Indian investors are typically lured towards equity rather than debt or fixed-income securities. In developed countries such as the US, fixed income is big business. Almost 40 percent of Franklin Templeton’s assets under management worldwide are in fixed income securities, 32-33 percent in equities, about 18 percent in alternative assets, and 10 percent in multi-asset funds.
Sonal Desai is chief investment officer at Franklin Templeton Fixed Income. The Indian-born Desai oversees the firm’s fixed income strategies. Desai joined as director of research for Templeton Global Macro in 2009 and she became the fund house’s global head of fixed income in 2018.
Today, she oversees a global fixed income team of more than 150 portfolio managers, analysts and traders managing over $132 billion in fixed income assets as of September 30.
In a conversation with Moneycontrol’s Kayezad E. Adajania, she said India is relatively un-correlated from the US markets and Fed rate hikes and is more impacted by oil prices. Edited excerpts:
Franklin Templeton is popular in the US for its high-yield strategies. In India, these funds are popularly known as credit risk funds and in the past roughly four years, these funds went through turmoil. Are such funds well-understood in the US?
Yes, as far as US investors are concerned, they are well understood. The US market is extremely large, at over $1.5 trillion outstanding, and is much deeper. Hence, there is a solid understanding.
India is, comparatively, a very young market – that is the reality of it. In the US, it started with junk bonds in the 1980s. It is an almost 40-year-old market. Downgrades or defaults are viewed as an acceptable risk as investors are compensated by the higher yields and returns potential. Historically, you have been able to achieve equity-like returns with a fraction of the volatility in the high-yield market.
What were your biggest takeaways from Franklin Templeton’s India episode of 2020 when its debt schemes got caught in the credit crisis?
Yes, we have had difficult markets in general. (But) we never observed a crisis of the style of Covid-19, not just in India, but globally. The impact on the economy, on businesses, and on liquidity in the debt market in particular, are well documented. Nearly $60 billion worth of strategies encountered problems around the world and many more faced liquidity issues, requiring swift and sweeping action from the various central banks.
For me, the takeaway is this: If I look at something like a high-yield portfolio, it is aggressive, there is no doubt. Depending on the investor's risk tolerance, there probably is space for it in an aggressive portfolio. It would be wrong to say that you should never go to managed credit again.
There is a space for all strategies. The biggest lesson would be to ensure that investors have a diversified portfolio.
In an earlier interview with Franklin Templeton, the fund house told us that it will not launch any debt funds until the court cases are over. Is there more clarity on if and when Franklin Templeton would reintroduce its high-yield strategy in India?
Like I said, managed credit (credit risk or high-yield strategy) is going to play a role in Franklin Templeton and investors’ portfolios. It will play a role in our offering. But right now… clearly not. But yes, it will be an offering sometime again.
Has the US Fed almost finished hiking interest rates? There are concerns that due to a possible slowdown in the US economy, the Fed might start cutting interest rates sometime soon in 2023.
I think the Fed is going to hike rates by another 125-150 basis points. That will take you to somewhere between 5 and 5.50 percent. And I do not think that the US Fed is going to cut next year at all. I think the Fed will cut in 2024. Currently, if I look at the way bond market yields in the US are, market participants have already priced for lower chances of a rate hike and higher chances of a rate cut coming soon. I think that is unlikely to happen.
How will that impact the Indian markets?
It will not impact India much because India is not significantly affected by international capital flows. India is relatively un-correlated from the US markets. India is more impacted by, say oil prices, whether they go up or down.
There are, however, many emerging markets that are highly dependent on capital flows and they have high inflation. Their monetary policies have to carefully tackle their domestic economic challenges. Look at Turkey, for instance. Its inflation rate, at present, is over 80 percent and they have large financing needs.
How important are fixed-income mutual funds for an investor? Typically, investors in India get drawn more to equity funds and don’t mind investing their entire corpuses in equities.
That is actually very India-specific.
Globally, fixed income is the single largest asset class. It is huge. India is a somewhat special case because you have administered return products, bank fixed deposits and so on.
In the US, fixed-income funds have historically been the main instrument of choice. Increasingly, investors in the US have also begun looking towards fixed-income exchange-traded funds (ETF). ETFs are cheaper, too.
Do you have a lot of ETFs in the debt segment also, internationally?
Oh yes. In the US, fixed-income ETFs are a big market.
Who are your role models in tricky situations? We have many so-called investment gurus in equity that fund managers always look up to. But what about fixed income? What about your part of the world?
Ray Dalio is one. As one of the world’s most successful investors, he has followed a set of principles built around radical transparency and open-mindedness, meritocracy, accountability, and an appreciation of the art of thoughtful disagreement. Above all, he values authenticity, culture, people, and continual improvement. I try to live both my personal and work life in the same fashion and view every role I have held through these lenses.
Sir John Templeton, too. He was a pioneer in not only investment management but also philanthropy, and similarly to Ray Dalio, spent his entire life encouraging open-mindedness with a profound respect for learning. He believed in the value of investing, not speculating, and knew well before it was widely accepted that there is no one kind of investment that works best for all and that you have to look for opportunities everywhere. He believed in buying value, not market trends, and to not be driven by fear or greed. Most importantly, he recognised that everyone makes mistakes and that people should learn from their errors and avoid repeating them.The author was in Singapore at the invitation of Franklin Templeton to attend its Asia-Pacific Investor Forum 2022.