6 Corporate Credit funds to consider

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By Morningstar Analysts |  09-01-17 | 
 

Reliance Regular Savings – Debt Option

The focus on lower-credit quality is crucial in this strategy, and, while constructing the portfolio, the manager invests in pure corporate bonds with higher allocation towards the sub-AAA rated securities. He also invests in structured assets and lending against shares transactions rather than simply going down the credit curve. For lending against shares transactions, the manager focuses on the promoter group. The fund manager does not invest in securities in which the cover is less than 2 times.

The fund manager avoids taking duration risk in the portfolio and typically maintains a moderate duration up to 2.5 years. He has maintained a well-diversified portfolio and normally adopts a buy-and-hold approach for these bonds.

As such, investments carry illiquidity risk. Pimple tries to mitigate this by using a laddered approach. He invests 30%-35% of the portfolio in bonds that mature in three to six months.

Overall, the risk/reward of the fund has not been convincing.

  • Fund: Reliance Regular Savings – Debt Option
  • Category: Corporate Credit
  • Analyst Rating: Neutral
  • Star Rating: 3 stars
  • Minimum Investment: Rs 500
  • Expense Ratio: 1.90% - the high expense ratio can hold back performance.
  • Fund Manager: Prashant Pimple
  • Portfolio: Thorough and proven investment process that has been well executed. Primarily invests in sub-AAA rated debt and structured credit.

You can read more of the analysis here.

HDFC Short Term Plan

Most of the HDFC fixed-income funds show a bias for higher-quality fare and securities issued by public-sector undertakings. The investment team’s experience in the meltdown of 2008, when some of its funds were invested in a few illiquid securities, has shaped this investment philosophy. Over the years, the investment team at HDFC has developed an expertise in managing high-quality, low-duration products. Expectedly, this approach has worked well for most of the funds from the firm.

HDFC Short Term Plan was managed with a similar approach until its investment philosophy underwent a makeover in the early part of 2014. The fund manager has the liberty to go down the credit ladder into sub-AAA and sub-AA rated segments. However, the focus continues to be on research and security selection.

The fund manager uses fundamental research to identify robust and investment-worthy companies. While constructing the portfolio, a proprietary model is used that assigns a credit score to each issuer, helping decide the exposure to each entity. Within the chosen investment universe, the manager scouts for securities that offer attractive spreads.

The execution of the strategy has been good thus far. However, we would like to see the same being executed in the same vein over the long term before building confidence.

  • Fund: HDFC Short Term Plan
  • Category: Corporate Credit
  • Analyst Rating: Neutral
  • Star Rating: 5 stars
  • Minimum Investment: Rs 5,000
  • Expense Ratio: 1.07% - significantly lower than the category median.
  • Fund Manager: Anil Bamboli
  • Portfolio: The investment process is free-flowing in nature with credit bets being the mainstay. Securities with a sub-AAA rating dominate the portfolio.

You can read more of the analysis here.

Birla Sun Life Medium Term

Our conviction in the manager's ability to execute this strategy with finesse, the depth of the process, and the thorough execution of the strategy leads us to assign a Morningstar Analyst Rating of Silver.

The strategy underwent a change in 2012. While the fund initially invested solely in high-quality AAA and AA+ rated papers, it now takes an opportunistic stance and invests in lower-rated papers. Despite this change, the investment strategy remains well-defined and in line with the fund's investment proposition. The manager can move aggressively across rating buckets and invest a significant portion of the portfolio in government securities. Although the fund did not hold any government securities until 2015, it currently has an exposure of about 27%.

The issuer-selection process on the corporate-bond side is extremely detailed and based on a well-defined set of processes. The team relies on its internal ratings and processes as opposed to external credit-rating agencies. Analysts tend focus on the promoters, corporate governance, liquidity, and risks, among other factors.

  • Fund: Birla Sun Life Medium Term
  • Category: Corporate Credit
  • Analyst Rating: Silver
  • Star Rating: 5 stars
  • Minimum Investment: Rs 1,000
  • Expense Ratio: 1.62% - slightly higher than the category median.
  • Fund Manager: Maneesh Dangi
  • Portfolio: The fund manager adopts a research-intensive approach with a clear focus on internal research and ratings.

You can read more of the analysis here.

3 funds from Franklin Templeton

All three funds are managed by Santosh Kamath. His pursuit of underpriced securities and those offering attractive yields often take him down the credit ladder, and the allocation to sub-AAA rated securities tends to be significantly higher than the norm. However, we believe the research-intensive process help mitigate the risks inherent to such an approach.

The fund went through a rough patch last year when one of its holdings - Jindal Steel & Power, defaulted on its interest payment. The manager had to sell off this holding at a loss, which hurt the fund’s performance.

This did not deter our conviction in the fund, its manager, and the capability of the investment team. It’s worth noting that such a risk is inherent to the strategy plied here which entails going down the credit ladder. In our opinion, it was only a blip in the manager’s otherwise impressive track record in security selection.

Factors such as a skilled manager, strong team, a proven investment process, and one of the best asset managers give these funds an edge over its competitors.

  • Fund: Franklin India Income Opportunities
  • Category: Corporate Credit
  • Analyst Rating: Silver
  • Star Rating: 4 stars
  • Minimum Investment: Rs 5,000
  • Expense Ratio: 1.69% is a competitive expense ratio.
  • Fund Manager: Santosh Kamath
  • Portfolio: A research-intensive approach that focuses on both qualitative and quantitative aspects. Primarily invests in sub-AAA rated debt and structured credit.

You can read more of the analysis here.

  • Fund: Franklin India Short Term Income Plan
  • Category: Corporate Credit
  • Analyst Rating: Silver
  • Star Rating: 4 stars
  • Minimum Investment: Rs 5,000
  • Expense Ratio: 1.55% - lower than the category median.
  • Fund Manager: Santosh Kamath
  • Portfolio: A research-intensive approach that focuses on both qualitative and quantitative aspects. Primarily invests in sub-AAA rated debt and structured credit.

You can read more of the analysis here.

  • Fund: Franklin India Corporate Bond Opportunities
  • Category: Corporate Credit
  • Analyst Rating: Silver
  • Star Rating: 4 stars
  • Minimum Investment: Rs 5,000
  • Expense Ratio: 1.81% - The high expense ratio robs the fund of some of its appea
  • Fund Manager: Santosh Kamath
  • Portfolio: A research-intensive approach that focuses on both qualitative and quantitative aspects. Sub-AAA rated paper accounts for a significant portion of the portfolio.

You can read more of the analysis here.

All the above are growth schemes of regular plans.

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