TWO SHINING PERFORMERS IN SHORT TERM DEBT EVEN DURING THESE VOLATILE TIMES
Post RBI rate cuts on April 22’2009, I had recommended change in asset allocation : a) Reduce exposure to long end b) Hold/increase exposure to short end by investing in Short Term Plans with lower average maturities & c) increase exposure to Arbitrage Schemes.
On April 25’2009 we had identified one such Short Term Plan which was lower on average maturities, higher on gross yields due to exposure to PTCs/ABSs ( giving a separate presentation on why investment in schemes with PTCs/ABSs should not be treated as taboo & on the contrary might be even safer than single issuer exposure). I had written the following to my clients:
“In these days of a) Volatile interest rates & b) falling rates at the shorter end, it is difficult to outguess the markets and position your portfolio accordingly. Long end of the curve is becoming volatile with supply concerns and short end of the curve is accruing less and less gross yields; therey making it difficult for investors to choose the right asset class and right scheme under that asset class.
Longer average maturity portfolios are creating MTM havoc on quarter ends and short term schemes are accruing less and less in their portfolios due to falling rates at the shorter end. Investors are vary of taking credit calls to enhance gross yields. Pass Through Certificates ( PTCs) or Asset Backed Securities ( ABSs) are treated as taboo for investment consideration (even though they are capable of accruing higher YTMs).
To break this myth of disregarding PTCs/ABSs for investment options, we have enclosed a presentation which answers some of the concern of investors to this segment of asset class. It explains in simple terms why a) PTCs/ABSs are safer than single issuer exposures, b) how it can generate higher gross yields, c) how it spreads risk and safegurads investors from default risk v/s single issuer risks & b) some industry trends on how in the past default risk of single issuers is higher than that of PTCs and ABSs.
One scheme that has a decent exposure of close to 20-25% in PTCs/ABSs with much lower average maturity of less than on year with much higher gross accruals of over 10% v/s industry average of close to 7-8% in this asset class is well poised in the current market conditions to give consistently higher returns without unduly taking a) interest rate risk & b)duration risk. That scheme is Templeton India Short Term Plan.”
As will be apparent from the following returns analysis, our call of investing in Short Term Plan with shorter average maturites ( specifically Templeton India Short Term Plan & Religare Short Term Plan- Refer our PPT recommendation of April 17’2009 & our E mail sent on April 25 which is reproduced above) has paid rich dividends. As the long end of the curve started inching up, even the short end of the curve retraced its early gains and yields inched up by 40-50 bps in the past 30-45 days.
Most of the short term plans which were aggressive in their average maturity profiles have shown marginal positive or negative returns since April 22’2009, Templeton India Short Term Plan & Religare Short Term Plan have been the shining performers with higher single digit figure returns in the same time horizon.
|
S. No. |
Mutual fund |
Date |
Current Date |
Period |
% Return |
|
1 |
Templeton India STP -IP |
22-Apr-09 |
09-Jun-09 |
49 |
8.17 |
|
2 |
Religare Short Term Plan – IP |
22-Apr-09 |
09-Jun-09 |
49 |
5.13 |
|
3 |
ICICI Pru Short Term – IP |
22-Apr-09 |
09-Jun-09 |
49 |
-1.95 |
|
4 |
DWS Short Maturity Fund – IP |
22-Apr-09 |
09-Jun-09 |
49 |
0.61 |
|
5 |
Kotak Bond Short Term Plan |
22-Apr-09 |
09-Jun-09 |
49 |
-0.19 |
|
6 |
Birla Sun Life Dynamic Bond Fund |
22-Apr-09 |
09-Jun-09 |
49 |
-1.71 |
Inspite of the increase in yields in 1/2/3/5 years segment ( as is evident from the chart below), these two schemes have been able to deliver above par performance for the same period due to their defensive strategy, higher yields & lower average maturities:
|
Segment |
Yield (May beginning) |
Yield (June beginning) |
Increase |
|
1 year AAA |
5.80% |
6.20% |
0.40% |
|
2 year AAA |
6.45% |
6.65% |
0.20% |
|
3 year AAA |
7.10% |
7.40% |
0.30% |
|
5 year AAA |
7.60% |
8.18% |
0.58% |
Other Scheme Attributes of Templeton Short Term Plan:
Corpus as on May 31’2009: Rs1104.21 crs
Average Maturity 0.87 years
YTM ( in %) 8.82%
Modified Duration 0.77 years
|
Composition by Assets |
|
|
Corporate Debt |
56.18% |
|
Money Market Instruments |
8.98% |
|
Securitised Debt |
27.14% |
|
Call, Cash & Other Current Assets # |
7.70% |
|
Composition by Rating |
|
|
AAA/P1+/A1+/AAA (SO)/LAAA (SO)/P1+ (SO)/LAAA/AAA (ind) (SO)/F1+ (IND) (SO)/F1+ (SO) |
45.01% |
|
AA+/AA+ (SO)/LAA/LAA+/AA (SO)/AA (Ind)/LAA- |
52.75% |
|
A |
2.24% |
RELIGARE SHORT TERM PLAN: Current Corpus : approx: Rs.2000 crs
Despite increase in yields at the short-end spectrum and incremental addition to corpus during this period ( of close to Rs.700 crs), Religare Short Term Plan has managed to deliver day-on-day positive returns. The Fund increased its cash and cash equivalents exposure during this period while adding incremental money market exposure. This has helped protect the downside for investors.
Religare continues to run the short term defensively prior to advance tax payments.The Fund Manager would look to increase duration once the advance tax payments are out of the way since they believe that liquidity conditions would continue to remain easy. LAF balance have been averaging more than 1 lakh crore on a daily basis while incremental credit-offtake is negative so far. A sharp pick-up in credit looks unlikely till the beginning of the busy season in October and there may be a correction in short term rates once the market aligns itself to that fact.
As mentioned on my Blog yesterday, most of the negatives on the short end are behind us. Possibility of rate cut coupled with huge liquidity hangover & maybe positive announcement in the Budget on Fiscal consolidation through disinvestment & 3G auction may act as booster in the short end & bring down further rates at the long end & with that even the shorter end.
Hence, I would once again reiterate my recommendation of investing in Short Term income Schemes ( with lower average maturity) like Templeton India short Term Plan & Religare Short Term Plan with 4-6 month investment horizon. Besides Arbitrage, I do not forsee ( with the exception of the schemes mentioned above) any other asset class to outperform liquid plus schemes ( which are posting lower & lower returns of close to 4.50 to 5.50% p.a. & likely to go down further if RBI announces further rate cuts). Even RBI’s statement of sucking out excess liquidity does not give right signals to the debt markets for the longer end of the curve. Closer to advance tax outflows on June 15 & already higher yields even at the short end should be treated as opportunities for investing in the said schemes.
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