|
Click here to download Fund Update of ICICI Prudential Regular Income Fund
|
WF: When considering credit risk in accrual funds like your RIF, an issue that some advisors have flagged is that collateral in many cases is shares of mid-cap stocks (in RIF's case this will include Apollo Hospitals, Emami, Bajaj Corp etc) which can turn illiquid in the event of a sudden downturn in business fortunes, like we have seen in a couple of cases recently. How good then is the effective security in such situations and how do you try to mitigate this risk?
Rahul: This is a good question. I think in terms of these investments it is necessary to understand the rationale of investments and also their structure. First of all we make such investments very selectively - we have only about ten such investments across our credit funds. To do so, we have to be very comfortable with the promoter and the underlying company. Before making any such investment, we have an intensive engagement with our equity analysts to understand their comfort around the equity shares. Any promoter / company where the equity analyst is not comfortable are weeded out of our investible universe. We do significant analysis at the promoter level as to whether they have additional shares that they can pledge at all points in time and also look at their ability to generate cash in case of a downturn. The security cover is typically close to 1.75 - 2 times and the monitoring of such cover happens on a daily basis - so at all points in time there is a healthy buffer to our exposure. Also our trigger price (at which we can sell) is much lower than the fair valuation of the company as decided by our own equity analyst. You would also appreciate that promoters are very sensitive to their shareholding in the company getting sold. In the Indian context the best form of collateral is shares as these can get sold very easily - this itself acts as a deterrent against any adverse behaviour. Plus since we have around 2X security cover, even if we sell at 40-50% discount to the market price we would still cover our investment. In fact it makes sense for the promoter to sell part of his shares and pay us back rather than see his shareholding sold at 40-50% discount.
WF: You have been pruning the modified duration of this fund from a high of around 1.5 yrs last July to around 1.03 years now. What is the rationale for this, especially given the favourable outlook on declining interest rates?
Rahul: The portfolio is well diversified across various credit ratings ranging from AA+ to A- with an aim maintain a reasonable portfolio yield. The fund's YTM currently stands at 10.15%. The fund has maintained low modified duration of around 1 year, with the aim to generate return mainly from accrual income with lower volatility. One year back yields were at higher level but in the last one year, yields have come down and therefore the fund has reduced the duration.
WF: Cash & CBLO in the portfolio is consistently around 10%. How do you plan to manage near term liquidity pressure in this fund?
Rahul: There is always a balance to be kept between yield and liquidity. If you keep too much liquidity then can have an impact on investor returns; on the other hand you must be prepared 24/7 to meet redemption needs if any. The way we look to balance this is to look at the liability profile of the fund. RIF is a very retail fund with a wide diversification of investors which provides us considerable comfort. Further the average maturity of the underlying investments is only between 1 - 2 years so a significant proportion of underlying assets are going to get redeemed every month / quarter. The size of the fund is still only Rs.1574 cr (as on May 31, 2016) so even if we need to sell assets you are still talking about selling a few hundred crores. We also have banking facilities to take care of redemption requirements.
Moreover, we believe investors today realise the importance of remaining invested for at least 3 years given that there is a significant opportunity cost to exiting before this time period.
WF: With an average maturity of 1.2 years, re-investment risk is still a concern in a declining interest rate environment, especially since distributors would like to look at a 3 year horizon given the tax situation. How should a distributor evaluate the trade-off between locking client money into a fixed return product for 3 years versus an accrual fund like RIF?
Rahul: RIF aims to deliver considerable returns relative to traditional investment avenue and also provides tax efficiency. The whole positioning of our accrual fund franchise is traditional investment plus i.e. we endeavour to provide reasonable returns on a consistent basis without too much volatility. Today RIF has YTM of around 10% which is higher than traditional investments (net of tax). Further, the return experience could be enhanced by selecting investments which may get upgraded and therefore could see appreciation in value. We also keep looking for new investment themes which might be under-appreciated by the market and can therefore be "value investments" in credit terms.
WF: The recent credit events in the market caused a lot of concern, some redemption, and a lot of nervousness. Now that the dust seems to have settled on these issues, what are the key lessons for distributors and fund managers from this experience? In what way has your fund management and/or sales approach changed as a consequence?
Rahul: ICICI Prudential AMC has robust systems and processes in place for managing credit. Firstly, any investment that is being made needs to be reviewed independently by the Risk Department and the investment committee.
Secondly, we keep an eye on the amount of risk we are taking against any single promoter. Exposures taken on all companies of any particular promoter are added at the AMC level rather than just being considered individual and separate scheme level exposures. Measured exposures are taken at both fund and AMC level. In terms of disclosure, our fact sheets have been publishing overall promoter-level exposure since 2007 across all schemes.
Lastly, adequate liquidity is maintained to ensure that redemptions that arise are taken due care of. The fund house has invested significantly in resources to handle all assets classes. For example to handle credit investments there is a dedicated team of five professionals with an aggregate work experience of over 45 years.
In general, for credit funds the following are extremely important parameters to look at for all stakeholders:
Fund managers should do their own homework on the company they are thinking of investing in rather than rely only on the credit rating by the rating agency. Investors and distributors should spend time in understanding how returns are being generated. Apart from interest rate risk, fixed income funds are primarily subject to 3 risks: credit, concentration (aggregate exposure to one promoter) and liquidity. Investors should not just be tempted by the yields or the past performance. They should also look at portfolio quality. Investors and advisors should not be fixated on specific isolated incident but look at the overall picture. Also they should not get swayed by newspaper headlines. For example, there has been a lot of news generated around downgrades of credit ratings of some companies. However, the number of upgrades vastly outnumbers that of downgrades. The number of industries seeing upgrades is also very diverse as compared to downgrades that are happening in specific sectors. Investors should therefore, keep their own counsel rather than just going by what is being reported.
WF: What would you say is the key investment argument for your RIF today?
Rahul: With scope for improvement in the overall economic environment, some holdings in the scheme may get upgraded and this can help the scheme to generate potential capital appreciation. Upgrade in the ratings may translate into fall in yields which has the potential to trigger rise in bond prices.
The scheme is relevant for investment during all time periods. The current portfolio YTM of 10.15% (as on May 31, 2016) aims to offer good accruals. Considering the fact that yields are expected to fall further, it may be an opportune time to lock investments at prevailing levels of Yield to Maturity (YTM).
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
The information contained herein is only for the reading/understanding of the registered Advisors/Distributors and should not be circulated to investors/prospective investors. All data/information in this material is specific to a time and may or may not be relevant in future post issuance of this material. ICICI Prudential Asset Management Company Limited (the AMC) takes no responsibility of updating any data/information in this material from time to time. The AMC (including its affiliates), ICICI Prudential Mutual Fund (the Fund), ICICI Prudential Trust Limited (the Trust) and any of its officers, directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner. The sector(s)/stock(s) mentioned in this communication do not constitute any recommendation of the same and ICICI Prudential Mutual Fund may or may not have any future position in these sector(s)/stock(s). Past performance may or may not be sustained in the future. Nothing contained in this document shall be construed to be an investment advise or an assurance of the benefits of investing in the any of the Schemes of the Fund. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
Share this article
|
AMC Speak
