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Friday, 22 February 2013

IDFC DYNAMIC BOND FUND

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Call 0 94 8300 8300 (India)

Launched in June 2002, IDFC Dynamic Bond Fund has had aranking of CRISIL Fund Rank 1 since September 2012. For the past six quarters, the fund was also in the top 30 percentile of its peer group (CRISIL Fund Rank 1 and CRISIL Fund Rank 2).

The fund is managed by Suyash Choudhary, head ( fixed income), IDFC Mutual Fund.

IDFC Dynamic Bond Funds average assets under management ( AUM) for the quarter ended December rose to 2,387 crore, against 128 crore in the quarter ended December 2011. The long- term income fund category recorded asix- fold jump in AUM, primarily due to expectations of interest rates softening. Bond prices ( fund net asset value, or NAV) and yields move in opposite directions; a fall in interest rates would result in a rise in bond prices and boost longterm debt fund NAVs ( returns).

Investment style The fund plans to manage the portfolio through exposure to the money market and debt instruments, depending on market conditions. According to the stated asset allocation, IDFC Dynamic Bond Fund can allocate the entire portfolio to money market securities and debentures with residual maturity of less than one year. It can also invest up to 90 per cent in long- term debt instruments.

Risk- return attributes The fund has outperformed the benchmark CRISIL Composite Bond Index and the category in the six- month, one-, twoand three- year time frames.

Through the past year, it has delivered 13 per cent returns, against nine per cent and 11 per cent by the benchmark and the category, respectively.

Though the fund has been more volatile than its peers, it managed to outperform those on a risk- adjusted basis in the previous three- year period, indicated by its Sharpe ratio of 2.83, against the categorys 2.69.

Duration management The fund has actively managed its duration ( maturity) across market cycles. In 2009, when the yield on the 10- year government security rose from 6.26 per cent to 7.73 per cent, the fund reduced its maturity from 14 years to 0.6 year. With the Reserve Bank of India ( RBI) raising key policy rates since March 2010, the fund reduced its average maturity from eight years to 3.7 years at the end of December 2011. From July 2012, it increased its maturity steadily, in line with expectations of an interest rate cut by the central bank. The dynamic duration management helped the fund outperform its peers.

Portfolio analysis In terms of portfolio allocation, the fund invested in collateralised borrowing and lending obligation in May 2009, when interest rates started rising. In 2010 and 2011, the fund manager invested across government securities, certificates of deposit, non- convertible debentures and bonds, based on the market scenario. In 2011, when the yield on the 10year government security rose from 8.14 per cent in March to 9.07 per cent in October, the fund was primarily invested in certificates of deposit, nonconvertible debentures and bonds.

In March 2012, when oneyear certificate of deposit rates were at their peak, the fund increased its exposure to this category to 69 per cent. However, in August 2012, it did away with this exposure completely. Since then, the fund has maintained high exposure to government securities, anticipating an interest rate cut by RBI. On January 29, RBI cut the repo rate by 25 basis points. During the threeyear period ended December 2012, the fund invested 86 per cent of its portfolio in the highest rated papers (AAA/ A1+), as well as government securities.

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