Bond funds: A review
CATEGORY WATCH
ABN AMRO FLEXI DEBT REG: CONSISTENT PERFORMER
ABN AMRO Flexi Debt Regular was launched in September 2004. The fund's mandate states that it aims to optimally balance yield, safety and liquidity. And to achieve this, the fund enjoys ample flexibility. The fund can invest in both short-term as well long-term maturity debt instruments and securitised debt.
In the last two years, the fund has turned in a good performance with annualised returns of 8.39 per cent in 2007 and 8.42 in 2006. These returns have been way head if its category averages of 7.62 and 5.96 per cent.
These higher returns have been achieved because the fund has been quality conscious by investing around 70 per cent of its assets in AAA- and P1+-rated papers. Exposure to below AA-rated papers has been around 8 per cent most times, although it went up to as high as 40 per cent in July 2007, a move which helped the fund generate higher returns.
The fund has been known to take big bets on the interest rate outlook. The fund has also seen radical movements in its average maturity, which went up to 4000 days in July 2005 and came down to 1 day in January 2008.
Since January 2007, the fund has maintained exposure in Commercial Paper, Certificate of Deposit and Debentures issued by both public and private sector banks. As on June 2008, Commercial Papers issued by corporate like Marico Limited and Apollo Tyres accounted for 39 per cent of the fund's portfolio.
On the expense front, the fund has managed to be in control. Its expense ratio came down from 2.25 per cent (September 2005) to 0.73 per cent (March 2008), marginally below its peer which was 0.78 per cent.
BIRLA DYNAMIC BOND FUND: FOCUSSED POTFOLIO
The objective of Birla Dynamic Bond Fund is to manage the duration of the bonds it invests in dynamically, keeping in mind the interest rate scenario. The fund is benchmarked against CRISIL Comp BFL.
So far, the fund has turned in a relatively good performance. In 2007, it generated returns of over nine per cent, which was almost two per cent more than its peer set. In previous years too, the fund has been able to deliver above average returns. The fund's ability of giving above average returns, coupled with its lower risk grade has propelled the fund to the top quartile of the medium term fund category.
As the mandate proposes, the fund is actively managed to profit from the interest rate movement. In December 2007, it increased the average maturity of its holdings to 11 years from around three years and then again decreased it drastically to just 36 days in January, 2008. The success of this tinkering with the portfolio is that the returns of the fund surged ahead of the pack both in December and January.
The fund maintains a focused portfolio with most of its investments limited to call money, short term instruments like Commercial Paper and Certificate of Deposits while in the longer time horizon, it invests primarily in Debentures or GOI securities.
The fund has stayed away from the risky and less liquid Structured Obligations. For this fund, the liquidity of investment is of paramount importance than returns, which is the reason behind its heavy investment in high quality instruments.
The fund has taken active management of assets to another level. It has since March 2008, started to actively manage its inflows and outflows by increasing and decreasing its exit load at times twice a month. This has enabled it to create a time horizon and be reasonably unaffected by sudden huge influx or redemption.
The fund's performance and portfolio quality, together with its low risk, makes it an attractive option in the medium term category.
ICICI PRU FLEXIBLE INCOME: INCONSISTENT PERFORMER
ICICI Prudential Flexible Income Fund was launched in September 2002 to take advantage of the interest rate movement by investing in either short-term or long-term securities and thereby deliver returns higher that the plain vanilla income funds. The fund chose the CRISIL Composite Index as its benchmark.
Has the fund lived up to its mission? Well, yes and no. The fund has been more optimistic than other funds in its expectation of the interest rate movement. Its optimistic strategy worked in the first year but it backfired in the following years.
The interest rates commenced their upward journey in 2004 and in 2005. And the fund, after being at the top of the league by giving returns of 9.68 per cent in 2003, tumbled. In 2004, it gave a measly return of 1.26 per cent.
Investors' confidence in the fund also waned and during the period of November 2003 to March 2006, the fund lost more than 5000 per cent of its corpus. The then fund manager Mr. Rahul Goswami, to tackle the adverse conditions, brought down the average maturity of the instruments.
Since March 2006, the fund's average maturity has hovered around 4.32 months compared to the category's 1.02 years. This has made the fund the least vulnerable to interest rate movement comparatively. The fund has posted an annualised monthly return of around 8 per cent per annum on a consistent basis.
The fund has at times been managed very passively. From March 2006, the fund has parked on an average as much as 61.87 per cent of its assets in bank deposits rather than working it in the market. It woke up only after April 2007, when SEBI ordered mutual funds to limit their investment in banks deposits.
At present, the fund's investment compromises of only four instruments including negligible exposure in bonds. Its investments are primarily into papers issued by finance companies. In the last couple of months, it has invested very heavily into commercial papers of ICICI Bank.
There has not been any case of concentrated holdings in this fund's history except in the financial year 2006-07 when a single investor held 81.37 per cent of the fund. This kind of concentrated investment makes a fund's performance very much dependent on a single investor, which is very unfair to other smaller investors.
Fortunately, the fund has not witnessed any adverse impact because of such reasons. The fund, with its lower than average maturity and low expense ratio is ideal for short-term investors who like consistent returns with low risk.
Value Research