Why these debt funds received a Neutral Rating

By Kavitha Krishnan |  05-10-21 | 
 
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About the Author
Kavitha Krishnan is a Senior Research Analyst on Morningstar's Fund Research team. She has over 9 years of experience in the Financial Sector. She would like to hear from you, but cannot give financial advice.

Aditya Birla Sun Life Mutual Fund is the fourth largest fund house in terms of assets under management as of June 2021.  The fund house manages assets worth Rs 2.75 lakh crore.

On the fixed income side, the fund house's line-up of funds is above average. They tend to restrict flows into their funds, especially during times when they believe that a single large investment could impact performance and lead to underwriting lower quality debts. We reviewed three debt funds from Aditya Birla Sun Life MF stable. Here is a brief overview and analysis of these funds.

Aditya Birla Sun Life Income Fund 

  • Star Rating: 5 Stars
  • Category: Medium to Long Duration
  • Analyst Rating: Neutral
  • Fund Manager: Bhupesh Bameta
  • Inception: October 1995
  • Return: 6.74% (1 year), 10.13% (3 year), 6.93% (5 year), 8.35% (10 year), 9.34% (since inception). Return of regular plan as on October 4, 2021
  • Date of Analysis: September 2021
  • Bond Holdings: 69
  • Assets in top 10 holdings: 51%
  • Assets under management: Rs 2,518 crore (September 2021)
  • Credit Quality: High
  • Interest Rate Sensitivity: Moderate
  • Total Expense Ratio: 0.40% (regular), 0.80% (direct)
  • Fund Overview

Process

Aditya BSL Income takes an active call on duration. On the credit side, it typically invests in high quality AAA rated credits with a view to keeping risks low. The core of the strategy lies in taking a duration view based on the interest-rate directional movements and investing in high-quality corporate bonds.

On the macroeconomic front, the team tracks headline indicators and tends to follow a market-linked strategy as opposed to a pure macro-based strategy. The duration views of the team resonate across all of its fixed-income strategies.

Portfolio 

The strategy can typically allocate up to 80% in government securities and state development loans in addition to investing in AAA/AA rated debt. The managers can vary their allocation toward government securities and corporate bonds based on their valuations and relative spreads, keeping in line with the fund's mandate. The portfolio as of August 2021 reflected an allocation of around 80% in sovereign papers, 10% in corporate bonds, and the rest in cash and cash equivalents. There is a lot of focus placed on maintaining liquidity levels on this portfolio. Emphasis is placed on the quality of the issuer, the ability of the company to meet its debts and corporate governance.

Performance 

On a year-on-year basis, the fund remained in the top two quartiles versus its category peers during the period between 2018 and 2020. The fund fared poorly in 2015 owing to its overweight duration position and again in 2017 owing to its slightly aggressive duration positioning. The fund fell in the third quartile across both years. Year-to-date returns as of August 2021 placed it in the second quartile, with the fund returning 2.70% as compared with the category average of 2.13%. The fund runs a slightly higher risk (as measured by its standard deviation) on a one-year basis in comparison to its category peers.

Aditya Birla Sun Life Corporate Bond Fund 

  • Star Rating: 5 Stars
  • Category: Corporate Bond
  • Analyst Rating: Neutral
  • Fund Manager: Kaustubh Gupta
  • Inception: October 1995
  • Return: 6.06% (1 year), 9.31% (3 year), 8.05% (5 year), 8.95% (10 year), 9.28% (since inception). Return of regular plan as on October 4, 2021
  • Date of Analysis: September 2021
  • Bond Holdings: 302
  • Assets in top 10 holdings: 17%
  • Assets under management: Rs 24,413 crore (September 2021)
  • Credit Quality: High
  • Interest Rate Sensitivity: Limited
  • Total Expense Ratio: 0.46% (regular), 0.30% (direct)
  • Fund Overview 

Process

The core of the strategy lies in investing in high-quality corporate bonds across the yield curve. The manager also takes a duration view based on the interest-rate directional movements. In line with its philosophy, the strategy allocates a portion of its assets (currently around 18%) to government securities and state development loans in addition to investing in AAA/AA rated debt papers. Kaustubh Gupta can vary his allocation towards these based on their valuations and relative spreads, keeping in line with the fund's mandate.

Portfolio

Allocation to duration and credit are typically based on in-house views and are reflected across all their strategies, in line with individual mandates. Corporate bonds constitute a major portion of this fund. Top 10 holdings, including names like Reliance Industries Limited, Larsen & Toubro Limited, and National Bank for Agriculture and Rural Development, constitute around 17% of the portfolio. Government securities currently constitute around 17% of the fund and can go up to a maximum of 20%. The portfolio has a considerable investment in pass-through certificates and state development loans, which currently constitutes around 10% of the portfolio. These are used from a tactical perspective, and allocation to these papers can change significantly based on the additional alpha that they can provide.

Performance

We think that Kaustubh Gupta has the wherewithal to manage the fund in an efficient manner. The execution of the strategy is reflected in the fund’s noteworthy performance. The fund has consistently fared in the top two quartiles versus its category peers on a year-on-year basis since 2011. The fund returned 7.00%, beating 84% in 2018; 9.60%, beating 74% of its peers in 2019; and 11.89%, beating 92% of its peers in 2020. The fund’s year-to-date performance as of July 2021 places it in the top quartile, with the fund beating 85% of its peers. On a one-year basis, the fund returned 6.48%, falling in the top quartile. The fund continues remain in the top quartile across the longer term three-, five-, and 10-year basis, too.

Aditya Birla Sun Life Dynamic Bond Fund

  • Star Rating: 3 Stars
  • Category: Dynamic Bond
  • Analyst Rating: Neutral
  • Fund Manager:  Bhupesh Bameta and Mohit Sharma
  • Inception: September 2004
  • Return: 6.45% (1 year), 5.66% (3 year), 4.28% (5 year), 7.62% (10 year), 7.76% (since inception). Return of regular plan as on October 4, 2021
  • Date of Analysis: September 2021
  • Bond Holdings: 78
  • Assets in top 10 holdings: 43%
  • Assets under management: Rs 1,595 crore (September 2021)
  • Credit Quality: Medium
  • Interest Rate Sensitivity: Limited
  • Total Expense Ratio: 1.65% (regular), 1.05% (direct)
  • Fund Overview 

Process

The fund's focus lies in taking a combination of active duration bets and credit calls to optimise portfolio returns. Given that duration is an integral part of the strategy, studying the macroeconomic scenario and taking interest-rate directional views form the broader framework of the process. At the same time, given that the fund can invest in sub-AA rated papers; the importance of credit research cannot be undermined.

The fixed-income team could take structural, cyclical, or tactical views. It tracks headline indicators and tends to follow a market-linked strategy as opposed to a pure macro-based strategy that looks at an event post occurrence. The process is very stringent, both on the government securities as well as the corporate bond side.

Portfolio

The fund house carved out a segregated portfolio on the dynamic fund towards their exposure to an Essel Group Company by the name of Adilink Infra Multi trading Pvt. Ltd., considering that the company defaulted on its payment. As a result, it has marked down the value of the segregated portfolio to its residual value while keeping the main portfolio intact. It has also had to take a markdown on a few of its other holdings.

Performance

The fund has lost assets to the tune of around Rs 117 billion since June 2017 owing to a series of events that have unfolded in the debt markets. An uncertain interest-rate environment followed by the impact of the defaults in the debt markets continue to plague the fund. While some of these issuers have seen a resolution and have been making regular payments, a few others continue to await a resolution. The high level of redemptions led to an increase in the concentration levels of illiquid papers. However, the AMC has successfully managed the concentration levels by consciously bringing them down and enforcing exit loads wherever required.

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