Q:  What is the background and philosophy of the fund?

A : The fund launched around five years ago and focuses on providing an alternative liquid investment option and a higher return to investors than traditional bank savings account. The long-only fund focus takes advantage of arbitrage between corporate and government bonds and between short and medium term corporate and Treasury bonds. However, our first priority is the safety of the principal of our clients and selecting bonds that are liquid enough to buy and sell.

We pay a lot of attention to the domestic macro-economic scenario and have views on the government’s needs of funding. The Treasury bonds issuance is driven by the government needs and private sector demand is driven by their capital expense requirements. We are looking to earn additional returns by investing in safe liquid debt instruments.

Q:  What are investment challenges?

A : Investors use our funds to park money for the short term and that creates higher than normal volatility in the fund flows. Our investment approach has to consider that and build our fund with bonds where maturities match with investors redemptions. Of course, we do not know when our investors will need funds but over the years we know our client needs and we have developed a good knowledge base about their behavior.

We use bucket investment approach and spread our investments across several bonds with different short-term maturities between one and six months so that we are not caught off-guard with flood of redemptions. Liquidity management in the fund is the biggest challenge that we face.

End of quarters are quiet volatile for the money market funds industry and for our fund as well. Corporations withdraw cash from the fund to replay advance taxes to the government and banks pull money to meet their regulatory capital requirements. The four stress points in the system are quarter ends in March, June, September and December when redemptions are steepest as a percentage of fund assets.

We intend to hold most debt instruments we buy until maturity, which we do in most cases. Holding bonds to maturity allows us to create additional returns for our investors. There is a very small secondary market for most money market instruments and the only other short-term liquid instrument that we are interested in are certificates of deposits. Because of the liquidity needs of the fund, we will buy short term bonds or invest in deposits even if our valuations model suggests longer term maturities.

Q:  What are your investment priorities?

A : Liquidity of assets we invest in, safety of credit instruments that we are exposed to and then the return curve are the three priorities we have in that order. The needs of our investors require us to make their funds available on a short notice and we have to be prepared for that. I like to take advantage of the bond yield curve but I do not have that luxury as a money market fund manager.

Generally, we meet all redemptions from maturities or new subscriptions without liquidating holdings. However, when the liquidity is tight in the system, we have to manage it through the selloff of our investments.

The selloff usually does not happen because of the market dynamics. Money market funds rely heavily on the maturity of invested capital. As a result, you get the liquidity within the fund by scattering it over different maturities and making some extra provisions around the quarters.

For investment prudence, the investment quality is important. That’s how we think when selecting bonds or any debt investment. We also have to maintain a credit profile that preserves the highest rating awarded to us by various rating agencies. We have consistently maintained this high rating only because we do better in distributing our maturities than most other funds in our category.

Not all investments in the fund are rated by well-known investment agencies but we assign a credit score to each debt that we look at. We strive to maintain a certain overall credit score in the fund without solely relying on the third-party rating agencies. We look at rating agencies’ views on bonds with skepticism and carry out additional detailed independent research.

We assign the lowest risk to the government bond and increase the risk score as we look at various maturities level of debt from the corporate sector. To maintain the highest rating in the fund we always keep the credit score of the overall fund below 10 on a weighted average basis.

We can buy unrated debt in the fund but it cannot exceed 10% of the assets under management.

Q:  What is your research process?

A : Our research process involved fundamental and credit analysis of the companies and their bonds to meet our investment diversification approach. Based on our liquidity concerns, we look for bonds with our maturities needs. We evaluate all the available six-month bonds if we need a six-month bond. We do a careful analysis of the balance sheet and history of debt repayment and business outlook in the near term. If we are comfortable with the credit analysis then we look at the relative merits of individual bonds and companies.

I manage the fund with a team of three other people. They include a trader, an analyst, and a credit analyst.

Our bond rating selection is done to make sure that we maintain our internal credit score that also meets rating agencies needs. Then we decide the trade strategy to acquire the bonds we like. The size of the trade has to meet our risk and liquidity criteria. It is influenced by our buy and sell disciplines.

Q:  What is your bucket process?

A : In a normal environment, there are four stress points for this fund in a year. Those are the months of march, june, september and december. This is the time advance corporate tax payments happen to the government. A lot of money goes from the banking sector to the treasury of the government and it does not come back to the system until the government spends it.

These are also the points where the banks pull money from the fund to meet their regulatory capital requirements.

The trick is how to distribute your capital so that when fund outflows are at the peak we have bonds that are maturing. From time-to-time, we look at various options in the market, develop an understanding of the yield expectations, and leverage corporate bonds. We can combine the yields from these bonds, generate additional returns with investments in the options market, and that give us the same liquidity and maturity profile in the fund.

Sometimes non-financial events also play a role in our investment posture. The quality of the monsoon season, general elections results, and outlook on inflation help us to build our investment view. Trends in funds flows from abroad and global sentiment also influence our views on the rate outlook. We try to build a broad picture and awareness before be decide how to fill our investment buckets.

These are the kind of analyses that we perform to decipher probable course of the economy and interest rate trajectory. It’s an ongoing exercise and the personal judgment plays a large role.

Q:  Generally, how many securities holdings do you have and what are your diversification strategies?

A : The fund holds between 40 and 50 securities. We decided to allocate investment weights based on total outstanding debt on that bond, daily trading in the bond, and our share of the total issue size.

We restrict our holding in the issue to less than 25% of a particular issue and limit the % holding of that issue below 5% of our assets under management. The fund can allocate more than 5% to a specific company issued bonds but the fund needs to review the investment decision with the investment committee. We cannot exceed 15% of our assets in bonds issued by a single issuer.

Q:  What are your investment buckets and what kind of maturities do they have?

A : The bucket sizes change based on our investment outlook and views on the liquidity in the financial system. One of the gauges that we use is to look at how much money invested in bonds is expiring in the near month. That analysis prepares us with the cash available in the system. For example, if we feel that the liquidity in the month of June is ample, then we look at the liquidity scenario in the months of July and August. Once we are satisfied with the liquidity in the system we then focus more on the credit analysis and specific bond selection.

Under normal conditions, the fund will have 25% of maturities around quarter end for June to meet historical redemption requirements at the end of the quarter. If liquidity conditions are tight, then the fund may hold above normal percentage share in debts maturing in that month. One of the few luxuries we have in managing this fund is that we have a very consistent core group of investors. We also have a good understanding of their historical investment pattern and that gives us insights in their liquidity needs.

Q:  What are single investor limits in the fund and why do you have them?

A : We are the only money market fund manager in India with a single investor limit. We restrict that to 150 crore rupees. This avoids the investor concentration in the fund and helps us in better management of the liquidity. We do not allow a single investor to hold above 5% to 10% of the fund even if regulators permit as much as 25% from a single investor.

This kind of investor limit and diversification has helped us in times when liquidity is tight. In October 2008, India faced tight liquidity in all markets including bonds and money markets as global markets seized. Many money market funds had negative returns just when the large investor base in their funds chose to withdraw money. We were able to manage this crisis as we had diversified investor base.

The money market funds industry is very competitive and dynamic. Since we all compete for new investors and we cannot dictate the redemption amount, at Fortis we manage our liquidity needs with prudent approach to investor concentration.

We have achieved that by putting up overall cap per investor. An investor may have ten folios with us but our limit is not folio, but investor based.

Q:  What are your risk controls?

A : The biggest risk we face is related to liquidity and we try mitigating it by bucketing or matching our redemption profile with our maturity profile. The second risk is the default risk. These are all money market instruments so we need to be vigilant in terms of the solvency of the investment that we hold. The third risk is related to interest rate but we usually run around a 90-day average maturity. With that low average maturity, on a weighted average basis, the interest rate risk in the fund is very low and manageable.

Q:  What is your allocation between government bonds and private sector bonds?

A : The private sector bonds are generally between 65% and 70% of the fund’s asset. Up to 5% could be in the securitized debt and up to 10% in cash.

Q:  Do you see any move towards exchange based trading or do you think the over-the-counter trading in corporate bonds will continue?

A : The government bond and the T-bills are already traded on exchanges. It is an online system provided by the Reserve Bank of India; it allows seamless settlement. That system has been in place for about five years. We see most of the volume in the government bond space shifting to the order matching system. As far as the corporate bond and the money markets are concerned, it is still through the Over-The-Counter market.

The order matching is done by a government agency called Clearing Corporation of India; it manages it on behalf of the Reserve Bank. It is an online system where you can make a bid and accept offer via a single click. The transaction settles the next day with no manual intervention.

Q:  There are 25 money market funds in India, how do you distinguish your fund?

A : Our strict focus on diversification in our investments and our investors sets us apart. Our adherence to guidelines in restricting concentration in both investments and investors to manageable levels has helped us in navigating turbulent markets.