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.