The right fixed income strategy for this market
Pankaj Jain, Principal MF, speaks on the investment case for a low duration fund now
- The mandate of the Principal Low Duration Fund is to generate consistent income and superior risk-adjusted returns over short investment horizons (typically 1 -3 months) through a portfolio strategy that invests in a diversified basket of shorter maturity NCDs and Money market instruments such as CPs and CDs with the overall fund level average maturity less than 370 days.
- Fund employs a risk controlled credit process and aims to invest in a diversified basket of issuers of NCD, CP, CD with good credit quality and attractive relative yields, while ensuring adequate liquidity.
- Portfolio typically allocates to quality NCDs typically between 40-60% of the fund holdings and rest of the allocation to higher yielding quality money market instruments (CP, CD, T-bills, CBLO) with an aim to deliver a higher gross yield with adequate liquidity.
- The recent spate of news flows and the Union Budgetary announcements with higher expected fiscal deficits and upside risks to inflation on the back of a stronger oil prices and potential hikes in farm MSP in the next 4-6 months of 2018 has resulted in a spike in yields across maturities.
- January WPI data release came at 2.84% as compared to 3.58% in previous month. CPI for January came at 5.07% compared to 5.21% in previous month. Recent Industrial production (IIP) growth came at 7.1% compared to 8.4% for previous month. For the month of February 2018, banks borrowed on an average Rs 6166 Cr at various RBI liquidity facilities put together reflecting neutral to moderately negative liquidity conditions. The Centre’s fiscal deficit rose to Rs 6.76 lakh crore or 113.7 per cent of the Budget target between April and January 2018.
- The current Banking system liquidity is likely to remain in neutral to deficit zone on divestment related outflows and lower maturities.
- Recent RBI policy has maintained a neutral stance with no change to the repo rate at 6%, albeit with a more hawkish rhetoric reinforcing upside inflationary risks. Short term Money market rates are expected to remain stable with an upward bias as liquidity tightens further as we approach March end 2018.
- Post Budget, with fiscal targets and borrowing figures announcements, we feel the current yields have priced in the negatives arising out of same. Recent auctions of SDLs also weighed on investor sentiment. Hence sentiment remains weak and market needs a strong trigger to come out of bearish zone.
- As of March 5th 2018, The 3M CP yield is trading around 7.90% and 3M CD yield is around 7.25% and the Benchmark 10Y Yield has spiked to 7.77%.
Case for Principal Low Duration Fund
- The current debt market conditions offer interesting opportunities linked to the near 100 bps spread between the shorter maturity credits (within March 2018) and longer dated papers (around 18-24 months). Within this space, we aim to identify quality NCDs and CPs with attractive relative yields with adequate liquidity that can deliver superior risk-adjusted returns.
- We follow a disciplined investment process that aims to identify quality issuers of NCD and CP with relatively higher yields that may arise from reasons such as mispricing opportunities in the market, relative illiquidity and any demand / supply mismatches.
- All approved issuers and instruments are selected based on internal research of companies and management coupled with sectors and external research sources and inputs from Rating agencies and finally ratified by the investment and credit committees.
- Issuers are typically diversified across NBFC, Banks, HFCs, PSU and Manufacturing companies.
- Further, we emphasize adequate instrument level liquidity and issuer level diversification. SEBI guidelines on single issuer and sector limits are applicable as part of positioning sizing. In addition, we generally hold nearly 35-40% of the portfolio in high quality liquid money market instruments to support periodic investor redemptions
- The fund aims to follow a risk controlled approach to portfolio construction and aims to maintain the mix of NCDs and CP/CD in a range of 50:50% +/- 10%.
- The fund’s current gross yield is around 8.4% (end January 2018) with nearly 50% (end January 2018) allocation to NCDs and rest of the portfolio allocation to higher yield CPs and CDs.
- Principal Low Duration Fund can serve as part of a core debt allocation for investors who seek portfolio diversification and optimum risk adjusted yields.
Minimum time horizon
We advise clients to invest in this fund with a horizon of 1-3 month or more to take advantage of current elevated money market yields. We feel investor stands to gain capital appreciation when yields come down in the money market space.
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The investment strategy stated above may change from time to time without any notice and shall be in accordance with the strategy as mentioned in the Scheme Information Document of the Scheme.
The views expressed and information herein are independent views of the interviewee and for informative purpose only and under no circumstances should be construed as an opinion or Investment advice. The information contained herein is not intended to be an offer to seek solicitation for purchase or sale of any financial product or instrument. Investment involves risk.
The information included in this document has been taken from source considered as reliable, however, the AMC does not accept any liability with regard to the information being shared. Recipient of this article/ information should understand that statements made herein regarding future prospects may not be realized. Investors are requested to consult their investment advisor and arrive at an informed investment decision before making any investments. The Sponsor, Trustee, AMC, Mutual Fund, their directors, officers or their employees shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages arising out of the information contained herein.
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