Credit risk funds have gone through a turbulent phase owing to the downgrades/defaults witnessed as a result of the headwinds faced by the economy. This was exacerbated by the Corona pandemic. Further, the closure of Franklin Templeton’s six debt schemes created a panic among investors, which led many investors to flee from this category.
Credit risk funds have witnessed net outflow since April 2019 every consecutive month till December 2020 to the tune of Rs 56,317 crore. As a result, the asset base of this category has declined by 65% from Rs 80,756 crore in April 2019 to Rs 28,440 in February 2021.
These funds carry relatively higher risk as they invest a minimum of 65% of total assets in bonds which are below the highest rated instruments. Bonds carrying lower credit rating offer higher yield to compensate for the risk and the lower rating. These funds also take some exposure to government securities, AAA rated securities and money market instruments up to the remaining 35% of the portfolio or hold cash as a liquidity measure.
The category average return of credit risk funds stood at - 1.59%. The best performing fund has delivered 12.56% return while the worst performer delivered a negative -59.81% return over a one year period.
Here are two credit risk funds reviewed by our analysts recently.
HDFC Credit Risk Debt Fund
- Star Rating: 5 stars
- Analyst Rating: Neutral
- Average Credit Quality: AA
- Fund Manager: Shobhit Mehrotra & Anand Laddha
- Inception: March 2014
- Return: 11.29% (1 year), 8.13% (3 year), 8.21% (5 year), 8.85% (since inception)
- Analyst: Nehal Meshram
- Date of Analysis: December 2020
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Fund Overview
The in-depth understanding of companies has helped Shobhit Mehrotra in identifying securities offering attractive spreads. The fund invests at least 65% of net assets in bonds rated AA and below. The fund has higher exposure in AA and AAA bonds, which makes for a quality portfolio. It typically maintains 30% in AAA, 50% in AA, and 20% in A and below rated instruments. Overall, the fund's credit rating is tilted towards low risk.
The managers’ investment philosophy is centered on building a portfolio with safety and liquidity. This is achieved through a disciplined and focused risk-controlled investment process. The investment team begins the process by formulating a macro outlook and then determines appropriate exposures through credit and duration play. In terms of credit selection, the team focuses on factors such as company management, financial strength of the promoter group, and corporate governance standards. This is followed by rigorous quantitative analysis such as leverage, coverage, and solvency ratios. It also leverages the expertise of fundamental equity research to select individual debt securities. Due diligence of the lower credits is reviewed more closely within a shorter time gap, and the managers consider bonds for investment where the financial strength of the issuer is analysed by the major rating services.
Duration is determined through assessment of various macro factors, yield-curve positioning, and interest rates. A highly experienced risk-management team is well-integrated into the investment process. The team stacks up well on the credit research front and the execution of the fund has been good, with the portfolio having the right mix of high-quality and high-yielding bonds, generating superior returns over the medium term.
ICICI Prudential Credit Risk Fund
- Star Rating: 5 stars
- Analyst Rating: Neutral
- Average Credit Quality: AA
- Fund Manager: Manish Banthia & Akhil Kakkar
- Inception: December 2010
- Return: 10.01% (1 year), 8.30% (3 year), 8.37% (5 year), 8.65% (since inception)
- Analyst: Himanshu Srivastava
- Date of Analysis: December 2020
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Fund Overview
Manish Banthia constructs a pure corporate bond portfolio with credit as the central theme. He identifies credit, liquidity, and concentration risk as the three major risks for this strategy and tries to construct the portfolio in a manner that reduces their impact on the fund. Security selection is largely bottom-up, with traces of top-down play to weed out certain sectors. Banthia looks for securities which could benefit from certain events such as domestic acquisition and promoter financing. He also hunts for securities which may be rated lower but are potential candidates for an upgrade.
A substantial portion (over 80%) is invested in sub-AAA rated securities, of which A/equivalent rated securities dominate the portfolio. But, to battle the liquidity crises during March-May period, Banthia methodically increased the exposure to AAA securities as well as government securities in the portfolio. That said, it was largely a liquidity management tool as a part of risk management exercise. But despite relatively higher exposure to G-Secs or AAA securities, the fund’s credit nature has remained intact. The institutional investment process and strong risk management framework have helped the team screen out companies that have faced headwinds in recent times. This we believe will keep the fund in good stead going forward.
A defining aspect of the investment process is the team’s preference for safety over outsize return. Hence, it is ready to forgo high-yielding investment opportunities that could expose the fund to unwarranted risk. The idea is to focus on achieving long-term sustainable and consistent performance rather than chasing short term trends. Broadly the investment process is well-defined, robust, and research-driven.
(The analyst rating mentioned above are for regular plans. The rating for direct plans may differ.)
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