A look at 4 debt funds from Kotak AMC

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By Nehal Meshram |  19-12-16 | 
 

Kotak Bond Fund Short Term Growth

Deepak Agrawal has a flair for managing credit strategies, which has been exhibited in his 15-year stint with Kotak. The investment process is highly research-oriented, with economic, credit, and liquidity analysis used to determine the fund strategy. As per the fund mandate, the manager can vary the portfolio duration within three years based on his view on short-term interest rates.

Agrawal is well supported by a six-member investment team composed of two research analysts; two dealers; a risk analyst dedicated to fixed income; and the head of fixed income, Lakshmi Iyer. The fund's performance depends largely on the manager’s ability to allocate between money market instruments, corporate bonds, and to some extent in government securities depending on their relative spreads and market condition. They recently positioned the fund by investing primarily in high-quality credits, mainly AAA rated instruments. When adopting an accrual strategy, the manager typically looks for corporate bonds that provide attractive yields, and which in his view offer adequate comfort on the credit quality of the instruments. Although duration bets are used to enhance performance, they are of lesser relevance here as the managers adhere to the fund’s short-term billing, thereby restricting the size of the bets.

The execution of the process has been good. While the fund’s short-term results are encouraging, the year-on-year track record has not been appealing. Within the limited duration profile, the manager has effectively enhanced returns but investors should note that this fund is likely to underperform its peers in a scenario of falling interest rates. The fund’s expense ratio at 1.04% is slightly higher than the category median and would like to see the expense ratio coming down in future. We retain the funds’ Morningstar Analyst Rating of Neutral.

  • Star Rating: 4 stars
  • Analyst Rating: Neutral
  • Category: Short Term Bond
  • Credit Quality: High
  • Interest Rate Sensitivity: Limited
  • Expense Ratio: 0.83% - Around the peer group median
  • Investment Process: Research-based process with an emphasis on safety and liquidity
  • Fund Manager: Deepak Agrawal

Kotak Gilt Investment Fund Growth

We maintain our cautious view on the fund’s expense ratio, which undermines our positive opinion on its team and process. The core part of the portfolio is aligned more towards the long-term view of the fund, while the tactical part is more liquid and is used to enhance the running yield of the portfolio. Abhishek Bisen manages this fund, and he has been with the fund house since October 2006. In our view, Bisen has the experience and capabilities to manage this strategy. He has built his reputation here with his duration strategies by making long-term, high-conviction bets. He is backed by a six-member investment team that comprises two research analysts, two dealers, a risk analyst dedicated to fixed income, and the head of fixed Income, Lakshmi Iyer.

As the name suggests, Bisen invests in a mix of government securities of varying maturities. Duration plays and yield-curve positioning are the main sources of return. The fund is actively managed, and Bisen typically varies the duration range between 5-20 years based on his view on interest rates. The manager has also found opportunities in less-frequented corners of the government-bond market. For example, at times the manager has also invested in state development loans to benefit from the additional spreads they offer compared with central government Treasuries. The process is based on the team’s ability to combine longer-term macroeconomic and market analysis with shorter-term cyclical considerations to build portfolios that are well positioned to take advantage of mispriced opportunities across yield curve. Bisen churns the portfolio often and maintains higher portfolio turnover as against its peers.

We see the disadvantages of the fund in view of high fees charged by the fund, which impedes the performance. Although we believe the manager has the necessary experience and resources, the disappointing returns and high fees limit our conviction and result in a Morningstar Analyst Rating of Neutral.

  • Star Rating: 4 stars
  • Analyst Rating: Neutral
  • Category: Long Term Government Bond
  • Credit Quality: High
  • Interest Rate Sensitivity: Extensive
  • Expense Ratio: 1.92% - Higher than the category median
  • Investment Process: Research-intensive process with an overlay of active trading bets
  • Fund Manager: Abhishek Bisen 

Kotak Treasury Advantage Fund-Growth

A highly experienced manager employing an established process drives our positive view of this fund.

Kotak Treasury Advantage (formerly Kotak Floater Long Term) is managed by Deepak Agrawal. The fund's duration had ranged between three months and one year, but from January 2015 the fund house decided to cap duration at six months. The fund is positioned to deliver returns via accrual income rather than duration plays. Hence, credit selection and spread analysis are the main sources of excess return and the focus is on identifying mispriced money market instruments and bonds with strong credit fundamentals.

Agrawal has a flair for managing credit strategies, exhibited in his 15-year stint with Kotak. Agrawal is supported by a six-member investment team that comprises two research analysts, two dealers, a risk analyst dedicated to fixed income, and the head of fixed income Lakshmi Iyer. The manager primarily invests in high-quality credits, mainly AAA rated instruments. He conducts rigourous qualitative and quantitative research to establish whether prospective investments have the competitive, financial, and strategic advantage to deliver on that potential. The fund does take credit calls with a cap of 10%-15% and does not intend to go below AA- rated instruments. The manager profiles clients regularly to understand their liquidity requirements and investment horizons, which is a positive as the funds in the ultrashort-bond Morningstar Category experience large inflows and outflows. The fund has done well within its limited duration profile after the change in the fund’s positioning and has been a consistent second-quartile performer. The competitive expense ratio also aids performance; hence, we retain the funds’ Morningstar Analyst Rating of Bronze.

  • Star Rating: 4 stars
  • Analyst Rating: Bronze
  • Category: Ultrashort Bond
  • Credit Quality: High
  • Interest Rate Sensitivity: Limited
  • Expense Ratio: 0.52% - Inexpensive compared with the category median
  • Investment Process: Research-based process focusing on credit selection and spread analysis
  • Fund Manager: Deepak Agrawal

 Kotak Bond - Plan A - Growth

We believe the fund is a strong choice for investors seeking a quality portfolio and who are willing to take on higher investment risk to ride through the benign interest-rate scenario.

The fund’s philosophy is to remain consistently long by maintaining higher portfolio duration even if the interest-rate outlook remains unfavourable. The fund aims to generate returns through active management by capturing positive price and credit spread movements by oscillating among government securities, state development loans, and corporate bonds. With its active investment strategy, the fund typically outperforms in the falling interest-rates scenario and vice versa.

In our view, manager Abhishek Bisen has the experience and capabilities to manage this strategy. He has over 10 years' investment experience, and his involvement in the fund dates back to 2008. Bisen is supported by a six-member investment team that comprises two research analysts, two dealers, a risk analyst dedicated to fixed income, and the head of fixed Income, Lakshmi Iyer. The main appeal of this fund has been the execution of the strategy. Duration calls and active trades have paid off for the fund in recent years under the manager, helping it outpace 90% of its peers.

The fund’s process has been applied consistently over time across market cycles. The process blends views on the macroeconomic factors with fundamentals of the company while assessing government securities and corporate bonds for its investment. The manager has built a solid record; the macro calls have tended to be right more often and the fund has handily beaten its benchmark and peer group since inception as well as over the recent three- and five-year periods, with slightly higher volatility. The fund’s fees offer room for improvement, but overall we like the investment process and believe the team is capable of adding value. Hence, we have upgraded the rating to a Morningstar Analyst Rating of Bronze. 

  • Star Rating: 4 stars
  • Analyst Rating: Bronze
  • Category: Intermediate Bond
  • Credit Quality: High
  • Interest Rate Sensitivity: Extensive
  • Expense Ratio: 1.71% - Higher than the category median
  • Investment Process: Robust process with a strong hand at credit and duration management
  • Fund Manager: Abhishek Bisen

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