Medium Duration Funds are categorised as funds that invest in debt and money market instruments such that the Macaulay Duration of the portfolio is between 3 years to 4 years.
Macaulay duration shows the weighted average time it will take for the investor to receive the bond’s future cash flows. The longer measure in years for Macaulay duration, the more exposure the bond’s future cash flows will have to changing interest rates.
What is Maturity and Duration?
As the Reserve Bank of India has begun rising interest rates to rein in inflation, this category has witnessed a majority of funds posting negative returns in the recent past. Over a six-month period as of May 11, 2022, the category has delivered negative returns in the range of -0.02% to -1.32%. Similarly, over a three-month period, this category has yielded negative returns in the range of -0.21% to -2.23% as of May 11, 2022.
Here are five Medium Term Funds reviewed by our analysts in the recent past.
Aditya Birla Sun Life Medium Term Plan
- Inception: March 2009
- Star Rating: 4 stars
- Analyst Rating: Neutral (Regular and Direct)
- Date of Analysis: April 2022
- Morningstar Analyst: Kavitha Krishnan
- Modified Duration: 2.46
- Yield to Maturity: 6.85
- Average Credit Quality: BB
- Fixed Income Sector Weightings: Government (15.74%), Corporate (73.22%), Cash & Equivalents (11.04%)
- Performance: 5.61% (2018), -4.40% (2019), 8.11% (2020), 7.10% (2018), 7.61% (since inception as of May 13, 2022)
- Bond Holdings: 93
- % Assets in Top 10 Holdings: 36
- Top 5 Bond Holdings: Shriram City Union Finance, 6.1% Govt Stock 2031, Mahindra Rural Housing Finance, Bharti Hexacom, Tata Realty and Infrastructure
- Fund Manager: Sunaina Da Cunha, Mohit Sharma
Process
The fund’s focus lies in taking active credit bets. The team’s ability to evaluate credits and invest across credit buckets with a view to optimise returns is important, especially given that the fund invests a significant portion of its assets in below AA+ rated papers. The strategy allocates a small portion of its assets to government securities. Hence, a combination of duration bets and credit calls drives the fund’s strategy.
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 G-Sec as well as the corporate bonds side. The team records its expectations as well as the outlook versus the outcome around every macro event. On the corporate bonds side, the fund house uses internal ratings as opposed to relying on external credit ratings. Any credit can be invested into, only after it makes a grade on the internal research process and is backed by strong covenants. Maneesh Dangi can tend to move quite aggressively across rating buckets. In our view, the research process at the AMC is very detailed.
Performance
Exposure to stressed assets has had a significant impact on the fund’s cumulative performance. During Maneesh Dangi’s current tenure (October 2014-March 2021), the fund returned 6.53% (annualised) as opposed to the category average of 6.89% (annualised), falling in the third quartile in terms of performance.
The strategy underwent a change in 2012, from investing in high-quality paper to taking opportunistic credit bets and investing in lower-quality (below AA) paper. After the transition period, the fund remained a consistent top-quartile performer with the exception of 2019 and 2020. The underperformance of 2019 was quite significant, with the fund losing 4.40% and managing to beat only 6% of its peers. Performance in 2021 has remained positive, with the fund falling in the top quartile and beating 89% of its peers.
SBI Magnum Medium Duration Fund
- Inception: November 2003
- Star Rating: 5 stars
- Analyst Rating: Neutral (Regular and Direct)
- Date of Analysis: February 2022
- Morningstar Analyst: Nehal Meshram
- Modified Duration: 2.84
- Yield to Maturity: 6.16
- Average Credit Quality: AA
- Fixed Income Sector Weightings: Government (34.61%), Corporate (55.56%), Cash & Equivalents (9.83%)
- Performance: 6.19% (2018), 11.05% (2019), 12.27% (2020), 3.85% (2021), 7.86% (since inception as of May 13, 2022)
- Bond Holdings: 56
- % Assets in Top 10 Holdings: 43
- Top 5 Bond Holdings: 54% Govt Stock 2032, 5.63% Govt Stock 2026, State Bank Of India, Indinfravit Trust, Indian Bank
- Fund Manager: Dinesh Ahuja
Process
The fund's strategy is to take slightly higher credit risk while minimising interest-rate exposure. It invests across the capital structure with a bottom-up investment process and applies a combination of quality and liquidity filters to its universe. This helps eliminate speculative companies with excessive debt or negative earnings.
The managers use various qualitative and quantitative parameters and put a lot of emphasis on a company's management, business, and financial health. They also focus on the covenants in detail, which helps protect from downside scenarios. They also use sell-side research and credit-rating agencies to form a view on the creditworthiness of companies, but to a limited extent. The credit committee then reviews the rated securities, and the approved securities are assigned credit and tenor limits. While constructing the portfolio, the managers have the flexibility to implement trades with reasonable leeway to express their views.
Performance
The fund has delivered solid absolute and peer-relative returns under the leadership of Dinesh Ahuja. Between July 2011 and December 2021, the strategy’s direct share class returned 10.28% annualized outpacing 100% of its peers, thanks to the team’s risk-conscious approach that looks to equilibrate credit risk with duration calls. The fund outperformed most of its peers and ranked as a first-quartile performer during the trailing three- and five-year periods.
The manager’s effort to maintain attractive carry with a moderate duration profile has gone well even on a calendar-year basis. The fund’s performance had been phenomenal between 2016 and 2020. However, the recent performance has taken a hit as the fund kept high cash levels relative to category peers, resulting in the fund ranking in the third quartile. But we believe in the team's capability and expect the fund to bounce back in the coming months with its risk-conscious investment approach.
ICICI Prudential Medium Term Bond Fund
- Inception: September 2004
- Star Rating: 5 stars
- Analyst Rating: Neutral (Regular) and Bronze (Direct)
- Date of Analysis: January 2022
- Morningstar Analyst: Himanshu Srivastava
- Modified Duration: 2.18
- Yield to Maturity: 6.56
- Average Credit Quality: AA
- Fixed Income Sector Weightings: Government (11.86%), Corporate (68.97%), Cash & Equivalents (19.16%)
- Performance: 5.11% (2018), 9.19% (2019), 10.39% (2020), 5.51% (2021), 7.42% (since inception as of May 13, 2022)
- Bond Holdings: 102
- % Assets in Top 10 Holdings: 30
- Top 5 Bond Holdings: 6.54% Govt Stock 2032, Coastal Gujarat Power, Bangalore Airport Hotel, Bharat Sanchar Nigam, The Great Eastern Shipping Company
- Fund Manager: Manish Banthia, Shadab Rizvi
Process
Over the years, the investment team has not only maintained the efficacy of the investment processes but has also worked towards improving them. Here, Manish Banthia emphasises security selection and portfolio construction over making substantial adjustments to duration on a regular basis. The team prefers investing in stable companies having higher certainty of returns than targeting uncertain higher returns. Hence, fundamental research is key to the investment process and combines qualitative aspects with quantitative analysis. The focus is on investing in firms that have strong management teams with proven track records, the financial strength of the promoter group, and good corporate governance standards. This is followed by rigorous quant analysis in which various financial ratios are considered. A credit is added in the investment list only after getting approval from the board and the risk management team.
Another defining aspect of the investment process is the team’s preference for safety over outsize returns. The idea is to focus on achieving long-term sustainable and consistent performance rather than chasing short-term trends. Duration calls are taken after considering macroeconomic factors such as gross domestic product, inflation, and RBI borrowings. Broadly, the investment process is well-defined, robust, and research-driven. Hence, we are retaining an Above Average Process rating.
Performance
The fund’s performance under Manish Banthia (6 Jan 2018 to 31 Dec 2021) has been noteworthy. Its direct share class has clocked a return of 8.24% versus the category average of 4.47%, outperforming 97% of the competition. Despite the investment environment largely being against credit-oriented strategies during this period, this fund managed to wade through turbulent waters more comfortably than many peers. This could be attributed to the team’s better handling of the credit crises in the Indian debt markets.
A strong and robust security-selection process and investment in reasonably stable and resilient companies ensured that the fund does not witness any defaults, which could have adversely affected its performance. Moreover, a sound liquidity management practice helped the team to handle the liquidity crises in the fund, during the March-May period of 2020, effectively without hurting its prospects. Some timely duration calls also contributed towards its superior performance. For instance, with the onset of second wave of coronavirus in March 2021, Banthia proactively hiked the fund’s duration, given his view that the accommodative stance of RBI will continue for a much longer period, which paned out well.
Kotak Medium Term
- Inception: March 2014
- Star Rating: 4 stars
- Analyst Rating: Neutral (Regular) and Bronze (Direct)
- Date of Analysis: December 2021
- Morningstar Analyst: Nehal Meshram
- Modified Duration: 2.76
- Yield to Maturity: 6.50
- Average Credit Quality: AA
- Fixed Income Sector Weightings: Government (36.64%), Corporate (45.74%), Cash & Equivalents (15.15%)
- Performance: 5.44% (2018), 7.01% (2019), 8.54% (2020), 4.66% (2021), 7.54% (since inception as of May 13, 2022)
- Bond Holdings: 51
- % Assets in Top 10 Holdings: 44
- Top 5 Bond Holdings: 5.53% Govt Stock 2033, Punjab and Sind Bank, Power Finance Corporation, LIC Housing Finance, 4.81% Govt Stock 2031
- Fund Manager: Deepak Agrawal
Process
The fund house has a fairly tight structure in place to evaluate the credit matrix and take a transaction-based approach while deciding on investments. The fund maintains duration of 3.0-4.0 years and invests primarily in good-quality high-yielding assets. The manager seeks to identify duration bets through macroeconomic factors by incorporating views of internal and external economists.
Credit analysis is divided into banking, NBFC, and manufacturing debt, then further demarcated into three buckets based on business strength, management, and corporate-governance standards. Surveillance has shot up after the recent spate of downgrades, and now NBFC and HFC, which was evaluated on a quarterly basis, is now tracked monthly. The team also keeps a check on the sponsor debt and evaluates asset liability profiles on a monthly basis. The team leverages the expertise of the equity team at Kotak AMC and Kotak Bank.
Performance
The fund was launched in 2014, and performance has been impressive so far. The manager does not target high returns with high risk but focuses more on consistent returns. Under Deepak Agrawal's watch (April 2014-November 2021), the fund has delivered higher returns of 9.02% versus the category average of 6.45%, and it ranked in the first quartile. With efficiently managed duration and credit risk, the fund has displayed attractive returns over the longer horizon. The fund outperformed most of its peers and ranked as a second-quartile performer during the trailing three- and five-year periods.
The manager’s effort to maintain attractive carry with a moderate duration profile has gone well even on a calendar-year basis. The fund delivered consistent returns except for 2020 when the fund delivered slightly lower returns against most of the category peers. Agrawal has efficiently navigated this fund across various market conditions. We believe the manager is capable and the fund house has the necessary processes in place to make the strategy work over the long run.
IDFC Bond Fund – Medium Term Plan
- Inception: July 2003
- Star Rating: 4 stars
- Analyst Rating: Neutral (Regular) and Silver (Direct)
- Date of Analysis: August 2021
- Morningstar Analyst: Himanshu Srivastava
- Modified Duration: 3.36
- Yield to Maturity: 6.54
- Average Credit Quality: AAA
- Fixed Income Sector Weightings: Government (96.72%), Corporate (1.73%), Cash & Equivalents (0.48%)
- Performance: 6.26% (2018), 9.13% (2019), 10.94% (2020), 2.42% (2021), 7.20% (since inception as of May 13, 2022)
- Bond Holdings: 24
- % Assets in Top 10 Holdings: 96
- Top 5 Bond Holdings: 5.63% Govt Stock 2026, Rec Limited, National Bank for Agriculture and Rural Development, 8.20 GJ SDL 2025, 8.25 MH SDL 2025
- Fund Manager: Suyash Choudhary
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