AN INVESTMENT OPPORTUNITY IN KOTAK CREDIT OPPORTUNITY SCHEME
Kotak Credit opportunity fund is aimed to optimize the returns with an optimal mix of duration buckets without diluting the credit quality to the extreme end of the credit curve.
Refer to my note published today on how Short & Long End of the Yield curves are moving in opposite directions; giving excellent opportunities to Fund Managers to capture higher yields at short end without increasing duration unnecessarily. As mentioned in that note, those schemes which will be able to capture higher carry in this tightness (which is going to be temporary) will benefit more than those who are already fully invested.
The product strategy is primarily to encash the extreme steepness of the bond curve where the differential between 1yr and 3yr which was 150 bps but has currently come down to almost 80 bps. Corporate yield curve has therefore started flattening from the steepness it experienced in the recent past. 1 year CP rates have gone as high as 7.25% (Tata Tele raised 1 year CP at this level). 1 yr CD trades are happening at 6.50% to 6.75% but 2.5-3yr levels are still trading at 7.30-7.50 band bringing the spread down to ~80 bps. The tightness is expected to stay till mid June 2010.
In simple language if one holds a two yr paper for more than 1 yr the carry is 100-150 bps higher then 1 yr rate and at the end of one year in case if rates go up more than 100 bps the HPR (Holding Period Return) will be close to YTM and if it doesn’t then the returns will be higher then the YTM because of the roll down.
Now, so far the said scheme has been able to create a portfolio with average maturity of ~2yr and Portfolio YTM of ~7.50% as they have taken 50% of the intended assets and the remaining we are in the process of creating.
Opportunity Ahead:
For the reasons mentioned in my today’s note for liquidity tightening in the month of June & possibility of systemic liquidity going in negative territory, there is every possibility of banks withdrawing from MFs; putting further pressure on the extreme short end of the curve.
The Fund Manager will look to accumulate ~1yr CP/CD/PTC in the current tightness and will expect to get ~7.50% YTM for the remaining portfolio. Post Mid June when the Liquidity will come back in the system the curve will become steep again which could lead to capital gains in the portfolio.
Secondly Post July 2010 Mark to market guidelines for more then 3 month CP/CD will hit and therefore the curve will become more steep as the liquid and Liquid Plus will reduce duration and there will be less takers for papers between 91-365 days maturities which will bring down the returns in the Liquid plus schemes and therefore products like Kotak Bond Short Term and Kotak Credit Opportunities Scheme will attract flows and the short end rates will either remain stable or come down which will benefit the scheme.
I would strongly recommend investment in the said scheme with one year investment horizon as there is exit load of 1% applicable if one redeems within one year from the date of investment.
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