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BOI AXA Corporate Credit Spectrum Fund- A new theme for Risk Enthusiasts
June 16, 2016

A detailed note on our pick from the debt gamut of funds which is recommended for our aggressive investors.


Author : iFAST Research



Fund Focus - SBI Magnum Midcap

BOI AXA Corporate Credit Spectrum Fund

A new theme for the Risk Enthusiasts

In the fixed income space, investors are currently divided between investing into traditional debt funds that construct a portfolio of highly rated companies vis-a-vis those funds that scout for opportunities in the credit space with the aim of generating superior risk adjusted returns.

The discussion on this topic has become intense since the default of Amtek Auto bonds which was part of an ultra short term and a short term fund in one of the fund houses in the industry. This, along with the continuous downgrading of JSPL bond which was again included in the portfolios of a few funds has created uncertainty around the credit opportunities funds among investors. However, we at iFAST Research would like to compare these funds to small cap/micro cap funds wherein, fund managers conduct an in-depth research to identify stocks in this space which are most of the times unknown and not widely researched. Similarly, in the case of Credit Opportunities Funds, fund management teams conduct intensive research and due diligence on the companies they wish to take exposure and have a strong conviction about the quality of the management and the business. By investing in these debt securities, fund managers will be able to potentially generate an alpha in the overall portfolio.

We are of the view that external ratings are not sacrosanct and it is not necessary that instruments rated below AA- are a taboo to be included in portfolios. Hence, reiterating our belief in this space, we have decided to focus on a fund whose portfolio is structured in such a way that it invests into corporate debts across the credit spectrum which includes investments into structured debt. The fund we are referring to is BOI AXA Corporate Credit Spectrum Fund, launched in February 2015. The fund is being managed by Alok Singh who has been managing this fund since inception and has over 15 years of experience in the fixed income fund management space.

The mandate of the fund states that it can invest a majority of the corpus into corporate debt across the credit spectrum. This can include rated, unrated instruments, and structured obligations of public and private companies. The fund manager also has the flexibility to invest 0% to 20% of the surplus into money market instruments, while exposure into Government securities and state development loans will be Nil.

The USP of this fund is the exposure into structured debt for which the fund management team is drawing on the expertise of a global investment management firm. In this scenario, the question that arises among the investors will be "What do we mean by structured debt and why would the inclusion of the same create superior risk adjusted returns in a portfolio?"

Structured Debt means that the fund manager will lend to well managed companies with a strong pedigree or companies with a good reputation in the industry, that are not eligible for traditional funding by banks or financial institutions.  Most of these companies have very strong parentage and reputed sponsors but by virtue of being either a new company or a holding company need flexibility in financing; for instance in tenor, type of collateral, repayment and interest payment scheduling etc. This will not be possible if the same companies try to borrow from traditional sources of debt in India. Hence, in the case of structured debt, parameters like future growth, profitability, cash flow generation capacity, attractive valuations and so on will be taken into consideration before deciding to provide credit. As the name suggests, debt is structured to suit the needs of the promoter and the dynamics of the business after careful and intense assessment of the business metrics by the investment and due diligence team. In a scenario wherein banks are grappling with NPAs and are in the process of cleaning up their books, structured debt is turning out to be a good alternative for India Inc.

Fund Manager Speaks:

"Considering the continuing recovery of growth in the economy, many companies and promoters would be looking for innovative capital solutions which are non-equity-dilutive to enhance the value of their business. This fund invests in secured debt securities after detailed due-diligence of the sector, company, promoter and future prospects for the business to generate superior risk-adjusted returns for investors."

 Investment Strategy

"The Scheme's investment objective is to generate capital appreciation over the long term by investing predominantly in corporate debt across the credit spectrum within the universe of investment grade rating. The Scheme will also invest in the debt instruments where the fund manager believes that the capital structure needs or where broader market dislocation has created an opportunity to generate superior risk adjusted returns. The Scheme may also invest in debt instruments of companies requiring structured debt solutions where the fund manager believes investment in debt securities of such companies provides attractive opportunities and meets specific financing need of the issuer. The Scheme's investments are generally expected to comprise privately negotiated investments in debt or debt securities of public or private companies, including, bonds, debentures and asset-backed securities".

 Portfolio Analysis

A glance through the portfolio shows that the fund is true to its label as it is predominantly invested into corporate debt. The fund's initial allocation into corporate debt was 13.76% in March 2015 which has increased to 71.31% by May 2016 with the allocation into this instrument going as high as 94% in August 2015. During the time period March 2015 to May 2016, the average allocation into this instrument has been to the tune of 77.73%.

Market Cap

Among the corporate debt instruments, the fund manager started by investing into Power Grid Corporation of India and Steel Authority of India in March 2015, with an exposure of 9.98% and 3.78% respectively, both of which were rated as AAA. Since April 2015, the fund manager has started taking an exposure into corporate debt having ratings of AA- and below and even unrated instruments. Over a period of 14 months (April 2015 to May 2016), the average exposure into AA- and below instruments along with unrated instruments has been to the tune of 58.59% respectively.

Market Cap

It is interesting to note here that Enzen Global Solutions Ltd. has been one of the top holdings of this fund since April 2015 with an average allocation of 15.59%. This is a global technology company which is into consulting services in the energy and utilities market. The company derives 90% of its profitability from business in the UK.

On the other hand, Liquid Investments has been the top holding of this fund since September 2015 with an average allocation of 15.53%. This instrument has been a part of the portfolio since July 2015. The company is the holding company for Analjit Singh and family, the promoter group of MAX India.

Another top holding of this fund is Bacchus Hospitality Services & Real Estate Pvt. Ltd. which had been a part of the portfolio since June 2015. The company is holding company of Ameera Shah and family, one of the promoters of Metropolis Healthcare, which is one of the top 3 players in the medical Diagnostic sector.

 Quick Facts about the Fund

Performance

Performance

Top 5 holdings as on March 2015 and May 2016.

Instruments Category Holding % (March 2015) Instruments Category Holding % (May 2016)
Canara Bank Certificate of Deposits 24.72 Liquid Investment And Trading Co Pvt Ltd ZCB 13.18
Vijaya Bank Certificate of Deposits 18.26 Enzen Global Solutions Pvt Ltd Corporate Debt 12.47
Small Industries Development Bank of India Ltd Commercial Paper 18.19 Resync Agro Pvt Ltd Corporate Debt 9.62
Power Grid Corporation of India Ltd Corporate Debt 9.98 Bacchus Hospitality Services & Real Estate Pvt Ltd Corporate Debt 8.79
Punjab & Sind Bank Certificate of Deposits 7.26 Bhavya Cements Ltd Corporate Debt 8.20

Performance

Our Take

A fund which is parking 60%-80% of its surplus into structured credit is a theme which is being played out by the fund house with no peers as of now in the industry. We know that one year is not enough to judge the track record of the fund, however, the way the fund has been managed with the help of the global consulting team and the due diligence being followed gives us the confidence in putting this fund on our radar.

We recommend the fund to our matured investors having an aggressive risk profile who understand the working of structured debt / mezzanine finance and have a time horizon of at least 3 years. One of the biggest risk of this fund is that considering the nature of structured debt, there is always the possibility of prepayments from existing investments which will give rise to re-investment risk. This in turn would impact the performance of the portfolio over a long term. Upgrades and downgrades will always be a part of such funds and a downgrade should not be confused with a default. This fund is strictly not recommended for the faint hearted, for whom any slight volatility will lead to sleepless nights.

As for those investors who are interested in parking their surplus into this fund, portfolio yield should not be the sole criterion for their entry into the same. We are positive that the portfolio construction that is being done is backed by a global team that knows the pros and cons of structured credit. We are also of the view that a pro-active fund management team that definitely understands the risks involved in such funds will help in generating superior risk adjusted returns for our investors in the long run.

Disclaimer:
iFAST and/or its content and research team's licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website.


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