AXIS CONSTANT MATURITY FUND
I had given a trading call in G Secs in a systematic manner from July 2011 (when 10 year benchmark was 8.50%)to November 2011 (when 10 year benchmark peaked at 9% levels). Thereafter I gave a disinvestment call from 8.45% levels on December 11’2011. I also mentioned in that note that the way one can not time the investment dates (in rising interest rate scenario), one will not be able to time disinvestment dates (in falling interest rate scenario) & hence, one should start disinvesting from 8.45% levels & disinvest at every drop in the yields. Thereafter, yields did drop to as low as 8.15% levels & is currently at 8.22% levels.
As you all are aware, though trading call was given based on movements in 10 year benchmark yields, it never gets fully priced in as most of the fund managers run different average maturities based on their assessment of the market & run average maturities ranging from 5-7 years. Hence, a trading call so far, was never fully implemented in true sense of the word due to different average maturities of these schemes.
However, as is the practice of AXIS MF, they have come out with a unique concept of CONSTANT MATURITY FUND which will replicate the maturity of the 10 year benchmark G sec by buying 9-11 years G Secs (including 10 year benchmark) & create an average maturity of as close to 10 years as possible. In this manner, any G sec trading/investment call can be executed thru this scheme rather than other schemes with varying maturities as explained above.
Now the question is whether timing of this NFO is correct or not & should one invest in the said scheme (when 10 year benchmark has already rallied from 9% levels to currently at 8.22% levels).
WHAT ARE THE POSITIVES GOING FORWARD FOR DEBT MARKETS:
- There has been some inflows from FIIs; thereby rupee has appreciated currently from a low of Rs.54/$ touched in November/December to currently quoting Rs.51/$
- Inflation numbers have gone below 8% mark for the first time in some time
- Due to rising rupee, even imported inflation will come under control; thereby reduce the inflation numbers going forward
- Rupee depreciation added fuel to fire in inflation numbers which remained near 10% levels even in September as rupee depreciated between July to August 2011. Hopefully, reverse will be the trend going forward
- RBI’s change of stance from only controlling inflation to focusing on growth
- GDP figure will be dismal breaching even 7% or 6.5% number; thereby aiding RBI to start focusing on growth more aggressively
- All these numbers will push RBI to come out with OMOs, CRR cut, Benchmark Rate cuts going foreword
- Credit off take numbers way below RBI’s expectations is leaving liquidity in the hands of the banks to chase G secs
- Inflation numbers will further ease off between January to March 2012 due to base effect & otherwise
- During rate cut cycles, 10 year benchmark has gone below REPO Rate. This has happened twice in past decade:
- December 2000-November 2001-REPO Rate cut by 150 bps/10 year benchmark yield fell by 307 bps
- July 2008-December 2008-REPO Rate cut by 250 bps/10 year benchmark yield fell by 450 bps. In both instances, 10 year Benchmark Yield fell below REPO Rate
WHAT ARE THE NEGATIVES FOR THE DEBT MARKETS GOING FORWARD: (This will help in creating an average in G Secs investments going forward
- Generally there is liquidity flow back into the country post December every year. However, March CD rates (quoting 9.50% in December & 10% in January) indicate otherwise
- There might be disappointment in the market if RBI does not tinker with any rate cuts in January Policy Review; which will give rise to some correction in benchmark yields
- Also, fiscal numbers in the Budget which will be announced in the month of March will be hugely disappointing
- Also, auction calendar is yet to get over & is in fact on the higher side due to more borrowing programme announced recently
Assuming that soften by 50-100 bps over next one year, an investor can generate following returns (assuming the Fund Manager captures 8.50% yield during NFO stage by having combination of 9-11 years maturity papers):
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17-Jan-12 |
17-Apr-12 |
17-Jul-12 |
17-Oct-12 |
17-Jan-13 |
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Months |
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Current Yield |
8.50% |
3 |
6 |
9 |
12 |
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Expected Yield
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-0.25% |
8.25% |
13.57% |
10.28% |
9.09% |
8.54% |
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-0.50% |
8.00% |
20.34% |
13.61% |
11.26% |
10.13% |
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-0.75% |
7.75% |
27.26% |
17.01% |
13.48% |
11.76% |
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-1.00% |
7.50% |
34.34% |
20.48% |
15.74% |
13.42% |
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Maturity Date |
Expense Ratio (Assumed) |
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17-Jan-22 |
1.50% |
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TO CONCLUDE:
I recommend investment in the said NFO which is closing on January 19’2012. One should allocate 50% of the allotted amount in the NFO & balance 50% over weekly investment on every Thursday (a day prior to auction every Friday) from now to March 2012. This will help in creating an average once again between 8.20% to maybe 8.40% levels. Disinvestment can happen once RBI starts to act on the rate cut cycle (this will be a separate call which will be given by me at an appropriate time in the future). This should be treated as a trading call once again.
Yield trajectory going forward (with some corrections from now to March) is on the downward side only. Hence, with one year investment horizon & by creating an average as mentioned above, an investor can earn decent double digit figure returns.
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