Ride the tide
The recent bond market rally has increased the attractiveness of STPs. Going forward, short-term bond funds will continue to be a good alternative to liquid funds.
By TNN |
A lot has changed since ET last reviewed fund managers in the debt space. Since then, the debt market has witnessed a sharp rally, led by the reluctance of the Fed to hike interest rates and a bullish bond environment across the globe. So, how have our bond fund managers fared in this phase?
After all, with the bond market rallying since the middle of the July-September ’06 quarter, fund managers can’t blame the market anymore. The benchmark 10-year G-sec yields have fallen from 8.1% per annum at the beginning of the quarter to 7.7% per annum as of September 30, ’06. They touched a high of 8.4% during the quarter.
In the latest ET Quarterly MF Tracker, around 52 schemes were rated. Among short-term plans (STPs), there were five ET Platinum funds — Reliance Short Term, DSP Short Term, Tata Short Term Bond, DWS Short Maturity and Principal STP. Murthy Nagarajan is responsible for Tata Short Term Bond, while Suresh Soni manages DWS Short Maturity.
Debt funds as a category gave a return of 1.7% during the September ’06 quarter. Among the top funds, DWS Short Maturity gave a return of 2%, followed by Reliance Short Term, Principal STP and FT ST Income, which gave a return of 1.9% each. In the past one year, the average debt fund returns have been 4.9%, while Reliance Short Term, DSP Short Term, Principal STP and Birla Bond Plus Retail managed to give 6%-plus returns.
A combination of good interest rate and tactical trading calls helped ET’s Platinum funds to maintain their dominant position within the debt space. Some debt managers who had expected a compression in yield spreads in the one and two-year segments, benefitted from the rally in the bond market. Some Platinum fund managers had indicated in the last quarter that they were quite bullish on spreads narrowing in the one to two-year maturities.
ADVERTISEMENT
One-year AAA-rated corporate paper rates fell to around 7.7% per annum from 8%-plus per annum levels in the last quarter. Some tactical trading calls made by fund managers also worked in their favour. Mr Nagarajan says, “Given our view that interest rates had bottomed out when 10-year yields had touched the 8.37% level, we had invested 5-10% of our portfolio in G-secs, providing a kicker to bond fund returns.” Principal STP had also increased its exposure in longer tenure corporate bonds and G-secs, which boosted fund returns. In the past three months, Reliance Short Term has been making fresh allocations in medium-term bonds to increase the gross yield on the portfolio, as well as some allocations in Mibor-linked floaters to benefit from higher Mibor during tight liquidity.
Investments in Mibor-linked papers were done at a time when spreads were attractive; this has helped to maintain higher returns with a very low duration risk by using overnight index swaps (OIS). The rally in the bond market also played a definite role in its success.
Sujoy Das, who manages DSP Short Term fund, brought down the average maturity of the fund, which allowed it to hold a higher cash component. This helped the fund to tide over redemption pressures during end of the quarter and stay invested. Mr Das believes that credit spreads could narrow down in the one to two-year segments. He also feels that yields could drift lower because of a drop in issuances in these segments.
Sandeep Bagla of Principal STP is quite bullish on the one-year maturity. He believes it offers investors an opportunity to earn decent spreads over money market rates and also ensure higher capital gains if they hold for 3-6 months.
The fund typically buys into higher duration paper and earns higher interest rates; as the holding period falls, the fund earns capital gains accruing from the lower yields. This is because after 3-6 months, the one-year paper becomes a nine-month or six-month paper which attracts lower yields.
ADVERTISEMENT
Hence, STPs are very attractive options for investors looking for safety, while earning higher returns than liquid funds. Going forward, debt fund managers continue to advocate short-term bond funds as a good alternative to liquid funds, with decent margins in terms of returns.
Johan Mundat & N Sundaresha Subramanian
Download
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
Download
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
ADVERTISEMENT
