Why DSP BlackRock Strategic Bond Fund gets a Neutral

By Morningstar Analysts |  30-05-18 | 

BlackRock Strategic Bond is a truly dynamic fund that implements a disciplined investment process that focuses on duration bets, credit selection, and spread analysis. But new managers at the helm is the reason it gets  a Neutral rating.

  • Category: Dynamic Bond
  • Credit Quality: High
  • Interest Rate Sensitivity: Limited
  • Fund Managers: Saurav Bhatia and Vikram Chopra
  • Star Rating: 4 stars
  • Analyst: Nehal Meshram
  • Analyst Rating: Neutral
  • Date of Analysis: May 2018
The investment process begins with the formulation of a macroeconomic outlook and is built around extensive research and strong risk-control measures. It has strict investment guidelines, and all investments are made after rigorous in-house research.

Duration calls, spread analysis, and credit selection underpin this fund.

Duration bets are a result of macroeconomic calls, where the team conducts detailed analysis of influencing factors such as gross domestic product, Index of Industrial Production, deposit/credit growth, liquidity, currency movements, and global factors.

It has a well-defined credit-risk-management process with robust screening based on parameters to identify securities from the universe. A detailed internal credit analysis is undertaken, with a strong focus on factors such as company management, track record, financial strength of the promoter group and corporate governance standards. While evaluating lower-rated credits, issuers are monitored closely and management meetings are held more frequently.

To strengthen the entire process, the team uses external resources such as sell-side research and credit-rating agencies and leverages on the expertise of its equity team to form a view on the creditworthiness of companies.

The risk and quantitative analysis team define the credit risk limits. This makes the process fully integrated with a rigorous risk-management approach, which helps its funds create long-term value.

The fund follows a dual strategy, where the portfolio could benefit in one of two ways: reduction in interest rates or an improvement in the overall credit cycle.

The fund is dynamic in nature and the portfolio duration has moved in the wide range of 1 year to 7.5 years.

The manager is prompt in making changes in the portfolio, based on the interest-rate cycle, to limit the impact on performance.

Last year in line with RBI's monetary and liquidity stance, the manager reduced the duration in the first half by trimming the exposure in government securities.

However, in the second half, the manager increased the duration again on the expectation from the government in meeting the fiscal deficit target, but again in December it cut down duration with the increased government borrowing numbers.

The fund maintains a rather controlled approach to dynamic portfolio management and invests mainly in good-quality AAA rated bonds.

The fund held some sub-AAA rated exposure in recent times, mainly in perpetual bond of the State Bank of India. The fund manager does not shy away from taking higher allocations in cash if he does not see enough opportunities or even use it strategically to tide over volatility. For instance: Between December 2017 and February 2018, the fund was run more like a money market fund and had maintained high cash and cash equivalents to the tune of 25%-30%, considering seasonal liquidity tightening.

A truly dynamic fund but with new managers at the helm is a cause of concern.

Pankaj Sharma was co-managing this fund along with Vikram Chopra since July 2016; however, he relinquished his responsibilities of this fund to focus mainly on credit funds. The fund is now jointly managed by Saurav Bhatia and Vikram Chopra.

The fund house has seen restructuring in the team since 2016. The fund was earlier managed by Dhawal Dalal, head of fixed income from May 2003 to July 2016. Following his departure, Pankaj Sharma took over the position, having served as head of risk and quantitative analysis for almost 13 years. Although he started managing this fund in 2016, his tenure with the firm dates back to 2003 and he has 23 years of overall work experience. The fund house also witnessed departure of Marzban Irani in 2016. Since then they have strengthened their team by hiring Chopra and Kedar Karnik in 2016, and Bhatia and Rahul Vekaria in 2017.

They also hired additional research analyst, with this they now have five fund managers, two research analysts, one dealer, and an independent six-member risk management team which ensures free flow of ideas.

You can read the brief analyst note here.

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