Making The Right Calls
In a year when the mutual fund industry was hobbled by downgrades and defaults, SBI Magnum Income fund (12.4 percent) and SBI Dynamic Bond fund (10percent), Both managed by Dinesh Ahuja, have beaten category average returns of 9.1 per cent and 8.25 per cent, respectively, in the 12 month-period ended September 30, 2020.
SBI magnum income fund combines an accrual and duration strategy and typically allocated 60 per cent of its portfolio to non - AAA rated papers, going up to AA- with two, three or four-year maturities. The remaining 40 per cent is in sovereigns and liquid AAAs.
"Broadly, we follow this 60-40 allocation. There could, however, be times where good non - AAA rated papers are not available or the spreads are not attractive, During these times, the fund has the flexibility to change the allocation." says Ahuja. At present, nearly 56 per cent of the fund's portfolio is in government bonds, and 30 per cent in AA and above.
SBI Dynamic Bond Fund on other other hand, seeks to generate alpha only through active duration management, and predominantly invests in sovereign and AAA-rated assets-mostly public sector paper and a few well know private sector names.
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Interest rate call are taken based on the growth-inflation dynamics and the supply and demand situation of government paper, among other things, At present, the fund has 98.65 per cent invested in sovereign paper.
"The idea is to construct a portfolio which is absolutely liquid and which will help us in churning average maturities, depending on our overall view," say Ahuja.
Despite intermittent volatility, the decline in interest rates and infusion of liquidity by the Reserve Bank of India (RBI) in the past year has helped the Dynamic Bond Fund. Bond prices and interest rates are inversely related.
Not a single paper of the income fund has seen a downgrade over the past year. The fund has diversification strategy: Exposure to AAA- rated PSU names is capped at 9 per cent of the portfolio, private sector AA and AA+ companies at 5 percent, and issuances rated AA-and lower at under 3 per cent.
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The Fund bought into non-AAA rated paper in April and May as spreads widened. "There was a panic about non-AAA rated paper and a lot of investors got out. But in hindsight, that was the best time to buy those assets, and we got our call right, "Says Ahuja.
SBI MF follows an elaborate process for assessing credit, The issuer is analysed on the basis of parameters such a promoter and management background, and the business and sector the company is in. The credit analyst then assigns tenure limits on a particular credit, depending on the company's profitability, net worth, and so on.
"Our analysis is predominantly bottom-up. We do not have a negative list or a specific sector or company whose papers we do not want to invest in, "says Ahuja.
Financial or management ownership covenants are assigned. For instance, a covenant could be assigned that says the debt service coverage ratio should always be maintained at three months, or one which restricts the management from diluting its stake below 51 per cent in the company.
"These covenants are part and parcel of the non-AAA trades that we get into. If they are breached, we have the right to exercise the put option and the company will have to prepay us the amount that is due, " Says Ahuja.
The proposal to buy a particular paper is finally placed before an investment committee comprising the fund house's managing director, deputy managing director, chief investment officer and head of risk.
With RBI adopting a accommodative stance until the firs quarter of next year, Ahuja believes that interest rate can continue to ease in the coming months. "It does not make sense to increase rates when growth has taken such a hit and there is no demand-led inflation," Says Ahuja.
While credit spreads have compressed, he is not letting his guard down: "Pockets of stress could lead to a defaults. One still needs to be cautious while assessing the credit-worthiness of companies in this kind of a environments."
SBI Magnum Income Fund and SBI Dynamic Bond Fund Shine in the Medium-to- long Duration Debt Category
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