InvestorQ : Why it is said that Santosh Kamath has lost the plot, the master of managing credit risk funds?
Ishita Jain made post

Why it is said that Santosh Kamath has lost the plot, the master of managing credit risk funds?

shrinidhi Rajan answered.
2 years ago
I don’t think it is about losing the plot as much as it is about a strategy backfiring. Everyone familiar with Santosh Kamath’s working style knows that he preferred investing in risky, high yield, non-AAA bonds. In fact, he is credited for creating a market for low-rated corporate bonds. The irony is the very thing that made Kamath beat other money managers in the debt fund space is what led to this predicament. Kamath bet on risky and long-term papers in a bid to get higher returns. This strategy paid off handsomely for Franklin's debt funds for a while. However, when liquidity in the credit markets started drying up, Kamath was caught out. 

The credit markets were already in a pickle due to IL&FS defaults, the NBFC crisis, etc. Add to that the sudden lockdown due to the coronavirus pandemic, and things just exacerbated from there. An unfavorable Supreme Court decision in January 2020 on Vodafone Idea Ltd led Franklin Templeton to completely write off its exposure to the telco. The collapse of Yes Bank Ltd in March 2020 and the consequent write-down of its debt was another huge bump. Almost 88% of Franklin’s India Credit Risk Fund was invested in rupee corporate bonds that were rated AA or below at the end of March, according to a Franklin fact sheet. The Franklin India Low Duration Fund had 64.7% assets in bonds rated below A+, with 40.8% in bonds rated AA and AA-.

The strategy of sticking with lower-rated papers backfired in January 2020. When investors started redeeming money due to the crisis caused by the pandemic, Kamath did not have anything to fall back on as most of the money was locked in long-duration, risky papers. Risk is something investors should be specifically aware of when it comes to debt funds. In this case, the investors and the fund house were caught on the back foot.