In these uncertain times of policy making by central bankers globally, high yield credits are coming under pressure. In fact, we as a fund house have been wary that the commensurate spreads are not being earned on lower rated corporate bonds for quite some time. Further with the introduction of sectoral and issuer wise limits @25% and @10% respectively (12% subject to trustee approval), constructing an optimum portfolio for 3year FMPs has been difficult due to paucity of the minimum requisite issuers in the market. Accordingly, we suggest to consider accrual funds - Short Term Opportunities Funds which has the following characteristics:
· Minimum exposure to AAA corporate bonds/ sovereign papers /A1+ rated papers/cash and short term papers at 65%
· No investments below AA- rating
· Modified duration will not exceed 3.50 years
· Exposure to government securities is capped at 30%
Despite growth slowing down sequentially in the last quarter, rates have hardened across maturities and asset classes in the fixed income market. In our assessment there has been a confluence of factors contributing to the same. Spreads for non AAA papers have increased largely on account of fears of increased rating downgrades due to the worsening credit situation and leveraged balance sheets coupled with a reduced appetite for such papers in the capital markets. Spreads for even AAA corporate bonds have started to inch up on expected lines as supply for these papers increases in the run up to the busy credit season. Also with increased rupee volatility, FIIs who have been usually buyers in the 3yr segment have turned incrementally bearish. We had anticipated many of these moves and have broadly reduced our exposure to corporate bonds post September 2015 by increasing exposure to dated securities of Central government. Currently AAA Corporate bonds spreads are trading at a 2 year high (Post July 2013 crisis) as depicted in Charts below. Similar is the case with spreads on 2 and 3 years NBFCs as depicted in Chart 3. We anticipate RBI will cut rates by 50-75bps over the next 6-9months and thus in our view these bonds provides great accrual opportunity at current levels. Having said that we will maintain the discipline of not exceeding duration of 3.50yr.
Also This fund continuously will look for the non AAA space to seek opportunities where we believe that our investors are getting adequately compensated for the risk taken post completing our detailed bottom up analysis of the company and structuring our investments to ensure that risk mitigants are in place. However while we generally follow a bottoms up approach to credit underwriting we are cognizant of the tremendous challenges facing certain sectors and shall accordingly be wary of investing in companies belonging to the metals, oil and gas, and power generation sectors.
Thus we believe that a combination of spread compression in AAA corporate bonds, investments in selective carry assets and active duration play can potentially give investors a good experience over the short term
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