Avoiding the momentum trap

The best investment opportunity arises when the market is one sided, says UTI Mutual Fund's Sudhir Agrawal

When some of his peers were busy checking into longer duration papers in May 2013 in anticipation of rate cuts, Sudhir Agrawal, debt fund manager, UTI Mutual Fund, chose to go against the grain. With wholesale price inflation (WPI) coming off, many fund managers had bet on the Reserve Bank of India (RBI) to cut interest rates and benefit from the following rally in bonds. Agrawal thought otherwise and cut duration from three to two years of the UTI Short Term Income Fund with a corpus of Rs 2,896 crore. "Though WPI inflation was coming off, the consumer price inflation (CPI) was still ruling high. There were macro concerns on account of a weak rupee, higher current account and fiscal deficit. It was not the right time to go aggressive," he says.

The strategy paid off as Agrawal beat the index with a return of nine per cent as against the benchmark, Crisil short-term bond fund index's returns of 8.76 per cent.

While Agrawal is not averse to going aggressive if he has the conviction, he believes one has to be patient and wait for the opportunities to come your way rather than aim to pocket each and every basis point gain. Being research driven helps avoid falling into the momentum trap when fundamentals do not support investments.

Says Agrawal, "Playing the momentum might not be the best strategy. You should also focus on fundamentals rather than getting carried away. The best investment opportunity arises when the entire market is one sided. In this case as well, we were not too carried away by momentum, and preferred to cut duration." When the rates rose, Agarwal was sitting pretty while his peers had to cut losses. His strategy is in line with the mandate of the fund which is to generate decent accruals and get some capital appreciation when the opportunity comes by.

The other call he got right was in April 2014, just before the elections when the fund increased average maturity. Given the improvement in sentiments there were large flows into long-term debt papers, post elections. The led to the rally in bond prices and yields came off helping the scheme pocket the gains.

While the contra strategy helped, when the opportunity or conviction on the call is absent, Agrawal prefers to stay range-bound or close to the benchmark. "This way you will neither underperform nor outperform in a big way," he says.

Agrawal had his share of worries too. The last year was a unique learning experience for Agrawal and for the debt fund industry with steep rate hikes (marginal standing facility(MSF) was raised by 300 bps) starting July 2013. "The lesson during such times is not to get too much into very illiquid papers which you cannot get out of," he says.

Last year, in the April-May period, just before RBI raised rates, his fund invested corporate bonds which were available at lower spreads compared to their historical levels. That resulted in a bit of a MTM loss to the portfolio later when the RBI hiked the MSF rates in July. Given that the corporate bond market is not very liquid and these were private paper, he could not exit as desired. So despite reducing maturity, he had to take some hit on spreads.

While some expect interest rates to come off with a rate cut over the couple of quarters, Agrawal believes that there might not be a rate cut for the next 8-12 months given that there is still an upside risk to inflation. While lower oil prices are a big positive, there could be some pressure as consumption picks up. "It will be interesting to watch whether inflation can be contained within the six per cent mark," he says.