Larissa Fernand: Welcome to Morningstar. I'm Larissa Fernand, the Editor. Joining me today is Kavitha Krishnan, a Senior Fund Analyst on our team.
Kavitha, you recently initiated coverage on Birla Sun Life Dynamic Bond Fund. So, could you tell us what led to the Silver rating?
Kavitha Krishnan: So, the fund has a really long history and has been managed by Maneesh Dangi since 2007. We have a really positive view on Maneesh Dangi and his abilities and skills in terms of taking the right interest rate directional calls. We view his understanding of the macros for both on the global as well as the local front as another positive.
The team at Birla has remained really stable over the past 5 to 10 years and we thought that the fixed income team at Birla follows a very detailed process both on the issuer selection as well as G-Sec side. The issuer selection process, for example, looks only at the internal ratings as opposed to looking at the external credit ratings. On the G-Sec front then analysts track trading volumes and open market operations quite closely while the duration calls are left to individual fund managers.
Overall, we think that the process holds the fund in really good stead and which is why we have awarded the fund with a Silver rating.
Fernand: You emphasized that the process is very well-defined and issuer selection is very detailed. Can you specifically talk on these two aspects?
Krishnan: That's right, Larissa. So, the company undertakes a 360-degree review of the issuers that they are looking at investing in. So they tend to conduct site visits. They meet the companies personally. They also undertake a thorough evaluation of the vendors, the companies' ability to meet their payment obligations and try to understand the fundamentals of the company as well. So this gives them a lot of advantage over what an external rating agency would do.
On the G-Sec side as well, they undertake a lot of research and track open market volumes quite closely. They also look at investing in highly liquid papers and document their views based on every event that they foresee. So, this again gives them a lot of advantage in terms of keeping a track of historical events and ensuring that their research process is on track.
Fernand: How would you explain the core strategy of the fund and with that strategy in mind, how does Dangi invests?
Krishnan: Sure. The core of this strategy is a combination of taking active duration bets and investing in high-quality credit papers. The fund is truly dynamic in nature as the name suggests and it can go anywhere in terms of both duration as well as credit. While the mandate allows the fund to invest in lower-rated debt papers, it typically doesn't do so with the exception of 2012 to 2014 periods when it held a few lower than AAA-rated papers as a part of their holdings.
So duration of the fund has moved quite dynamically between 6 months to 8.5 years. For example, between 2011 and 2015 the fund was running a relatively lower duration based on the manager's negative view of the interest rate cycle. However, in 2016, this has gone up to about 8.5 years which is one of the highest on a historical basis.
The fund also holds a higher exposure towards G-Secs as compared to corporate bonds on a historical basis. And these are some of the core characteristics that we have noticed on this fund.
Fernand: You earlier mentioned that the strategy is not without risk. So, could you now talk about the risk in some detail?
Krishnan: It does have a chair of risk, Larissa. Say, for example, if we look at the risk levels on the fund as measured by the standard deviation over a three-year period, it does run a slightly higher risk as compared to its peers. However, it does make up on the risk-adjusted return basis, but we are wary of the kind of relatively higher risks that the fund runs.
Another probable risk on the fund is also a slightly concentrated strategy that it currently runs. So it can take up to 60% exposure in a single G-Sec paper. Having said that, G-Secs are considered to be fairly liquid. However, the level of concentration in a single paper could pose a risk in terms of the tradability. Say, for example, in 2015, they bought into a 2045 G-Sec paper and have been increasing their exposure towards this paper going up to about 59%. So, this is something that we really want to keep eye on.
Fernand: How must this fund be positioned in an investor's portfolio?
Krishnan: So given these factors and given the fact that it takes a combination of duration and credit bets, it will be apt as a supporting investment in an investor's portfolio.
Fernand: Thank you, Kavitha.
Krishnan: Thanks Larissa.
Fernand: This is Larissa for Morningstar. Thank you for watching.