Red flags and triggers for investors to watch out for

Gang Mohit: Honestly, debt triggers (side) are quite different from what you see in stocks per se. It’s a much more complicated category. When I invest in a debt fund, the first and most important part is not whether I will get 50 basis points more or 50 basis points less, but I think the safety of my capital is the first principle when I invest in debt.

Thus, a change in the credit quality of a fund is one of the main triggers for a debt fund.

If I’m investing in a full AAA portfolio, I don’t want it to be diluted in any way. So, there are fund houses, there are fund managers that I know will always follow a full AAA portfolio, and that’s where I’m comfortable.

Suddenly, if you see an increase in AA or A papers exceeding 10% of the overall portfolio, that is the biggest trigger and the first alarm bell should ring.

Every month when the wallets are out, one should have the wallet checked. If you see that the exposure has increased in the low quality credits, press the red bell there. This is the first point.

The second is obviously in a credit event situation, if you see consistently downgraded securities in a portfolio. Let’s say you see Vodafone type events, where AGR dues are there and you find a decision made in court, or you find a DHFL or IL&FS type event where items are regularly downgraded in a particular portfolio. Then you might just want to cut your losses and get out of the portfolio before a big credit event happens.

Even though a credit event has occurred and you know the portfolio will be separated now, and you know any loss has been separated. It may not be a bad decision to take an exit if you see that the wallet has produced some type of credit event. This must be a call calculated on the overall portfolio. But yes, we can consider that.

The third point emanates from the attributes of a portfolio, which is the change in duration of the portfolio. Now, debt being interest rate sensitive, if I have invested in the short end of the curve – i.e. if I am investing in very short term funds or low duration funds, or money market funds – I don’t want my duration to exceed two years or one year. I have a mental threshold to this and I don’t want to take interest rate risk in my portfolio.

But if I see a fund manager suddenly acting like a dynamic bond manager, say in the medium term, trying to get to 10 years duration. These types of triggers are very high alarm bells for me. At this point, you have to do a quick review of the portfolio, depending on the type of risk you want to assume.

The final point on the debt side is a sudden drop in AUMs. An increase or decrease in assets under management can always be taken into account in shareholders’ equity.

Debt is mostly institutional money, which means a lot of institutions have pulled out and maybe they need or could have more information than retail investors.

If the AUM suddenly drops to a large extent in a debt fund, that’s a really big trigger for us, and at that time it’s good to get out fast.

Dolores W. Simon