ETMarkets AIF Talk | Double-Digit returns amid equity volatility: How Vivriti’s debt funds are navigating market uncertainty

“Over the last four years, the funds have delivered consistent double-digit returns to investors who have allocated to this Performing Credit strategy as part of their portfolio,” says Raghunath T, Head of Credit, Vivriti Asset Management.

In an interview with ETMarkets, Raghunath said: “We have invested in debt papers of ~30 emerging corporates and through careful credit selection have earned an average credit risk premium of 700-800 basis points over risk-free government securities,” Edited excerpts:

Your Emerging Corporate Bond Fund delivered more than 13% return in February, followed by Alpha Debt Fund which was up over 11%. What led to the price performance?

Emerging Corporate Bond Fund and Alpha Debt Fund are sleeves of Vivriti Asset Management’s flagship diversified bond fund which was launched in 2021.

Over the last four years, the funds have delivered consistent double-digit returns to investors who have allocated to this Performing Credit strategy as part of their portfolio.

The monthly price performance is mostly a reflection of the regular coupon earned on our portfolio plus redemption premiums, if any, on the maturing investments.

Most of the funds have delivered double-digit returns from a 6–12-month period when equity markets remained volatile. What is the fund's investment objective?

The funds have stayed true to the theme – investing in debt instruments of mid-sized and emerging corporates in India, which typically lack capital market access and are reliant on banks for their funding needs.

We have invested in debt papers of ~30 emerging corporates and through careful credit selection have earned an average credit risk premium of 700-800 basis points over risk-free government securities.

The investment universe is also fairly diversified; the funds have invested in all key segments of the economy including infrastructure, manufacturing, services, and financials.

Before I move forward with questions, for the benefit of the audience can you explain what is Performing Credit?
Credit markets can be broadly segmented into three sub-segments – Venture Debt, Performing Credit, and Distressed / Special Situation investing.

Performing credit investing, in contrast to Venture Debt, involves working with scaled, profitable companies that have settled business models and who need debt capital purely for growth. Also, the takeout/repayment is entirely through operating cash flows and not event-driven as is the case in most special-sits investing.

The investments we make from our Performing Credit funds are all secured by cash flows and business assets thereby negating most of the volatility linked to external market events.

What are the expected risk-adjusted returns for investors with a 4-year investment horizon?
Each fund from our stable has a different risk-return matrix. However, most of the Performing Credit funds, operate within a return range of 11-13% which is pre-tax post-expenses for the investors.

What are the key factors that investors should consider before investing in this fund?
Emerging Corporate Bond Fund and Alpha Debt Fund are closed ended-funds and have been closed for subscription – the funds are about to start returning capital to investors after a steady performance over the last four years.

However, we are continuing the same strategy through our Diversified Bond Fund – 2 (DBF-2). For investors considering our DBF-2 or any credit fund offering, the key factors to consider should be:

• Manager track record - generating consistent returns by staying true to the label and returning capital back to investors as committed.
• Right team and infrastructure - As fund sizes are increasing, this demands a robust infrastructure including a well-rounded investment team, diligence, monitoring, and legal infrastructure
• Macro environment – with the ongoing equity market volatility, credit investing provides a steady alternative to earning risk-adjusted returns. Locking in today’s rates will also benefit given the expected rate cut cycle.

How does the fund navigate changing interest rate environments and credit cycles?
The funds invest in fixed-rate debt papers. Given a typical investment period of two years, and the flexibility in investing across sectors and end-uses, we have been able to generate stated returns even in case of an overall reduction in market rates.

Our team has deep experience in the Indian credit markets and has seen and worked across cycles. Our investment strategy allows for toggles across sectors, end-uses, security structures, and tenors.

This has allowed us to keep investing across market cycles, including the COVID lockdown period, without facing any credit challenges.

How big is the Indian Corporate Bond market in India and what is the trajectory you foresee in the next few years?
The Indian Corporate Bond market is sized at ~$600 billion which is only 25% of the overall bond market with the central and state governments taking the lion’s share of the domestic capital available.

With nominal GDP growth of 11-12%, the bond market is also expected to grow in tandem and hence just the corporate bond market will see a growth of more than US$75 billion annually.

There is also a visible trend, though gradual, of deepening of bond markets with respect to both issuers and investors.

Many lower-rated borrowers (sub-AA) are expected to approach the bond markets for financing. Retail investors are also expected to invest more in bonds given the reduction in minimum investment size to Rs 10,000; this will aid in overall development of the secondary bond market.

With India planning to become the third largest economy by 2047 what role will the bond market play? Most of the developed economies have a well structured bond market which is at times bigger than equity markets?
As highlighted, most developed countries have a bond market that exceeds the equity markets in terms of scale.

In India, the size of the bond market is still <0.7x of the equity market capitalisation. For India to achieve sustained GDP growth, a step change in the growth of the bond markets is imperative and there is a regulatory acknowledgement of this fact.

Well-functioning bond markets will reduce the demands on the overburdened Indian banking system which has not been able to manage the credit cycles associated with large-ticket corporate and infrastructure investing.

The issuers will be able to achieve flexible financing terms for growth and not rely on foreign currency debt or dilutive private equity financing.

And lastly, this will also provide a steady source of returns and diversification to the Indian investors who are over-exposed to equity markets on one end and bank FDs on the other.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)