Mr Manish Banthia is a Senior Fund Manager and has been associated with ICICI Prudential AMC in several roles including fixed income trading, credit analysis and product development. He has rich 12-year experience and started in the Indian credit market space in 2007. Mr Banthia categorizes his investment style as value investing and his investment philosophy is safety, liquidity and returns – the key tenants of debt investing. He manages the ICICI Prudential Credit Risk Growth Direct Plan.
We spoke to him on email on the current credit conundrum.
Gaurav Rastogi (GR): How long you have been investing in Indian credit? What drives you to find the best credit opportunities?
Manish Banthia (MB): I have been associated with the Indian credit market space since 2007 when I started out as a credit risk analyst.
In terms of finding credit opportunities, we believe a qualitative approach along with the quantitative assessment of the issuer is what works the most. One has to understand the issuer’s business profile; business environment the company is operating in, strategic placement of the company offerings in its sector, leverage the company has taken and repaying ability of the credit issuer. A combination of all these factors are inputs used in the decision-making process. So, essentially it is more of a bottom-up approach to research when it comes to determining credit opportunities.
GR: As someone who has seen multiple credit cycles, do you think there is anything different in this credit cycle? Is “this time really different”?
MB: Credit cycles are normally fat-tailed events which do not occur very frequently. Therefore it is difficult to gauge when the cycle would turn. However, the intensity of each cycle could be different. From 2012 to 2016, we saw a corporate credit cycle and currently, we are seeing a financial lenders credit cycle. It is very likely that we have come a long way through the current credit cycle as historically it is seen that when the pessimism is very high in a credit cycle, as is the case now, that’s when the cycle typically tends to turn.
Credit cycles are normally fat-tailed events which do not occur very frequently.
GR: What, in your opinion, precipitated this loss in trust in credit in the recent cycle? It would also be good to know how the MF investor came to start believing that a credit fund is the same as traditional investment avenue? A de-risking had happened in the minds of MF investors on credit funds and now that there have been actual losses some of them have not been able to come to terms with it. It will be good to know your opinion and thoughts on this?
MB: If we look at some of the recent credit events, they had the following broad characteristics:
- Borrowers had relied upon short-term market borrowings to finance long-term use of funds which resulted in liquidity mismatch thereby exposing them to increased refinancing risk. Increasingly, the borrowers are taking measures to address these issues through diversification of their liability mix and reducing excessive reliance on shorter term sources of funding.
- Credit spreads on the bonds issued by some of the issuers were significantly higher than similar rated papers. This was clearly pointing towards the growing divergence between the credit standing as suggested by the ratings provided by the rating agencies and the market perception. Thanks to the rating downgrade, some of these anomalies have got addressed.
- Lack of transparency and/or adequate disclosure for groups with complex group structures created challenges in the assessment of the credit profile of the issuers.
Thus far, while investing in credit risk funds, investors were largely looking at the overall Yield to Maturity (YTM) of a portfolio rather than the underlying risks in their investments. The recent events have emerged as an eye opener for investors as they will now look at the risk aspect as well. The investor typically tends to be at the extremes, either too optimistic or too pessimistic while what is required is a balanced view.
A credit risk fund is not the same as a traditional investment avenue. Both vary in terms of the nature of the product, underlying portfolio and the risks associated. Given this disparity, one cannot compare the return profile of these products. As the name suggests, the credit risk fund tends to come with a certain amount of risk. It is the purview of the fund manager to contain the risk aspect for its investors. We as a fund house are positive about credit risk category and believe that this is an opportune time to invest owing to prevailing high credit spreads.
Thus far, while investing in credit risk funds, investors were largely looking at the overall Yield to Maturity (YTM) of a portfolio rather than the underlying risks in their investments.
GR: Regarding the investment process – it would be great if you could give us some insights on how you manage credit risk and how you think of the return of capital and return on capital?
MB: We were probably one of the early movers among the fund houses having instituted an in-house independent risk management team entrusted with overseeing credit evaluation and approval processes. The Risk Management team is independent of the Investment Team. The decision to onboard a credit is taken after due diligence carried out in accordance with Debt Investment Policy. We follow “four-eyes” concept for approval of credit investments with the decision to invest in any debt instrument being taken after in-depth credit review and not based on the sole judgement of the Fund Manager.
We have always believed that credit rating is one of the inputs in the investment decision, but not the sole determinant. Two key tenets of our credit decision-making have been the focus on client selection and avoiding concentration. This discipline has helped us not to overly rely on credit rating
As part of the credit due diligence, we consider various aspects such as financial and operating parameters, management profile, industry outlook, competitive positioning, key risks and mitigation etc. These processes, have enabled us to deliver good investment experience to our investors.
We have always believed that credit rating is one of the inputs in the investment decision, but not the sole determinant. Two key tenets of our credit decision-making have been the focus on client selection and avoiding concentration. This discipline has helped us not to overly rely on credit rating
GR: Looking forward, where do you think the opportunities lie in the credit space and what are you focusing most of your energies on?
MB: At this juncture, there are opportunities across the credit spectrum. Of these, we believe, the AA-rated corporate credits seem to be an attractive segment given the combination of moderate-risk and relatively higher return profile. Currently, this is an asset class which has not many investors owing to the spate of negative headlines in this space.
While investors have turned more careful about the risk aspect associated with investing in credit, this space from a fresh investment perspective looks attractive as credit assets are attractively priced and the yields are high.
GR: From a portfolio perspective, how should investors think about credit funds and their spot in their portfolio? Any pointers on how they should go about selecting credit funds or pointers on what to avoid when looking at credit funds (w/o being specific on a fund name) would also help our readers a lot?
MB: When investing in credit risk fund, one should refrain from investing solely based on a scheme’s YTM. At ICICI Prudential Mutual Fund, we believe that four pillars for generating better risk-adjusted returns are by prudently managing Liquidity, Concentration, Credit and Duration aspect of a portfolio. So, before investing ensure that the portfolio is not concentrated in terms of securities or sectoral exposure. Also, the portfolio needs to be diversified across various securities with varying credit ratings. Such an arrangement may ensure that even in case of a negative development related to a security, the overall impact on the portfolio is limited given the diversified portfolio.
Disclaimer & Riskometer
ICICI Prudential Credit Risk Fund: An open-ended debt scheme predominantly investing in AA and below rated corporate bonds. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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