Management
Canara Robeco Income has been single-handedly managed by its portfolio manager, Ritesh Jain since April 2008. Prior to Canara Robeco Mutual Fund, where he is designated as Head-Fixed Income, the portfolio manager was associated with Kotak Mahindra Asset Management Company. He has overall 10 years of experience in the fixed-income research.
Investment Strategy
The fund is a dynamically managed ‘Intermediate Bond’ fund. The Morningstar Intermediate Bond Fund category includes funds with average maturities between 3-7 years. The portfolio manager gives significant importance to macro drivers and thereby forms a view on interest rate movements. Securities are identified based on the interest rate view; also, emphasis is laid on the liquidity aspect. We believe the fund’s performance is primarily driven by the portfolio manager.
The fund has a mandate to invest 80-100% in fixed-income securities and 0-20% in cash and money market instruments. However, the fund’s 100% cash exposure between January-October 2008 period (global financial markets turmoil led by subprime mortgage fallout) surprised us as it was not in line with its stated investment mandate. On being quizzed about the same, the portfolio manager stated that the fund can be entirely invested in debt securities and cash, depending on his view on interest rate movements. The manager also clarified that the fund house has initiated a process to change the investment mandate of the fund.
We would have liked the fund to either follow its investment mandate or for the investment mandate to be suitably modified before making the aforementioned investment decisions.
In the present scenario, the fund invests 0-40% in government securities, 0-40% primarily in public sector units’ bonds, owing to the fund’s strategy of avoiding credit risk and rest 0-20% is invested in cash.
Performance
Thanks to its favorable security selection and the manager’s active investment approach, the fund generated 11.1% annualized return, as compared to 6.6% average return delivered by its category peers, during the last five years through the end of August 2009.
In terms of risk rating, the fund performed well too. Its five-year Morningstar risk rating is average, while on a three-year period, its risk rating is below average.
As of July 2009, the fund had 32% exposure in AAA rated bonds with higher allocation to Power Finance Corp. (15%) and LIC Housing Finance (12%), which are yielding attractive returns. The Fund had 60% of its corpus invested in cash and money market instruments.
During the month, the manager cut the fund’s maturity from 7.5 yrs to 2.95 yrs, owing to rising interest rate scenario, thereby investing 45% of corpus in papers with a 0-3 month maturity.
Costs
The fund’s expenses at 2.05% were quite higher, as compared to its peers’ average of 1.65%, owing to the higher churning of the portfolio. We think the fund’s expenses must be in line with peers as higher expenses eat way returns, especially more true for fixed-income funds as their returns are relatively lower as compared to equity funds.
Conclusion
The fund boasts of an impressive performance on both the risk and return parameters. However, its failure to adhere to its stated investment mandate is disconcerting. We would also like the management team to rationalize the fund’s expenses.