Here's what makes ICICI Prudential AMC's Manish Banthia an outlier

With a research-driven process and an eye for opportunities, Banthia, senior fund manager-fixed income, ICICI Prudential AMC, beat the market and peers over the last year

Be greedy when others are fearful and vice versa is a maxim that has helped Manish Banthia, senior fund manager–fixed income at ICICI Prudential AMC, beat the market and peers over the last year. The money manager, who runs three debt schemes with a corpus of Rs 8,000 crore, delivered returns in the range of 9.3 per cent to 14.7 per cent for the period July 2018 to June of 2019.

Understanding the behavioural patterns, especially when they swing from optimism and pessimism, creates opportunities across assets classes, and debt is no exception. An example of the same was interest in credit risk funds during 2016-18, especially after demonetisation when liquidity was abundant, people were less risk averse and money flowed into credit funds. 

“People thought that while AAA bonds gives you low returns, it is simpler to invest in funds with higher yield-to-maturity (YTMs) and generate higher returns. This thought process caught up with investors who only talked about YTMs rather than analysing the underlying quality. However, these behavioural patterns are where most of the mistakes are made,” Banthia says. 

The best strategy now, according to him, is to be greedy when others are fearful. “Earlier, investors were euphoric and optimistic, they are now pessimistic. This is the best time to take risk in the credit asset,” he says. The fund house is positive on credit as an asset class. Even in the All Seasons Bond Fund, while in 2016-17, the fund house had 100 per cent invested in high quality AAA-rated assets and government securities, now they have 50 per cent of the portfolio in AA-rated bonds. 

The fund manager, over the past three months, has increased allocation to AA-rated assets in the portfolio. Given the higher spreads between AA bonds and the other debt instruments, investors are well compensated by buying those assets at this point of time, says Banthia.

The situation two years ago was exactly the opposite when the rates were on their way up. While early trends were visible, the trigger was the global tightness last year. The US’ Fed accelerated the rate hike process starting January 2018. The RBI, too, hiked rates and this was accompanied by currency depreciation, falling equity markets, and foreign portfolio investors moving money out of the emerging markets. These measures created tightness, which triggered the tipping point in change of behaviour of investors both on the equity and debt asset classes. While equity peaked in January 2018 and the party on the credit funds came to an end a little later. 

It was the model-based approach backed by research that alerted the fund manager about the same. “We follow a model-based approach, which in November 2017 indicated that yields were moving up, and, therefore, the duration risk in the fund needs to be adjusted down.” 

The fund manager was able to generate higher returns in the All Seasons Bond Fund from duration management that is by reducing the duration of the securities the fund was invested in. In addition to this, what helped generate alpha was trading opportunities from the volatility in the markets. His peers, on the other hand, lagged behind, given that they had higher duration securities in a rising market. It is difficult to change strategies if you chase momentum and you get stuck with a high duration portfolio, as was the case with some other fund houses.

Adequate research and discipline to follow the process has also helped the fund house manage situations such as the one created by IL&FS. People who had larger positions in the credit asset class, suffered. It is here that the focus on safety — the first in the safety, liquidity and returns sequence — helps. “If you manage the first and the second, the third will necessarily follow,” he says, adding that if risks are well contained and you can manage the general liquidity in the market, over a period of time, that discipline will bring consistent returns to the portfolio. 

The fund house has created credit risk as a separate department ensuring that the research is adequate, fund managers do not come under pressure from the market to underwrite any credit and the process helps to avoid that situation. “While it is difficult to time your exit, adequate research red flags the same earlier,” says Banthia. The bonds you buy have to move through a certain approval process, the filtration of the same is more meaningful, he says. What aids them in this process is an in-house independent risk management team, which oversees credit evaluation and approval processes.

While the fund house reduced duration till September 2018, it increased the same when the cycle turned post September and interest rates were on their way down. This helped Banthia reap the gains. His only regret: Not being able to increase duration as much as he would have liked to. May be the next cycle of optimism and pessimism will offer him the opportunity.