A good look at 3 credit funds

Morningstar's analysts look at three credit funds and assign Silver, Bronze and Neutral ratings.
By Morningstar Analysts |  11-02-19 | 

Franklin India Credit Risk Fund

  • Fund Manager: Santosh Kamath
  • Credit Quality: Medium
  • Interest Rate Sensitivity: Limited
  • Star Rating: 5-star
  • Analyst Rating: Silver
  • Date of Analysis: December 2018

The manager seeks to add value through security selection rather than making substantial adjustments to the fund's duration.

The investment approach relies on fundamental research; the latter entails combining both qualitative with quantitative analysis.

The manager attempts to avoid entities he views as offering a poor risk/reward trade-off.

An independent risk-management team ascertains the portfolio and company-specific limits, making the process holistic. We think this is a thorough and proven process with which the manager and the team are at ease.

Kamath’s pursuit of underpriced securities and those offering attractive yields often take him down the credit ladder, and the allocation to sub-AAA rated securities tends to be significantly higher than the norm. However, the research-intensive process, which involves acquiring an in-depth understanding of companies and their operations, helps mitigate the risks inherent to such an approach.

You can read the analyst note here.

HDFC Credit Risk Debt Fund

  • Fund Manager: Shobhit Mehrotra
  • Star Rating: 4-star
  • Analyst Rating: Bronze
  • Date of Analysis: December 2018

Erstwhile fund HDFC Regular Saving has been merged with HDFC Corporate Debt Opportunities Fund and the same was renamed as HDFC Credit Risk Debt in May 2018. The fund is categorized as a credit-risk fund, yet it has not witnessed any change in its philosophy.

The managers’ investment philosophy is centered on building a portfolio with safety and liquidity.

The duration range is determined through assessment of various macroeconomic factors, yield-curve positioning, and interest-rate. Furthermore, they have a highly experienced risk-management team, which is well integrated into the investment process.

The fund’s investment strategy lies in the manager’s ability to go down the credit curve to generate alpha.

In terms of duration, the manager maintains a moderate duration in the range of 2.5-3 years. The fund is well diversified with around 70-80 instruments across sectors. The individual security exposure is capped at 5% and the size of the bets decreases progressively as a company's financial strength and market cap decrease.

You can read the analyst note here.

Reliance Credit Risk Fund

  • Fund Manager: Prashant Pimple
  • Credit Quality: Medium
  • Interest Rate Sensitivity: Limited
  • Star Rating: 4-star
  • Analyst Rating: Neutral
  • Date of Analysis: December 2018

The focus on lower-credit quality is critical in this strategy, and, while constructing the portfolio, the manager invests in pure corporate bonds with a higher allocation towards sub-AAA rated securities.

Prashant Pimple also focuses on structured assets rather than simply going down the credit curve.

Given the nature of the fund, credit and liquidity risks are the major risks of this fund, and, hence, the manager has constructed a well-diversified portfolio with 50-60 issuers. To further mitigate the risk, the manager has not just focused on issuers but has also diversified on the basis of rating and maturity parameters. Pimple has adopted a strategy of laddering the maturity of the portfolio of underlying bonds where typically 30%-35% of the portfolio matures every three to six months.

You can read the analyst note here.

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