‘A good way to do better in fixed income is to avoid mistakes’

Why did Baroda MF and BNP Paribas MF decide to go for the merger, especially considering the past poor performance of the former? The decision was first announced in October 2019 and received SEBI approval in January 2022. what time did it take

Mergers and acquisitions are driven more by strategic consideration than anything else. So, this merger is essentially driven by these two large global institutions, one, Bank of Baroda, a leader in the Indian banking sector, and BNP Paribas Asset Management, a leading player in Europe, coming together. Used to be. To create a strong platform for the Indian public. Bank of Baroda, being a large national bank has a very recognizable brand name, a formidable reach and a very deep understanding of the Indian retail market. On the other hand, BNP Paribas Asset Management is one of the top players globally and hence it is leading from the perspective of risk control, industry best practices and asset management.

Now coming to your comments on performance. I do not agree with you that Baroda Mutual Fund is underperforming. In fact, I would request you to double check the data. So, if you really look at the performance of Baroda Mutual Fund in Multi Cap (Five Year Fund Return of 14% to 14%, Average Return of 14.7%), Large Cap (10.4% vs Category 5 Year Fund Return) Average return of 12% and midcap (5 year fund return of 15.7% vs category average return of 13.9%), all of them have performed quite well. They have industry leading exposure in one of their products, which is Balanced Profit Fund.

Now coming to your question, why did the merger take time. We finally got SEBI approval in January 2022 and we are working as a single entity from 14th March 2022. Apart from SEBI approval, we also needed several other regulatory approvals (related to RBI and FDI) and some of these took a little longer given the pandemic situation.

The erstwhile Baroda Large Cap Fund and Baroda Hybrid Equity Fund have underperformed their peers in the respective categories. please explain why? What will be the strategy of the merged AMCs to reverse this poor performance?

Again, I would argue that hybrid equity funds have performed fairly well (a 5-year fund return of 11% versus category average return of 10.7% and category return range 6.6-15.3%) and have massively marginal underperformance. hat category.

Of course, not all fund houses can place every single product in the top quartile at all times. This is the reality of the business, but overall, the funds have performed quite well. Secondly, the way we have approached the merger is to merge the two investment teams and add more resources and more people and implement one of the most rigorous risk management processes followed globally.

We found that both teams had similar investment approach, both are growth-oriented and want to buy businesses that are growing faster than the market. We use Management Quality as a non-negotiable filter with a very clear qualification. So, to that extent, it was quite easy to align the two teams.

What will be Baroda BNP Paribas MF’s stand on credit risk in debt funds? Do you have a limit on the minimum percentage of AAA-rated papers in your debt funds (other than credit risk funds)? With interest rates rising, what will be your strategy for generating returns?

So, the basic principles of fixed income are safety, liquidity and returns and in that order. Now as fund managers, we can do value addition on two aspects. One is on the macro view, i.e. taking interest rate view and the micro view is the company doing credit research. There are a lot of people in fixed income business who are trying to be smart, we are trying not to be stupid. And in fixed income, a good way to outperform is to avoid mistakes, avoid too aggressive calls and be completely mindful of the fact that risk has a huge impact on returns. Now, when it comes to fixed-income funds, you need to make it clear that you are managing the fund purely as per the philosophy of the fund. So, where the mandate itself is – not to take or take credit risk, SEBI itself has prescribed certain percentages.

So, what about categories like low, short and medium term funds where there is no specification in terms of credit risk and it is left to each fund house to decide?

In these categories, the primary driver of performance is positioning on the curve and identifying some of the wrong pricing opportunities that you may have in the same credit quality segment. I don’t want to hard code a number here (what would be the minimum percentage of AAA or AA+ rated paper).

In terms of interest rates, markets do not wait for the RBI to raise rates before going ahead. So even though policy rates haven’t increased, you’ve seen a significant increase in bond yields. So, while the rate hike by RBI is one tool, there are many other indicators due to which the market adjusts itself. In the current environment, where policy rates are expected to rise, I think the increase will be gradual rather than very rapid. So, we think on the short end of the market, there are good opportunities for investors. Therefore, categories like short maturity funds, which usually have maturities ranging from 18 to maybe 24-36 months, would do quite well as the yield curve in the short end is very steep. So even if rates go up, the accrual is very strong.

The second category that seems interesting is credit risk. Indian corporate balance sheet has become very strong. The credit upgrade downgrade ratio is the best in the last decade. Also, the pool of money chasing such papers has come down drastically. The mutual fund industry in terms of size of credit funds is Rs. 1 lakh crore around 2-3 years ago. Today is Rs. 25,000 crores. This allows you to choose and deploy your capital at good spreads. This is a category that investors can consider if they have a horizon of a few years or beyond.

How will your investors benefit from the merged large AMC? Would they benefit from a lower expense ratio?

One of the things that changes in this is, behind us is the combined power of the two sponsors that I explained to you earlier and they have more than 300 years of legacy between them. Second, as we merge, our capabilities expand on our capabilities, our product suite, and our reach and investment management.

While our products are becoming a relevant size, at the same time, they are not too big to affect the ability to make an alpha. In most cases, a slightly larger AUM size will bring about a marginal reduction in the expense ratio but it will be a marginal benefit.