HDFC Corporate Bond Fund Direct Plan Quarterly Payout Inc Dist cum Cap Wdrl Opt INF179K01XB2

The following text is from June 13, 2023.

The investment philosophy here is to optimize returns without taking excessive duration or credit risk. Though Anupam Joshi takes duration calls, that is done with a measured approach without going overboard. This is mainly a small portion of the portfolio to generate additional alpha, while most of the performance is driven by selecting securities offering attractive yields within the AAA rated segment. As expected, the investment approach relies on fundamental research. It entails combining qualitative aspects with quantitative analysis. The investment team prepares the coverage list with a focus on the company management and track record, the financial strength of the promoter group, and corporate governance standards. Meetings with management are followed by rigorous quantitative analysis to get a measure of the company’s creditworthiness. The team studies the company’s cash flow and relevant ratios—leverage, coverage, and solvency. At this step, the team also draws on the expertise of its equity team.

The fund company uses a proprietary model in which qualitative and quantitative inputs are used to arrive at a credit score for each issuer. This helps managers determine issuer-wise exposure they can take, thereby acting as a risk-management tool for the individual portfolio and the fund company. The investment team lays more emphasis on risk control, focusing on balancing safety, liquidity, and return. We think the investment process is thorough and that the manager and team are at home with the process.

In line with the category’s investment mandate, the fund invests at least 80% of assets in corporate bonds having ratings of AA+ or above. Although the fund’s broader portfolio framework remained intact, the change in its category in 2018 led to some tweaks in portfolio construction. Since then the investment framework has remained consistent. Previously, the exposure to government securities was capped at 40% of the portfolio and manager was not permitted to invest in any security having residual maturity beyond five years. Now the exposure to government securities can go up to 28%, and the restriction of not investing in a security with residual maturity beyond five years is no longer applicable.

Anupam Joshi’s emphasis on liquidity and risk control is borne out by the fund’s portfolio, where almost 100% of assets are invested in AAA or equivalent rated securities. Papers issued by public sector undertakings such as NABARD, PFC, and REC continue to find a place in the portfolio. From the private sector, established names such as HDFC and Tata Sons, in which the manager has confidence, feature in the portfolio. On the duration front, the investment team believes that the interest-rate hike cycle is reaching its end. While the cut in interest rates would be gradual, the manager has been adding duration to the portfolio. As of April 2023, the fund’s modified duration stood at 2.70 years compared with 2.58 years in April 2022. Finally, Joshi will build cash when there aren’t attractive investment opportunities and to ride out periods of volatility and uncertainty.