Birla Sun Life Short Term is a stand-out in the 'Short Term Bond' category. Fund manager Prasad Dhonde has done an excellent job in managing duration. Maneesh Dangi, Co-Chief Investment Officer at Birla Sun Life Asset Management Company explains the workings of the fund.
The short-term fund is one of the largest amongst its category peers and has witnessed significant flows towards the end of 2015. Could you take us through any impact that the relatively larger fund size could have on the management of the fund?
The dynamics of our debt market are such that large flows normally aid and facilitate in block buying and better pricing abilities when it comes to investing in corporate bonds. Additionally, the fund takes exposure to government securities, and highly rated corporate bonds which are very liquid.
Given that the taxation for fixed income funds provides the long-term capital gains benefit only for investments of 3 years and above, there is higher stickiness of assets than ever in the past.
Overall, the portfolio is more accrual oriented and has little impact of flows on the style of management.
At the start of the year, SEBI came out with new regulations regarding investments in debt instruments. How has that impacted the fund's allocation pattern?
The fund has always been well diversified with some degree of freedom to invest in instruments of choice across high quality issuers.
The recent SEBI guideline restricting exposure to HFCs and NBFCs up to only 30% of the AUM did not have much of an impact on this fund as the exposure of the fund to G-Secs and SDLs up to 5 years of maturities was increased from the first quarter of calendar year 2015. This active management of allocation paid off very well.
Similarly, the regulation regarding the restriction on the minimum number of issuers to be kept in the portfolio has had little impact on the fund given the better diversification.
The modified duration was taken down to 0.88 in July 2013 during the liquidity crunch to around 2 years this year. Take us through your thought process when managing duration.
BSL Short Term Fund has historically been managed with a cap on modified duration ranging from 2–2.5 years. Whenever the fund house has a strong and constructive view on duration we take the modified duration of the fund up to the specified cap and whenever we believe that our view has played out, we tend to reduce the duration.
The idea in managing this fund is to look at various curves available within the specified mandate, accordingly we move across asset classes and curve points.
Typically, high proportion of the total assets (~30% - 40%) in the portfolio are deployed in the 1-3 years instruments with ladder like maturity built in (i.e. allocations to up to 6 months instruments, 6 months – 1 years instruments, 1-2 years, 2-3 years etc). Depending on the bullishness of our duration view, the allocation to 4-5 years maturity bonds is decided. The investor profile of the fund is monitored regularly to factor for liquidity and cash in the portfolio.
We also work closely with our investors and partners, which also helps us gauge the sentiment and the expected cash flows ahead of the market as well as many times guide the investors across our funds.
How are you playing that going forward?
We continue to remain constructive on duration with a base expectation of 25 bps rate cut in the coming year with a decent probability of another 25 bps cut if GDP growth struggles to come back meaningfully.
Irrespective of the above, this fund stands to be the biggest beneficiary of the change in the liquidity stance taken by the central bank towards improving liquidity in the system.
Recently the fund increased its exposure to the NBFC/HFC space to augment the carry and also to benefit from expected fall in term premium. We expect structural liquidity measures adopted by the RBI to significantly benefit the short-end of the yield curve (up to 3 year) due to lesser ask for term premium.
What factors are you watching?
Going ahead, the path of CPI inflation, global economic conditions and a good monsoon remain the key factors to watch out for.