imgbd Think Debt - Business Perspectives

This "agni-pariksha" should strengthen your conviction, not weaken it

RaghavIyengar, Executive VP & Head of Retail & Institutional Business, ICICI Prudential MF


26th October 2015

In a nutshell

Raghav looks back at newsflow and events that thrust corporate bond funds into centre stage over the last couple of months, and consequent reactions from advisors, distributors and some investors. The product category he says, has gone through its biggest stress test - an "agnipariksha" of sorts, and to its credit has emerged unscathed.

This should bolster advisor confidence in the category that has served retail investors so well over the years, he argues, rather than leaving lingering doubts in your minds. There is however a greater need for advisors and distributors to categorize corporate bond funds appropriately into at least two risk-return buckets, rather than treat the entire segment as one homogenous category.

Friends,

The last couple of months have been a testing period for accrual strategy based corporate bond funds - a category that has become in recent years an IFA favourite. An unfortunate recent credit event brought to the forefront a lot of concerns among advisors, distributors and perhaps some of their clients as well. Questions have been raised on credit quality of corporate bond fund portfolios in the industry. And, redemption fears arising from these concerns then spilled over into liquidity concerns. The fact that lower rated corporate bonds are not very liquid fuelled many concerns about the ability of fund houses to meet redemption requests, should worries on this segment escalate.

There has been as a consequence, a lot more advisor scrutiny on portfolios of corporate bond funds in the industry. One of the unintended, but beneficial consequences of recent events is that there is now a much greater appreciation of the fact that returns alone should not be the metric for evaluating corporate bond funds. Risk and return are indeed two sides of the same coin, and there is a lot more scrutiny from advisors on both aspects now. That is indeed a welcome development.

There is now a much greater appreciation of the merits of focusing on investor diversification in addition to portfolio diversification. The industry's exit load strategy coupled with the change in tax laws have perhaps helped prevent some unnecessary knee-jerk panic selling, which would not have helped anybody - least of all our investors.

2 points for your consideration

I want to make two points here for the consideration of my distributor and advisor friends:

  1. Recent events should in fact strengthen your conviction in accrual strategy based corporate bond funds. They have gone through the biggest stress test of their lives - and I would say, have emerged stronger. This category has seen in the last couple of months - media glare, rumours galore, anxious distributors and investors, intense scrutiny from distributors and advisors, some redemptions as well. The category has acquitted itself rather well in the face of its first big test. I do hope this serves to bolster your confidence in corporate bond funds.

  2. I mentioned that a welcome development of recent events is an appreciation that risk and return are indeed two sides of the same coin. It is important for distributors to start segmenting products in this category based on their risk-return profile and not bunch all corporate bond funds into one homogenous category. Just like you differentiate between large cap equity funds and midcap equity funds and advise clients according to their risk profile, you may want to similarly distinguish between lower risk and higher risk corporate bond funds, set return expectations appropriately for each bucket in your client conversations, and advise products from a suitable bucket to your clients depending on their risk profile.

Two products - with distinctive positioning

At ICICI Prudential Mutual Fund, we have two flagship funds, both of which operate within the broad corporate bond funds space - but which have always had their own distinctive positioning and their own distinctive investment strategy.

ICICI Prudential Corporate Bond Fund

The Fund aims to generate returns mainly in the form of accrual income and also through potential capital appreciation as it predominantly holds debt securities with higher maturity

Investment Strategy

  1. Invests mainly in debt securities issued by corporates predominantly in 1 to 7 years maturity segment.

  2. Seeks to invest in securities that offer reasonable levels of yield at commensurate risks.

  3. Maintains a balanced exposure to securities across credits predominantly between AAA to AA-.

  4. Static Portfolio duration management in the range of 2 - 3 years.

  5. Aims to generate stable accrual income by following hold till maturity approach

ICICI Prudential Regular Savings Fund

The fund aims to generate returns primarily in the form of accrual income and through potential capital appreciation as it holds papers with moderate duration.

Investment Strategy

  1. Invests in well researched credits offering relatively higher yield.

  2. Intends to take advantage of internal credit research to generate credit alpha for the portfolio from any potential rating upgrades of debt instruments.

  3. The fund invests predominantly in well researched AA and A rated debt instruments.

  4. The Fund maintains a static duration in the range of 1.5 to 2.5 years.

  5. The fund aims to generate stable accrual income by investing in corporate bonds primarily with hold till maturity approach.

When you make your recommendation list within the corporate bond funds category, you may want to consider bifurcating it into two segments - a lower risk category and a regular category - or any other names that you want to give them. And I do hope our two funds will feature in both these shortlists!

Agni pariksha should strengthen your conviction, not weaken it

Friends, I want to sign off by reiterating one message: corporate bond funds have gone through a big "agni-pariksha" caused by an isolated credit event, and have emerged largely unscathed. I do hope this serves to bolster your confidence in this segment rather than leaving you confused and worried. It is time now to renew your conviction in this wonderful category that has served retail investors well. It is time for you to transmit this conviction onto your clients.

imgbd

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. All data/information used in the preparation of 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. 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. Sectors/stocks mentioned in the article do not constitute any recommendation and the Fund through its schemes may or may not have any future position in these sectors/stocks. Recipient alone shall be fully responsible for any decision taken on the basis of this document.



Share this article