Review of 3 dynamic bond funds

By Morningstar |  23-02-21 | 
 

Unlike other categories of debt funds, dynamic bond funds do not have a defined mandate of maintaining a particular duration or investing in a segment of bonds. They have the flexibility to invest in bonds with varying maturities and money market securities.

The modified duration of each fund in this category would differ as fund managers have the discretion to manage the portfolio as per their view on the interest rate movement. Modified duration measures the price sensitivity of bonds with the change in interest rates. Higher modified duration would entail higher sensitivity of bond’s prices to interest rate fluctuations. These funds typically maintain core and tactical portfolio to generate income through a blend of accrual and duration strategy.

The performance of these funds would depend on the fund manager’s skills of taking the optimal duration bet to benefit from rising or falling interest rate scenario. For instance, the fund manager will invest in short maturity paper if she thinks the interest rates are poised to go up. If the fund manager expects interest rates to fall going ahead, she would invest in longer maturity paper. If the call goes wrong, the performance of such funds could get negatively impacted.

The category has delivered 4.60% return over a one-year period. The top performer ICICI Prudential All Seasons Bond Fund delivered 8.76% while the bottom performer Franklin Dynamic Accrual Fund has delivered 1.82% over the same period, as on February 22, 2021.

Here is an overview and analysis of three funds rated by Morningstar analysts in the recent past.

Nippon India Dynamic Bond Fund

  • Star Rating: 4 stars
  • Analyst Rating: Bronze
  • Inception Date: November 2004
  • Return: 6.62% (1 year), 7.56% CAGR (3 year), 7.84% CAGR (5 year), 6.64% CAGR (since inception)
  • Fund Manager: Prashant Pimple
  • Average Credit Quality: AAA
  • Date of Analysis: December 2020
  • Analyst: Nehal Meshram
  • Fund Overview

The strategy is research-intensive and relies mainly on fundamental research. The manager primarily focuses on active duration bets. Given that duration is an integral part of the strategy, studying the macroeconomic scenario for taking an interest-rate directional view forms the broader framework of the process. The investment team incorporates the views of key external and internal economists on factors such as GDP growth, inflation, fiscal deficits, and trends in government borrowing.

Fund manager Prashant Pimple maintains a quality portfolio and invests only in AAA rated securities with focus on the business, management, financial health, and promoter group. They also use the analysis of sell-side research and credit-rating agencies to form a view on companies' creditworthiness.

The execution of the process has been good, with 60%-70% of the core portfolio reflecting the medium- to long-term view of the manager; the remaining 30%-40% of the portfolio is tactical, used to take advantage of any short-term movement in rates.

IDFC Dynamic Bond Fund

  • Star Rating: 5 stars
  • Analyst Rating: Bronze
  • Inception Date: December 2008
  • Return: 7.75% (1 year), 9.61% CAGR (3 year), 8.87% CAGR (5 year), 8.42% CAGR (since inception)
  • Fund Manager: Suyash Choudhary
  • Average Credit Quality: AAA
  • Date of Analysis: June 2020
  • Analyst: Himanshu Srivastava
  • Fund Overview

Studying the macro scenario for taking interest-rate directional views forms the broader framework of the process. The view is determined by conducting a detailed analysis of influencing factors such as growth versus inflation, fiscal and current account deficit, private sector and government borrowings, fiscal and monetary policy view, money supply, currency market movement, and global interest-rate scenario. This is complemented by an overlay of technical factors where the team examines the supply/demand dynamics to get clarity on valuations and the direction of the yield curve. Interest-rate direction calls and anticipation of yield curve movement form the basis of portfolio positioning in duration terms.

Fund manager Suyash Choudhary emphases safety and liquidity. Taking credit bets is not a part of the strategy, and this has enabled him to tide over credit risk more comfortably than most of his peers. He is at his best when he has a free hand; pleasingly, the fund’s strategy allows him to play to his strengths. He invests across the yield curve and segments: government securities, corporate bonds and money market instruments. The team studies bond spreads and liquidity of various segments to determine their optimal allocation in the portfolio.

DSP Strategic Bond Fund

  • Star Rating: 4 stars
  • Analyst Rating: Neutral
  • Inception Date: May 2007
  • Return: 6.88% (1 year), 9.11% CAGR (3 year), 8.27% CAGR (5 year), 7.12% CAGR (since inception)
  • Fund Manager: Vikram Chopra
  • Average Credit Quality: AAA
  • Date of Analysis: June 2020
  • Analyst: Nehal Meshram
  • Fund Overview

The process is built around strong research and risk-control measures. However, with new managers at the helm, we are yet to see their execution capabilities across the market cycle.  Duration calls, spread analysis, and credit selection underpin this fund. The process begins with the formulation of a macroeconomic outlook. Duration bets are a result of macro calls, where the team conducts detailed analysis of influencing factors such as gross domestic product, Index of Industrial Production, deposit/credit growth, liquidity, currency movements, and global factors.

The fund maintains a rather controlled approach to dynamic portfolio management and invests mainly in good-quality AAA rated bonds. However, the fund witnessed a series of downgrades in its investment in DHFL and eventually marked down its holding by 75%. The portfolio managers do not shy away from taking higher allocations in cash if they do not see enough opportunities or even using it strategically to tide over volatility. They also take exposure in state development loans if the risk/reward looks attractive.

© 2020 Morningstar. All rights reserved. The Morningstar name is a registered trademark of Morningstar, Inc. in India and other jurisdictions. Research on securities, referred to for the purpose of this document as “Investment Research”, is issued by Morningstar Investment Adviser India Private Limited, which is registered with SEBI as an Investment Adviser (Registration number INA000001357), providing investment advice and research, and as a Portfolio Manager (Registration number INP000006156). For the complete disclaimers, click here .

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