PRAMERICA MUTUAL FUND SCHEMES

I have been recommending some of the debt schemes of Pramerica AMC since their inception. Fund Manager has performed very well even in the most trying periods of debt markets & rising interest rate scenarios. One of the schemes whose strategy is similar to that of Pramerica Treasury Advantage Fund (TAF) was launched in October 31’2011. The said scheme has a dual strategy of capturing high accrual 12 month papers & drawing down on their maturities & buying 15-18 month papers & capturing capital gains due to roll down effect. Besides that, as the name suggests viz. PRAMERICA CREDIT OPPORTUNITIES FUND, they would be having some play on some credit plays.

 

Most of the times credit opportunities denote that the Fund Manager would invest in lower quality papers and take some credit calls. However, it is not necessarily the case every time. In this case, the Fund Manager is likely to play on those credits which have upgrade possibilities (like one of their investments in Future Capital which was upgraded recently; giving rise to good capital gains) and such similar stories besides only taking credit calls. This helps the portfolio construct in two ways viz. 1) gives higher accrual at the time of investment & 2) gives rise to capital gains in case of upgrades & subsequent compression in yields of these papers.

 

 

 

I would strongly advise investment in the said scheme with such high YTM with one year investment horizon. I would also advise investment in all debt schemes of Pramerica AMC with following investment horizons:

 

PROFIT BOOKING IN G SECS

I had started recommending investing in G Sec schemes on weekly basis since July 29’2011. I had reiterated this call on various dates viz. August 09’2011 & September 14’2011 & giving reasons for my belief as to why GILT yields will ease off inspite of several rate hikes by RBI during this period. I had also mentioned that in the near future, RBI will have to refocus on growth (which has started coming off very rapidly which is evident from the declining IIP numbers-latest IIP  number announced today: YoY: – 5.1% in October 2011 v/s 11.4% in October 2010 ; lowest in last 28 months) & start infusing liquidity (which is happening by conducting almost Rs.25,000 Crs of OMOs & also rumours of CRR cut, etc) which will soften the yields of 10 year benchmark.

 All the above is coming true which is evident easing yields of 10 year benchmark from a high of 9% to currently below 8.50% levels (8.47%). This has happened sooner than expected with some more positives yet to happen like softening of inflation numbers, further action by RBI on infusing liquidity, much lower than expected growth numbers, etc. Hence from now to maybe January (before the announcement of Budget & Fiscal numbers), there is further scope of yields easing to between 8.25% to 8.40% levels.

Post the shocking October IIP numbers, RBI will have to start making some noises on reviving economy with some news on infusing liquidity in the system. This will give some more impetus and aid yields to ease off further from these levels.

However, following  factors will have an adverse impact on the fiscal numbers & will put a halt on the softening of the benchmark yields, putting an upward pressure sometime post Budget:

• with slower economic growth, revenue receipts of the Govt from direct & indirect tax collections will suffer,
• disinvestment of PSU stocks is on the back burner due to negative equity market sentiments creating further pressure on Fiscal numbers
• State elections & paralysis of Govt policies  is adversely impacting both FDI & FII inflows

We are in a similar situation like December 2008/January 2009 when yields eased from 7.50% in November 2008 to a low of 5.50% by December 2008; triggering speculation that yields will ease off below 5% mark. I had given an investment call in November & a disinvestment call by December 2008 as investors had generated almost 25% absolute returns in a span of one month. However, industry actually gave an investment call in January 2009 when the story was already over & from then on, yields only started inching up; thereby creating negative portfolio returns & eroding all the positives generated between November & December 2008.

Most of the industry players have started giving an investment call in G Secs at current levels. However, I personally feel that there is very limited story left in G Secs from current 8.47% levels to maybe below 8.30% levels with an upward bias post February Budget announcements once Fiscal numbers are announced. Also I had mentioned that this was only a trading call & one will have to be nimble footed in exiting at the right time.

Hence, those who had invested based on the strategies mentioned on various dates should think in terms of booking profits at every stage of easing off of yields from now to January 2012.

Returns P.A. as on December 11’2011	7 days	14 days	1 month
Average Returns of all LT G Sec Schemes	23.81%	53.02%	34.58%

RETURNS THRU WEEKLY SIP FROM VARIOUS DATES RECOMMENDED BY ME ARE:

Birla Sun Life G Sec Fund – LT	29-Jul-11	09-Dec-11	XIRR	13.21%
Birla Sun Life G Sec Fund – LT	12-Aug-11	09-Dec-11	XIRR	14.31%
Birla Sun Life G Sec Fund – LT	16-Sep-11	09-Dec-11	XIRR	20.78%

 

 

 DISCLAIMER

MY RECOMMENDATIONS

I have been recommending various debt schemes from January onwards including investments in GILT schemes on a systematic basis. These schemes were recommended based on some long term strategies which were being followed by these AMCs & have worked successfully even in rising interest rate scenarios. During this period from January to November, RBI raised benchmark rates by 200 bps. Inspite of these hikes, schemes recommended by me have delivered excellent returns based on the strategies which were discussed in my various notes (please visit www.msjcapital.com for detailed notes correlating with dates mentioned below on all these recommended schemes & strategies).

 I wanted to analyse all my recommendations in light of rising interest rate scenario, rising inflation, etc & also figure out whether the Fund Managers’ stuck to their strategies during these difficult times faced by the debt markets. As can be seen from the returns below (point to point from the dates on which I recommended these schemes) both my beliefs in the Fund Managers’ and their strategies have worked out well and generated handsome returns for all my esteemed clients. I had also recommended investment in G Sec schemes thru SIP due to slowing economic parameters & with a belief that at some point in near future, RBI will shift focus from managing inflation to managing slowing economic growth & will offer an opportunity for making some trading profits. When I started recommending this strategy in July 2011, benchmark yield was 8.47% on July 29’2011. It touched a high of almost 9% on November 15’2011 and is currently quoting at 8.53%. Weekly SIP during this period generated following returns:

 

 

 

 

TEMPLETON INDIA CORPORATE BOND OPPORTUNITIES FUND – NFO

Franklin Templeton is one Fund House which has given solutions at every bucket of the yield curve. All that the investor needs to do is identify the investment horizon of their cash flow and plug it in with one of the schemes of Franklin Templeton keeping in mind their average maturities and exit load issues. Once the investor has done this exercise, the second step is to know the captured YTM of the respective scheme less the expense ratio and they would be reasonably certain of what returns they should expect post their investment horizon of say 3 Months/12 Months/18 Months, etc. If there are rate hikes in the intervening period, returns expectations should be adjusted for this (however still with positive bias on the portfolio returns scenario).

 Most of the Debt schemes of Templeton play on the following 3 stories (combination of any two or three of the stories):

1. High Accruals (or even low accruals if interest rates are on the lower side) & drawing down on maturities of this accrual
2. Roll down effect after (after 12 Months, 18 Months, paper becoming 6 Months paper & giving rise to capital gains if the yield curve is even slightly steep) &
3. Identifying sweet spots on the Yield Curve which offer maximum spreads and future compression possibility

However, TICBOF will play on one more stories besides the above 3: viz:

1. Bull steepening: going ahead TICBOF will play on one more story which is called Bull Steepening. Yields at the shorter end of the curve could come down more rapidly than the longer end, presenting a better opportunity of capital gains in 1-3 year corporate bond segment

Fund Manager feels that there is no scope for investment at the long end G Secs due to rising interest rate scenario and fear of higher fiscal deficit. Also, due to more demand by Insurance companies, FIIs, Banks, EPFO etc, very little spread will be available in the PSU bond segment.

However, due to following factors, spreads in AAA & AA rated Corporate Bonds in 1-3 years & 2-5 year segment are much higher and can in future give rise to capital gains due to the abovementioned impact of BULL STEEPENING:

• Higher Spreads in Corporate Bonds of almost 200-250 bps in 2-5 year segment
• Economic slowdown & lower credit off take to help in spread compression in this segment of the yield curve
• Fund Manager will be able to capture very high accruals between 10.50% to 11.00% p.a.
• Higher base PLR of banks will force corporates to borrow in the NCD market, giving ample opportunities to Fund Manager to select & choose
• Hopefully, inflation will come under control going forward &
• With that RBI will concentrate on growth & not inflation going forward by infusing liquidity in the system

Hence, with debt market story panning out as envisaged (peaking of interest rates, lower inflation numbers going forward, lower economic growth & lower credit offtake, etc) will augur well for investing in this segment of 2-5 year corporate bonds and earn very healthy double digit figure returns over next 3 years.

I would strongly recommend to invest in the said scheme NFO with 30-36 month investment horizon as there will be exit load in place for redemptions before 30 months as follows:

• 3% if redeemed within 12 Months of allotment
• 2% if redeemed after 12 Months but within 24 Months of date of allotment
• 1% if redeemed after 24 Months but within 30 Months from date of allotment

PARTICIPATE IN EQUITY PERFORMANCE WITHOUT LOSING SLEEP

 

DISCLAIMER