corporate credit funds rated by our analysts

By Morningstar Analysts |  17-05-17 | 
 

DSP BlackRock Income Opportunities Regular Growth

  • Star Rating: 4 stars
  • Analyst Rating: Neutral
  • Minimum Investment: Rs 1,000
  • Expense Ratio: 1.72%
  • Fund Manager: Pankaj Sharma and Laukik Bagwe
  • Credit Quality: High
  • Interest Rate Sensitivity: Limited
  • Investment Process: To enhance the portfolio yield, the manager maintains around 60% of assets in lower-rated credits. Assessment of market risk leads to the selection of a duration target and yield-curve positioning.
  • Date of Analysis: May 2017

The fund’s focus on lower-credit quality is crucial in this strategy. The fund managers invest in pure corporate bonds with higher allocation towards sub-AAA rated securities. The fund takes moderate duration risk in the portfolio and typically maintains three to five years of average maturity, which is based on the short- to medium-term interest rate view and the shape of the yield curve. The fund’s long-term record is solid.

Under Dhawal Dalal’s leadership, the fund has successfully endured various market cycles since its inception in May 2003. Following his departure in July 2016, Pankaj Sharma and Laukik Bagwe took over. Both managers have yet to make a positive impact. Though Bagwe managed this fund for a few years, that was before the change in the fund's fundamental attributes in April 2014.

ICICI Prudential Corporate Bond Growth

  • Star Rating: 3 stars
  • Analyst Rating: Bronze
  • Minimum Investment: Rs 5,000
  • Expense Ratio: 1.76%
  • Fund Manager: Rahul Bhuskute
  • Credit Quality: High
  • Interest Rate Sensitivity: Limited
  • Investment Process: The fund manager focuses on minimising the impact of risks associated with credit strategies on the fund. He follows a research-based approach that focuses on qualitative and quantitative aspects.
  • Date of Analysis: February 2017

Bhuskute plies a pure corporate bond strategy and does not invest in government securities. The mainstay of the strategy is taking credit calls rather than making substantial adjustments to the duration. This process gels well with Bhuskute’s prowess in taking credit calls. A research-intensive investment approach enables the manager to help mitigate the risks inherent to such an approach.

Notwithstanding temporary blips, which tag along with the credit-oriented strategies, we believe the manager and his process have the wherewithal to deliver an outperformance over category peers in the long term.

ICICI Prudential Regular Savings Growth

  • Star Rating: 3 stars
  • Analyst Rating: Bronze
  • Minimum Investment: Rs 10,000
  • Expense Ratio: 1.80%
  • Fund Manager: Rahul Bhuskute
  • Credit Quality: Mid
  • Interest Rate Sensitivity: Limited
  • Investment Process: A focus on credit calls. Sub-AAA rated paper dominates the portfolio. A research-based approach that focuses on qualitative and quantitative aspects.
  • Date of Analysis: February 2017

We believe the manager and his process have the wherewithal to outperform category peers over the long term.

Reliance Regular Savings Debt Growth

  • Star Rating: 3 stars
  • Analyst Rating: Neutral
  • Minimum Investment: Rs 500
  • Expense Ratio: 1.90%
  • Fund Manager: Prashant Pimple
  • Credit Quality: Mid
  • Interest Rate Sensitivity: Limited
  • Investment Process: Primarily invests in sub-AAA rated debt and structured credit to enhance the portfolio yield. Thorough and proven investment process that has been well executed.
  • Date of Analysis: December 2016

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 2x.

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.

Investors should note that the portfolio is likely to be illiquid, which could lead to an adverse impact under severe redemption pressure. Higher expenses have affected the performance of the fund and reduced its appeal, neither has the risk/reward of the fund been convincing.

Franklin India Income Opportunities Growth

  • Star Rating: 4 stars
  • Analyst Rating: Silver
  • Minimum Investment: Rs 5,000
  • Expense Ratio: 1.69%
  • Fund Manager: Santosh Kamath
  • Credit Quality: Mid
  • Interest Rate Sensitivity: Limited
  • Investment Process: The fund primarily invests in sub-AAA rated debt and structured credit to enhance the portfolio yield. The fund manager follows a research-intensive approach that focuses on both qualitative and quantitative aspects.
  • Date of Analysis: November 2016

Kamath draws on fundamental, company-specific research to identify securities offering attractive yields. In particular, the investment process emphasises identifying companies with robust business models and capable management teams. Another aspect Kamath focuses on is the collateral backing any structured debt. Kamath’s 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.

Kamath prefers to maintain the fund’s average maturity in the range of 1.5-2.5 years, which lends a degree of predictability to the investment process. Conversely, in a falling interest-rate scenario it may underperform peers that adopt a flexible stance and move towards the longer end of the yield curve.

Nevertheless, we expect the pros to outweigh the cons. Factors such as a skilled manager, strong team, a proven investment process, and one of the best asset managers give the fund an edge over its competitors. Hence the fund merits a Morningstar Analyst Rating of Silver.

Franklin India Short Term Income Growth

  • Star Rating: 4 stars
  • Analyst Rating: Silver
  • Minimum Investment: Rs 5,000
  • Expense Ratio: 1.55%
  • Fund Manager: Santosh Kamath
  • Credit Quality: Mid
  • Interest Rate Sensitivity: Limited
  • Investment Process: The fund primarily invests in sub-AAA rated debt and structured credit to enhance the portfolio yield. The fund manager follows a research-intensive approach that focuses on both qualitative and quantitative aspects.
  • Date of Analysis: November 2016

Kamath draws on fundamental, company-specific research to identify securities offering attractive yields. In particular, the investment process emphasises identifying companies with robust business models and capable management teams. Kamath also focuses on the collateral backing any structured debt. Kamath’s pursuit of underpriced securities and those offering attractive yields often takes 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 helps mitigate the risks inherent to such an approach.

Kamath prefers to maintain the fund’s average maturity in the range of one to two years, which lends a degree of predictability to the investment process. Conversely, in a falling interest-rate scenario, it may underperform peers that adopt a flexible stance and move towards the longer end of the yield curve.

All told, we believe the fund is a solid product for patient investors as it benefits from an experienced management team, proven investment process, and one of the best asset managers. Hence, we reiterate the fund’s Morningstar Analyst Rating of Silver.

Franklin India Corporate Bond Opportunities Growth

  • Star Rating: 4 stars
  • Analyst Rating: Silver
  • Minimum Investment: Rs 5,000
  • Expense Ratio: 1.81%
  • Fund Manager: Santosh Kamath
  • Credit Quality: Mid
  • Interest Rate Sensitivity: Limited
  • Investment Process: Sub-AAA rated paper accounts for a significant portion of the portfolio. A research-intensive approach that focuses on both qualitative and quantitative aspects.
  • Date of Analysis: November 2016

Kamath is a seasoned manager and has extensive credit research experience. He is the key decision-maker on investments in sub-AAA rated bonds or any form of structured debt across Franklin's funds. Hence, we believe his presence at the helm of this fund strengthens its prospects. Over the years, the team has carved a niche for itself in the corporate debt segment. This fund's investment mandate allows the team to play to its strengths.

The fund's mandate caps its average maturity at 36 months, which lends a degree of predictability. Conversely, in a falling-interest-rate scenario, it may underperform peers that adopt a flexible stance and move toward the longer end of the yield curve.

Its expense ratio is on the higher side, which may affect its performance. Nevertheless, we expect the pros to outweigh the cons. Factors such as a skilled manager, strong team, a proven investment process and one of the best asset managers give the fund an edge over its competitors.

HDFC Regular Savings Growth

  • Star Rating: 4 stars
  • Analyst Rating: Neutral
  • Minimum Investment: Rs 5,000
  • Expense Ratio: 1.07%
  • Fund Manager: Anil Bamboli
  • Credit Quality: High
  • Interest Rate Sensitivity: Limited
  • Investment Process: Securities with a sub-AAA rating dominate the portfolio. The investment process is free-flowing in nature with credit bets being the mainstay.
  • Date of Analysis: August 2016

Despite the change in the strategy, the focus continues to be on research and security selection. Manager Anil Bamboli 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, Bamboli scouts for securities that offer attractive spreads.

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

Birla Sun Life Medium Term Regular Growth

  • Star Rating: 5 stars
  • Analyst Rating: Silver
  • Minimum Investment: Rs 1,000
  • Expense Ratio: 1.62%
  • Fund Manager: Maneesh Dangi
  • Credit Quality: Mid
  • Interest Rate Sensitivity: Limited
  • Investment Process: This credit fund that takes an opportunistic stance with a view to optimise portfolio returns. The manager adopts a research-intensive approach with a clear focus on internal research and ratings.
  • Date of Analysis: July 2016

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.

Overall, we are impressed with the investment team's disciplined approach and believe the investment process should hold the fund in good stead.

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