Bold But Smart

Don’t be surprised if you come across Dinesh Ahuja belting out Bon Jovi’s ‘It’s my life’ at the top of his lungs. He has every reason to rejoice. Ahuja’s Rs 740 crore long-term gilts fund has topped the intermediate government bond category over a three-year period.

An ardent lover of Bon Jovi, Bryan Adams and Phil Collins, Ahuja adopts duration-play strategies to manage his bond portfolio. He likes to ride volatile cycles, but does not take a lot of (credit or liquidity) risk as his portfolio mandate is to invest in long-dated government securities.

Astute management of funds across the duration spectrum has helped Ahuja’s SBI Magnum Gilt Long Term Fund post 12.7 per cent returns over a three-year period. IDFC Government Securities Fund and UTI Gilt Advantage Fund are hot on its tail in second and third spots, respectively.

“Most gilt funds have given good returns over a three to five-year horizon,” concedes Ahuja, generously.

“Some of us have made good use of volatility by changing the duration of the fund; my fund’s modified duration is over 9.35 years currently. In a falling rate cycle, long-term portfolios make more money for investors,” explains Ahuja.

Intermediate government bond funds such as SBI Magnum Gilt invest in securities issued by central and state governments and government-backed entities. These funds have average effective maturities ranging from three to seven years. Given their focus on instruments with a medium duration, they offer lower interest rate sensitivity compared to funds of longer durations. These funds, however, are more sensitive to interest rate risk than shorter-tenured bond portfolios.

“We expect rates to drop over the next few months; also we do not see a scenario of significant rate hikes over the next 15 to 24 months. Therefore, it makes sense to hold a long-tenured portfolio,” says Ahuja.

Over 97 per cent of SBI Magnum Gilt is invested in central government-backed securities. This, in a way, negates any credit risk to the portfolio.

“We are more concerned with liquidity risk. Not all government papers are liquid all the time,” he says. “Therefore, we keep our liquidity options open all the time. As of now, 20-25 per cent of the fund’s portfolio is liquid; this gives us flexibility to manage the fund better.”

Though foreign portfolio investors have turned active in the bond segment, they’re yet to pump in liquidity in the lower rated debt segments. Also, there are apprehensions about a concentration of FII investments in certain bond categories; a sell-off of Indian bonds (by FIIs) could make the market very volatile, believe fixed income managers.

“But then volatility is not all that bad if you make the best use of it. We’ve managed it thus far,” says Ahuja. That’s probably his way of saying ‘I did it my way’.

(This story was published in BW | Businessworld Issue Dated 20-04-2015)