Morningstar's senior fund analyst Nehal Meshram looks at three gilt funds from different fund houses. Though she assigns the identical rating to them, here is her take on each.
ICICI Prudential Gilt Fund Growth
The fund has the necessary qualities to make a difference over the long term.
- CATEGORY: Long Term Government Bond
- ANALYST RATING: Bronze
- STAR RATING: 5 stars
- DATE OF ANALYSIS: June 2018
- FUND MANAGER: Rahul Goswami
- CREDIT QUALITY: High
- INTEREST RATE SENSITIVITY: Moderate
ICICI Prudential Gilt remains an ideal choice for investors seeking to invest in long-term government bond funds.
The objective of this fund is limited to generating returns through investment in long dated debt securities issued by the government. The fund’s investment strategy is well-complemented by Goswami’s experience in managing duration strategies. We think he ranks among the best in the industry on the duration management front.
That said, the investment strategy’s success depends largely on Goswami’s skills, which means there is key-person risk here. However, the AMC appointed Anuj Tagra in 2013 as co-manager. He is dealer cum co-manager and has sufficient expertise in the related domain area. Goswami is supported by a large investment team, all of whom bring unique perspectives to the fund.
Fundamental research forms the crux of the strategy. Goswami analyses the macroeconomic scenario to predict the direction of interest rates. The interest-rate call, shape of the yield curve, and anticipation of yield-curve movements form the basis of portfolio positioning. Spread analysis is integral to the strategy, as Goswami has regularly found opportunities in less-travelled corners of the gilt segment such as state government bonds. He is focused mainly on medium- to longer-term trends but has displayed an ability to combine them with shorter-term cyclical considerations to build portfolios that are well-positioned to take advantage of all market conditions. He is also willing to take big bets against the norm if he believes the risk/reward is favourable. We believe his caliber and research-intensive approach are well-suited to such moves.
Long-term gilts display greater sensitivity to interest-rate changes, with a rise in rates affecting the fund’s performance adversely. However, our thesis is driven by a solid process backed by a robust team, and we believe Goswami’s research-driven approach should hold investors in good stead. But we need to see improvement in the fund’s expense ratio, which is relatively higher than long-term government bond Morningstar Category peers.
Reliance Gilt Securities Fund -Growth
An experienced team with a well-executed strategy but need to see improvement on the fund’s expenses ratio.
- CATEGORY: Long Term Government Bond
- ANALYST RATING: Bronze
- STAR RATING: 5 stars
- DATE OF ANALYSIS: December 2017
- FUND MANAGER: Prashant Pimple
- CREDIT QUALITY: High
- INTEREST RATE SENSITIVITY: Moderate
Reliance Gilt Securities Fund has regained its position with an active-duration style of management.
Pimple has skillfully exhibited the strategy by actively managing the portfolio better than many of its Morningstar Category peers. The fund typically maintains a 6-to-9 year duration, which is higher compared with its category peers. The main appeal in this fund has been the execution of the strategy.
Pimple adopts a two-pronged strategy to manage this fund. The investment team first develops a view on interest rates, and then integrates these views to build core and tactical position based on the fund mandate. While 60%-80% of the fund’s portfolio reflects the strategic long-term view, 20%-40% of the portfolio is invested tactically to take advantage of changes in short-term interest rates. The process is robust with an overlay of active trading executed through government securities.
Pimple is a competent manager and is supported by a highly experienced, adequately resourced, and stable investment team which adds to the fund’s appeal. Amit Tripathi, CIO of Fixed Income, plays a supporting role in terms of determining the overall fixed-income strategy.
The team has managed the duration side of the portfolio extremely well based on the macroeconomic outlook. The fund’s otherwise above-average performance track record is slightly dimmed by its high expense ratio.
The strategy makes the fund a fairly volatile proposition. Indeed, its standard deviation is higher than that of a typical peer in the Long Government Bond category. Investors should note that longer-duration funds are highly sensitive to interest-rate movements. However, Pimple has demonstrated the proficiency in executing this strategy through active duration calls.
Kotak Gilt Investment Fund Growth
With an experienced team and robust investment process, we believe the fund has the ability to bounce back.
- CATEGORY: Long Term Government Bond
- ANALYST RATING: Bronze
- STAR RATING: 4 stars
- DATE OF ANALYSIS: November 2017
- FUND MANAGER: Abhishek Bisen
- CREDIT QUALITY: High
- INTEREST RATE SENSITIVITY: Moderate
The robust investment process, experienced team, and the declining expense ratio strengthened our positive view on the fund, resulting in an upgrade to a Morningstar Analyst Rating of Bronze from Neutral.
The strategy employs a robust investment process with an emphasis on safety and liquidity. It is a true-to-label fund, and the manager invests in a mix of government securities of varying maturities by actively managing the duration above 6.0 years based on his view on interest rates. The process is based on the team’s ability to combine long-term macroeconomic and market analysis with shorter-term cyclical considerations to build portfolios that are well positioned to take advantage of mispriced opportunities across the yield curve.
The core part of the portfolio is aligned more towards the long-term view of the fund, while the tactical part is more liquid and is used to enhance the running yield of the portfolio.
Abhishek Bisen manages this fund, and he has been with the fund house since October 2006. In our view, Bisen has the experience and capabilities to manage this strategy. He has built his reputation here with his duration strategies by making long-term, high-conviction bets. He is backed by a six-member investment team that includes two research analysts, two dealers, and a risk analyst dedicated to the fixed income. The presence of the fixed-income head--Lakshmi Iyer-- is a big positive, and her contribution gives the team an edge.
Duration plays and yield-curve positioning are the main sources of return. Over time, the manager seeks to add value through the less-frequented corners of the government-bond market such as state development loans to benefit from the additional spreads they offer compared with central government Treasuries. The fund has an inconsistent track record, with periods of stellar performance punctuated with bouts of sharp underperformance.
However, the underperformance is mainly due to its adherence to the fund’s style irrespective of market conditions. We also need to see further improvement in the fund’s expense ratio.
