Subbu's Solution

September Financial Scare - Opportunities for a Value Fund Manager

Her bones will ache, her mouth will shake
And as the passion dies her magic heart will break...
.......Come September
Everything wrong gonna be alright
Come September...
                                                             -Natalie Imbruglia

September was a relatively good month for value managers in India as stock prices declined sharply from their peaks established earlier this year. Cash is a valuable asset in choppy markets like these!

Stocks in the financial space led the selloff on fears surrounding loan defaults by IL&FS (Infrastructure Leasing and Financial Services). Owned largely by state-controlled entities, the unlisted IL&FS - which was set up in 1987 to fund infrastructure projects - still enjoyed a high credit rating from local agencies; everyone was caught unaware and forced to take their credit rating down to junk virtually overnight. This jolted money market funds, as some funds suffered losses on the IL&FS paper as well as on spread widening in other names that were feared to be next in line. The focus on asset-liability mismatches among non-banking finance companies (NBFCs) generated concerns of further defaults in the sector and sparked a "whatever can be sold" mentality in the markets as money market funds faced redemptions.

When one short term bond of a AAA-rated housing finance company was reportedly traded at 11% - a spread of 350 bps (100bps = 1%) over Treasury bills - it induced further panic across equity and bond markets over concerns about refinancing and rollover of short-term debt. This sudden increase in borrowing costs and tightening of liquidity is not something that many non-banking financing companies had accounted for while aggressively increasing their retail loan book portfolio in the last four years.

Meanwhile, the INR took a brutal lashing as the sustained move higher in oil prices prompted forecasts of a return to USD $100 crude, and the specter of a higher-than-expected current account deficit raised worries about future inflation. The rupee recently traded record lows of 74 to the USD, versus 63 at the beginning of the year 2018.

Amidst the carnage was some good news, though: the decline in stock prices gave us, at Quantum, an opportunity to add to our positions at more attractive levels. While noise from the non-banking financial sector clouds the headlines, the economy is on a natural path of recovery. Further decline in stock prices in October gave us opportunity to nudge into few new businesses.

The withdrawal of excess liquidity in U.S. bought back volatility in stock markets across the globe including India.

In my earlier article on the tenth anniversary of the Lehman crises, I had some pointers to remember such as;

1. History rhymes meaning events repeat.

2. The players differ. New players have no idea of past events, hence history repeats.

3. Systems are fragile. We need to be alert where we keep our money. No institution is guaranteed to be safe.

4. Do not borrow money to invest.

5. Do not be greedy and be tempted to earn that extra return by taking undue risks.

IL&FS was a reminder of these lessons and more.

In an artificially suppressed interest rate environment, like it was in the last 10 years, investors seek higher returns. Some investors use leverage while others undertake risky propositions. IL&FS indulged in them. Now that the easy interest rate situation is unwinding, problems are getting accentuated. IL&FS saga is not yet over and there is more pain to be faced. The pain may throw up more opportunities to be grasped, as they rightly say – No Pain – No Gain!.

Incidentally the ILFS issue also impacts many liquid funds. Who in search of higher yield overlooked the risks. Quantum Liquid Fund on the other hand has always looked at risks first and then the return. This helped us avoid securities like IL&FS. Quantum Liquid Fund only invests in government securities, treasury bills and highest quality instruments issued by public sector undertakings (PSU). Please read our article on why Quantum Liquid Fund has NO Exposure to IL&FS Group.

Stay tuned for more on IL&FS.

Product Labeling
Name of the SchemeThis product is suitable for investors who are seeking*Riskometer
Quantum Liquid Fund

(An Open Ended Liquid Scheme)
• Income over the short term

• Investments in debt / money market instruments
Quantum Long Term Equity Fund
Investors understand that their principal will be at Low Risk
* Investors should consult their financial advisers if in doubt about whether the product is suitable for them.


Subbu's Solution is authored by I. V. Subramaniam. I. V. Subramaniam is a director of Quantum Asset Management Company Private Limited. The responses expressed here are strictly for information and explanation purpose only. The responses are meant for general reading purpose and not to be considered as an investment advice / recommendation. The responses are not intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or units of the Mutual Fund. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments. The Sponsor, The Investment Manager, The Trustee, their respective directors, employees, affiliates or representatives shall not be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in the responses.

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Please visit - to read Scheme Specific Risk Factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the scheme's objective will be achieved and the NAV of the scheme(s) may go up or down depending upon the factors and forces affecting securities markets. Investment in mutual fund units involves investment risks such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the Sponsor / AMC/ Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited (AMC). The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.

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