Morningstar revises its ratings for three debt-oriented mutual fund schemes

Research firm says important to re-visit ratings for portfolio liquidity, redemption pressures

Morningstar, the global mutual fund (MF) research house, recently gave a downward revision to ratings on three schemes -- DSP Credit Risk Fund, Nippon India Credit Risk Fund and Birla Sun Life Medium Term Fund.

In a note, Morningstar said that it was important to revisit their ratings in light of the current market situation. Coronavirus pandemic, lockdown, Franklin’s scheme wind-up, heightened redemptions and lack of liquidity in debt markets, have impacted debt MFs in recent times.

DSP Credit Risk Fund saw its ratings revised from ‘neutral’ to ‘negative’. According to Morningstar, the scheme is managed through an integrated team approach, combining macro-economic and strategic analysis, with fundamental credit research.  

Pointing out the risks, Morningstar said, “The concern also stems from size of some individual lower rated bonds that has gone up significantly due to passive breach -- resulting from huge redemptions from the fund. Overall, last one year was challenging for fund as it witnessed few downgrades and eventually had to mark down the holdings”.

Nippon India Credit Risk Fund also saw its ratings revised from ‘neutral’ to ‘negative’.

The research firm said the fund “typically maintained moderate duration, adopting a buy-and-hold approach for underlying bonds.  However, the fund has witnessed huge outflows, seeing a 70 per cent drop in asset size (from September 2018) and close to a 50 per cent drop on a year-to-date basis.”

To manage the illiquidity risk, the fund has adopted a strategy of laddering the maturity of the portfolio, but miniscule allocation to AAA-rated bonds is a source of key concern, according to Morningstar.

“The concern also stems from the sizes of some individual lower-rated bonds that have gone up significantly owing to passive breach, resulting from large redemptions,” Morningstar said.

On Birla Sun Life Medium Term Fund, Morningstar analysts pointed out that the medium-term category is designed for a tactical investment product that can generate alpha by investing in lower-rated credits. However, a risk-off view by the fund house, had led the scheme to reduce its exposure to lower ‘A’ rated papers, especially during second half of 2019.

Despite robust research infrastructure, the fund house has been facing brunt of industry-wide downgrades that have affected the debt markets, Morningstar pointed out.  

Morningstar pointed out that some of the downgraded papers (with the fund) have witnessed a resolution and have started “to make regular payments, while others continue to await a resolution”.  

Moving rating from ‘Silver’ to ‘Neutral’, Morningstar said while Maneesh Dangi -- fund manager and (head-fixed income) -- has tried to ensure liquidity levels remain positive, current market conditions have been unfavourable to funds with high-risk mandate.