers working on G-Sec yields, one the easing rate bias that should induce lower yields and the other is very high fiscal deficit which should keep the pressure on yields. Next year will be the battle of both these forces and that should keep markets excessively volatile. I don't think G-Sec markets are going to trend in any particular direction.

Will you be an investor in PTC, CD and CP in these markets and why? What are the yields you are looking at in these instruments?
We are investors in all the instruments. Currently, CDs are favorable instruments as they offer very good yields and sufficient liquidity. One year CD is offering near 10 per cent yields. What is your view on the liquidity in the system? Why are bankers craving for more returns on their money — at least this comes to be seen from the auctions. What is your view and why?In my view, liquidity situation is likely to change quite dramatically in next couple of months. By April and May, RBI would have cut CRR as much to make sure that systemic liquidity is near neutral. Mostly, liquidity will remain neutral for many months after that. Financiers always crave to earn more on their money, but unless they collude, mere craving is futile. Its Mr Market, a collective force of all the participants' greed and fear, that drive the return or yields. Auctioned yields or Base rates are high because liquidity is deficient, and government seems to be crowding out private borrowing.

Is the fund house seeing a flow of money in to the fund house?  In the last six months how much of it is coming into fixed income and in which schemes? 
Over last 6 months, we have seen our duration funds garnering a lot of money. Dynamic bond fund, which has a mandate to run flexible duration of 1 to 3 years, has tripled in size.