UTI Pension Fund Pivots To Bonds After Equity Spree

India's third-largest pension fund is returning to bonds after a year of heavy equity buying, a shift that could bring some relief to the country's battered debt market.

State-backed UTI Pension Fund, which manages about 4.13 trillion rupees ($45 billion) in assets, plans to allocate about 40%-50% of its fresh investments to government bonds in the fiscal year starting April, Chief Executive Officer Umesh Kumar Gupta said in an interview.

Prompted by regulatory changes, the move reverses last year's equity-heavy tilt and could help support India's bond market, where yields have remained elevated despite the Reserve Bank of India's interest-rate cuts as heavy government borrowing and weak demand weigh on prices.

UTI Pension will allocate about 20%-25% of its new investments to equities next fiscal year, with the rest going into corporate debt. In the current year, about three-fourths of its investments went into equities while about one-fourth was allocated to corporate bonds, data compiled by Bloomberg show.

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Photo Credit: Bloomberg News

The asset allocation will “return to normalcy” after regulatory changes allowed for higher investment in stocks, Gupta said. Nearly 22% of UTI Pension's book now comprises shares, close to the 23% target weight for government-backed plans that were impacted by the rule change, he added.

Equity investments by three state-run pension funds, including SBI Pension Funds and LIC Pension Fund, have risen to 22% of their combined assets under management, from around 14% before the rule change, according to data compiled by Bloomberg. Net bond purchases by these funds lag equity investments by over 1 trillion rupees in the current financial year.

Demand for government bonds softened at a time when supply surged, with the federal government announcing record borrowing and states also stepping up debt sales, putting upward pressure on yields. The yield on India's benchmark 10-year bond has risen nearly 53 basis points from a low in May despite rate cuts.

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UTI Pension Fund will follow a low-duration strategy for its bond investments in the upcoming fiscal year as yields are expected to rise in the coming months now that interest rates have bottomed out, Gupta said. At present yield levels, state government debt is a more attractive investment than federal bonds, he said.

“A good mix of high yielding, lower duration securities of up to 15 years maturity would be the best,” he added. “State bonds fit into this bracket, or some of the five-year corporate bonds yielding 7.30-7.40% present good opportunities.”