*investors should consult their financial advisors if in doubt about … · 2019-01-22 · however,...

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*Investors should consult their financial advisors if in doubt aboutwhether the product is suitable for them.

Why prefer a debt fund over traditional fixed income investment?

Better liquidity Tax efficient Allows daily participation in growth Reasonable returns Flexibility of investment horizon Hassle free Systematic Investments

Traditional fixed income investments may offer assured or guaranteed returns. However, investments in mutual funds is subject to market risks. 1

Why invest now in a debt fund?

Real rates* are attractive.

Professionally managed

Taxation efficient

Better return potential

2*Real rates are inflation adjusted returns. Spread between RBI’s repo rate and AAA rated bonds across the yield curve is in the range of 150 - 200 bps as on Dec 31, 2018. These may change from time to time. They look even more attractive when compared to RBI’s latest projection of inflation (CPI) for H1 2019-20 at 3.8-4.2 range

Credit spreads over last 10 years

Current AAA-AA spreads are neutral; however, AAA-A spreads are reasonable

Why invest now in a credit oriented debt fund?

Past performance may or may not be sustained in future. Fixed Income Funds are tax efficient on completion of 3 years holding period. Hence the comparable rates of 3 years returns have been taken into consideration.Source: Bloomberg. Data as on Dec 31, 2018.

Spread Between AAA and AA

Spread Between AAA and A

Maximum Spread 1.58 2.38

Minimum Spread -0.08 0.65

Average Spread 0.52 1.50

Current Spread 0.59 1.77

Spread Between AAA and AA

Spread Between AAA and A

Maximum Spread 1.80 2.55

Minimum Spread 0.04 0.69

Average Spread 0.53 1.53

Current Spread 0.57 1.65

3

-0.5

0

0.5

1

1.5

2

2.5

3

Jan

-09

Au

g-0

9

Mar

-10

Oct

-10

May

-11

Dec

-11

Jul-

12

Feb

-13

Sep

-13

Ap

r-1

4

No

v-1

4

Jun

-15

Jan

-16

Au

g-1

6

Mar

-17

Oct

-17

May

-18

Dec

-18

1 year credit spread

Spread Between AAA and AA Spread Between AAA and A

0.00

0.50

1.00

1.50

2.00

2.50

3.00

Jan

-09

Au

g-0

9

Mar

-10

Oct

-10

May

-11

Dec

-11

Jul-

12

Feb

-13

Sep

-13

Ap

r-1

4

No

v-1

4

Jun

-15

Jan

-16

Au

g-1

6

Mar

-17

Oct

-17

May

-18

Dec

-18

3 years credit spreadSpread Between AAA and AA Spread Between AAA and A

Current scenario:AAA-AA spreads are neutral; however, AAA-A spreads are reasonable.

Why invest now in a credit oriented debt fund?

Our expectation: AA spreads to widen especially due to tighter liquidity scenario & credit averseness due to ALM mismatches of NBFCs.

Our positioning: Given the spreads, the current* portfolio has higher allocation to AAA and A rated instruments.

Our strategy in current scenario:To have shorter maturity (“A” rated) instruments reflects the above market reality. We have added exposure inAA recently on widening of spreads and would convert from AAA/A1+ to AA on further widening of spreads.

Our credit philosophy:We take near term credit calls over 1-2 years rather than taking bold calls with 3-5 years.

And its Outcomei) Investing in tenure with better visibility of business cycle (important for lower rated credits).ii) Early maturities help improve liquidity of the fund and may facilitate exits with relatively lesser impact cost.iii) Lower average maturity may reduce the initial YTM of the fund. However, it results in lower volatility due to MTM.

* As on 31st Dec, 2018. The investment strategy/philosophy stated above may change from time to time without any notice and shall be in accordance with the strategy as mentioned in the Scheme Information Document of the scheme 4

About Principal Credit Risk Fund

For investors seeking capital conservation with reasonable income accrual along with low interest rate volatility

Endeavors to generate alpha through appropriate credit selection rather than calls on interest rates movement

Aims at higher daily accrual income with lower modified duration (typically between 1-2 years).

Efficiently aspire to tap mispriced credit across the credit spectrum with or without rating migrations*

Investors seeking to do asset allocation across various asset classes and have credit risk appetite but low duration appetite can look to invest in this fund

*Upgrades/Downgrades may or may not provide the alpha as markets are efficient to some extent. However, opportunities still exist for mispriced credits (for example, new capital market issuers, size of issue, credit enhance structures, regulatory changes etc.). The investment strategy stated above is the current strategy and may change from time to time without any notice and shall be in accordance with the strategy as mentioned in the Scheme Information Document of the scheme. 5

Healthy Gross YTM despite low average maturity of Principal Credit Risk Fund

Why Principal Credit Risk Fund?

Traditional Fixed Income Investment - SBI 3 years FD rates. Source: www.sbi.co.in, MFI Explorer for data on all the Credit Risk Fund offered in the Industry, Internal Analysis. Investments in FDs are insured by Deposit Insurance and Credit Guarantee Corporation (DICGC) upto a maximum of Rs. 1,00,000 (Rupees one lakh) for both principal and interest amount.Fixed Income Funds are tax efficient on completion of 3 years holding period. Hence the comparable rates of 3 years FD has been taken into consideration. Principal MF does not guarantee any returns on investments in this fund. 6

-

0.50

1.00

1.50

2.00

2.50

3.00

-

2.00

4.00

6.00

8.00

10.00

12.00

Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18

Gross YTM (Principal Credit Risk Fund) Traditional Fixed Income Investment

Avg Maturity (Principal Credit Risk Fund in years) [RHS] Avg Maturity (Industry Median in years) [RHS]

http://www.sbi.co.in/

Data as on 31st Dec 2018. Source: MFI Explorer for data on all the Credit Risk Fund offered in the Industry, Internal Analysis.

Why Principal Credit Risk Fund?

*includes A-/(SO), BBB+, BBB-, BBB/(SO) and Unrated

This would lead to relatively robust credit composition at slightly lower YTM of our fund.

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Higher allocation to AAA/AA+:This would convert to AA and below on expected widening of spreads.

We would endeavor to have no exposure in unrated/below A-rated exposure.

AAA/AA+ A1+/A1 AA/AA- A/A+ Other Rated*/Unrated

27.56

0

40.69

18.64

0

20.49

4.06

42.8

17.83

7.83

Principal Credit Risk Fund Industry Average

How we evaluate Credits? Investments are structured with a view for over 1-2 years rather than taking bold calls with 3-5 years. This

is primarily because:1) Beyond a point even the Issuer’s management and market analysts have very hazy outlook.2) Many changes like Regulatory/Structural/Global/Demographic/Technological etc. are beyond

anyone’s control. Primary focus on:

1) Evaluating businesses over cycles.2) Financial analysis after making necessary adjustments3) Analyzing business vis-à-vis its sector.4) Face-to-face interactions with management and promoters before onboarding a new credit is a strict

mandate.5) Branch/Location visits for lower rated NBFC Credits.6) “Early entry and early exit” strategy.7) Deal structuring to minimize the risk

Utmost importance to Keyman risk and Liquidity Risk. No investments made in case of any opacity in granular data disclosure by the management.

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How we evaluate Credits?

“eliminate when in doubt rather than compulsive investing”

Since Jun 2012, there has been 11 credit stress /downgrade cases in the Indian MF namely, Deccan Chronicle Group(June-12), Amtek Auto (Aug-15), Jindal Steel and Power – Group (Dec-15), Ballarpur (BILT) (Oct-16) RelianceCommunication Group (Apr-17), IDBI Bank (May-17), Religare Group (Oct-17), Jana Small Finance Bank (Dec-17),Sintex Group (Jul-18), Reliance Infrastructure (Aug-18) and IL&FS Group (Sep-18).

Owing to our credit evaluation process, we didn’t have exposure to any of these barring IL&FS Group (IL&FS FinancialService) to the extent of Rs. 125 Crs. Of this amount, we have realized Rs. 50 Crs from the issuer.

We do not have thumb rules hence there are possibilities of contradictory calls.For example:If the group is strong, lending to smaller company with losses is possible, provided there is a visibleturnaround in its business.We avoid lending money to businesses where the intentions of group is unclear.

Our risk mitigate covenants:1) Promoters shareholding/management control/brand retention2) Financial ratios with defined terms.3) Escrow over cash flows/put-call structure.4) Step up of coupon on rating downgrades.5) credit enhancement with partial guarantee.

Historical indicators are no guarantee of future results. 9


Composition by Assets (% of NAV)Ratings Profile (% of NAV)

Fund Facts

Data as on Dec 31, 2018.

Sectoral Allocation (% of NAV)

10

13.00

8.54

3.72

6.39

9.59

31.09

27.57

0.10

Cash & Cash Equivalent

A

A(SO)

A+

AA(SO)

AA

AAA

Sovereign

86.90 0.10

13.00

BONDS & NCD Treasury Bills Cash and Other Assets

23.21

15.4 14.8812.26

7.97 7.925.26

Housing Finance Energy Metals Financial Services Telecom Pharma Public FinanceInstitution


Portfolio Quants

Asset Under ManagementExpense Ratios^

Fund Manager

Fund Facts

Benchmark

Load Structure

Data as on Dec 31, 2018. ̂ Ratio includes GST on management fees

Mr. Gurvinder Singh Wasan has over 15 years of experience in Fixed Income Markets

NIFTY Credit Risk Bond Index

Entry Load: NilExit Load: 1% if redeemed within 365 days from the date of allotment

Direct Plan0.86%

Regular Plan1.63%

As on month endRs. 77.77Crs

Monthly averageRs. 76.90 Crs

Modified Duration1.12 Years

Gross Yield to Maturity9.30%

Average Maturity1.39 Years

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Our Investment Philosophy

Focused Fund Management

Disciplined Risk Management

Rigorous Credit and Economic Research

Superior returns are best achieved for our investors through the integration of:

Investment Philosophy

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Investment Process

SEBI Guidelines, KIM, SID, Investment Manual, Scheme

specific investment objective, risk profile

Investment Committee, FI team discussions and

communication/exchange of views, Asset allocation

matrix, liquidity forecasting

Credit Process: IC Approved issuer universe/monitoring

and addition/deletion of companies

Trading/Deal execution/Deal

entry/limits checking by system/Deal settlement

Compliance checks/monitoring

Risk Management/performance

monitoring/Peer analysis

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Investment Process & Risk Management

Research Fund Management Risk Management

• Macro economic analysis

• Credit risk management

• Liquidity forecasting

• Asset allocation matrix

• Portfolio Construction

• Trading and Duration management

• Dealing: Trade Placement and Execution

• Limit monitoring/compliance

• Volatility management, stress testing for various risks

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a. Macro-economic Analysis • Access to PGI (Principal Global Investors) economic research• Track a whole range of economists’ views including foreign banks, PDs, private banks, brokers etc.

b. Credit Research/Risk Management• “Credit Tracker” list of approved Credits: long term and short term.• Inclusion and sustainability of a credit in the record/list is determined by the established credit process, which includes two broad areas :

• Approval for new credits (through credit note)• Review and monitoring of existing credits

• Long Term and short Term ratings are approved by the Credit Committee in India. The investment team maintains a record/list of approved Credits, and exposure to any credit.

c. Liquidity forecasting• Monthly forecast of banking system liquidity• Assists fund managers in taking view on short term rates and anticipate RBI actions

d. Asset allocation Matrix• Matrix devised with fundamental and market factors with weightages• Assists fund managers in taking view on various asset classes in fixed income: mainly Gilts, corporate bonds and money market• Helps to decide on whether positioning should be neutral, underweight or overweight and on duration



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The portfolios are managed as per the framework laid down by the investment mandate. Every product has an investment mandate which is a derivative of the scheme information document.

Constructing a fixed income portfolio comprises of the following:• Target duration is arrived by weighing the factors effecting Bond market on a particular scale and then arriving at

Bullish/Neutral/Bearish stance, which is then implemented in the portfolio from a medium term view point.• Curve positioning is decided based on relative value and expectations of curve steepening/flattening.• Credit component is decided based on attractiveness of spreads and liquidity.


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Apart from credit risk monitoring, the following key risks have been identified and tracked:

Regulatory Risk• Regulatory risk has increased over the years with new regulations coming steadily• Limits captured in system by Compliance• Daily reports generated wherever required• Reporting to IC Meeting chaired by CEO

Interest Rate/duration Risk

Liquidity Risk (Relevant for cash funds)

Volatility Risk• Various tools used to measure volatility like standard deviation, etc• Peer set analysis

Concentration Risk

Operational Risk


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Investment Team

Rajat has an experience of over 29 years in the capital markets. He has earlier worked with SBI MutualFund in various capacities and lastly as the CIO.

He holds a degree in Mechanical Engineering and has a Diploma in Management from the IndianInstitute of Management, Lucknow.

Bekxy has over 18 years of experience in dealing, research and fund management. In her previousassignments she has worked with L&T Mutual Fund as AVP (Fixed Income) handling all fixed incomefunds, Reliance Life Insurance as Fund Manager (Fixed Income) and SBI Mutual as Fund Manager for somedebt schemes.

She has completed her PGDM from IIM Bangalore and holds a B.A.(Hons) degree in Economics from LadyShri Ram College, Delhi University.

Pankaj has over 16 years of experience in dealing, research and fund management. In his previousassignments he has worked as Fund Manager with Taurus Mutual Fund and Edelweiss Mutual Fundmanaging debt schemes including Liquid, Short-term, Dynamic and other schemes. He has also workedwith Edelweiss Capital handling their Forex and debt portfolios. He has also been associated with StateBank of India (Treasury) and Thermax ltd.

He holds a Post Graduate Diploma in Management from The Indian Institute of Management, Bangaloreand degree in Mechanical Engineering from REC Nagpur.

Gurvinder has over 15 years of experience in Fixed Income Markets, Credit Analysis and StructuredFinance. Prior to joining Principal, he has worked with CRISIL Ltd and ICICI Bank Ltd.

He holds a Masters of Commerce degree and is qualified Chartered Accountant and CFA.

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Investment Insights

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Coastal Gujrat Power Ltd.

Rating: AA (SO) by India Ratings and CARE

Sector: Power

About: Incorporated in 2006, Coastal Gujrat Power Ltd. (CGPL) is afully owned subsidiary of Tata Power. It is operating a 4000 MWcoal-based UMPP in Mundra, Gujarat. The project has been fullyoperational since March 2013. The project has PPAs with statedistribution utilities of Gujarat, Rajasthan, Maharashtra, Punjaband Haryana. The fuel requirement for the power plant is sourcedunder long-term arrangements from Indonesia.

The exposure has an unconditional, irrevocable, continuingcorporate guarantee from The Tata Power Company ltd (rated AA-by CRISIL and ICRA and AA by CARE and India Ratings)

Investment Insights

20

IIFL Home Finance Ltd.

Rating: Crisil AA (stable) and ICRA AA (stable) and CARE AA(positive)

Sector: Financial Services

About: IIHFL, a subsidiary of India Infoline Finance Ltd. (IIFL), is National

Housing Bank (NHB) registered Housing Finance Company (HFC). IIHFL

caters to a vast segment of retail and corporate customers through its

loan offering - this includes home loans, construction finance and loans

against property, with the key focus area being housing loans to

individuals against the security of residential collaterals. The company

has built its portfolio only in the past few years and asset under

management (AUM) of the company stood at app. 10kcr as on March

31, 2018

Investment Insights

Suryoday Small Finance Bank

Rating: ICRA A- (stable) and CARE A-(stable)


About: Suryoday Microfinance was NBFC- MFI and offeredmicrofinance services to customers in select pockets. On 23rd Jan2017, it launched its 1st Bank branch and started its operations asSFB. The total Gross loan portfolio grew 54% CAGR in last 5 years. Itwill offer various financial products to bottom of Pyramidpopulation – MFI loans, Individual Loans, LAP/ Housing Loans andMSME loans. Suryoday SFB has 0.75mn of customers as on FY17which grew at CAGR of 28.64% in last 4 years. R Baskar babu is MD& CEO with 24 years of experience in financial services. He has heldleadership roles in Chola, HDFC Bank and GE Capital.

Ess Kay Fincorp

Rating: India ratings A(S0) (stable)


About: Ess Kay is a NBFC operating in Rajasthan and incorporated

in 1994. Ess Kay operates with total 208 branches of which 131

branches are in the state of Rajasthan, 61 branches in the state of

Gujarat, 6, in the state of Madhya Pradesh, 5 in the state of Punjab

and 5 in the state of Maharashtra as on March 31, 2017. The

company is promoted by Mr. Rajendra Setia and his family

members. Ess Kay is primarily engaged in the used vehicle financing

which includes commercial vehicle, car, multi utility vehicle, three-

wheeler etc. and SME loans.

The exposure has an unconditional, irrevocable partial credit

enhancement by Northern Arc Capital ltd. (rated A+ by ICRA)

21

Aspire Home Finance

Rating: Crisil A+ (stable) and ICRA A+ (stable)


About: Aspire is the housing finance arm of MOFSL,. The company

started its lending operations from May 22, 2014, primarily offering

housing loans to individuals. It is in its early stage of operations and

had a loan portfolio of Rs 4863 crore as on March 31, 2018. The

focus is on individual housing loans, targeting customers in the low

and middle income groups, with average ticket size of around Rs 9

lakh. Lending to the affordable housing segment accounts for

almost its entire existing loan book. Aspire has presence in nine

states, through a network of 130 branches.

Recent changes strengthening the case for investment:MD & CEO with career Risk & Credit background onboarded, Disbursements are likely to pick up in coming quarters.Legacy loan book clean up will result into lower incremental creditcost, Provisioning including write offs stands at 69% , Strongsupport from parent with further capital infusion of Rs 2 bn inQ3FY19, Positive trends in collection efficiency from Dec-18

Investment Insights

Piramal Enterprises.

Rating: Rating ICRA AA (stable) and CARE AA(stable)

Sector: Pharma

About: Piramal Enterprises Limited (PEL) is one of India’s large diversified

companies, with a presence in Pharmaceuticals (CRAMS, Critical Care, OTC),

Healthcare Insights & Analytics and Financial Services. PEL’s consolidated

revenues were over Rs. 85 billion in FY2017, with 51% of revenues generated

from outside India. In Pharma, through an end-to-end manufacturing

capabilities across 13 global facilities and a large global distribution network

to over 100 countries, PEL sells a portfolio of niche differentiated pharma

products and provides an entire pool of pharma services (including in the

areas of injectable, HPAPI etc.). The Company is also strengthening its

presence in the Consumer Product segment in India. PEL’s Healthcare

Insights & Analytics business, Decision Resources Group, provides healthcare

analytics, data & insight products and services to the world’s leading

pharma, biotech and medical technology companies. In Financial Services,

PEL provides financing solutions primarily to real estate companies through

its own funds as well as through private equity route.

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Returns as on 31st Dec 2018

*Inception Date: 14-Sep-2004

Performance of other funds managed by Mr. Gurvinder Singh Wasan

*Inception Date: 30-Dec-2003

*Inception Date: 09-May-2003

Different plans shall have a different expense structure. The performance details provided herein are of Regular Plan - Growth option.Past performance may or may not be sustained in future. Returns (in %) are calculated on Compounded Annualised Basis (CAGR). Performance of the dividend option for the investors would be net of dividend distribution tax, as applicable.Mr. Gurvinder Singh Wasan manages Principal Short Term Debt Fund (w.e.f. April 2011), Principal Credit Risk Fund and Principal Corporate Bond Fund (w.e.f. January 01, 2018).$PTP (Point to Point) Returns are based on standard investment of 10,000/- made at the beginning of relevant period.

PeriodsPrincipal Credit Risk Fund NIFTY Credit Risk Bond Index CRISIL 1 Year T-Bill Index

Returns (%) $PTP Returns Returns (%) $PTP Returns Returns (%) $PTP Returns

1 Year

3 Year

5 Year

Since Inception *

PeriodsPrincipal Corporate Bond Fund CRISIL Short-Term Bond Fund Index 10 Year GOI


1 Year

3 Year

5 Year

Since Inception *

PeriodPrincipal Short Term Debt Fund CRISIL Short-Term Bond Fund Index 10 Year GOI


1 Year

3 Year

5 Year

Since Inception*

24

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

For Distributor only and not for further circulation.

*investors should consult their financial advisors if in doubt about … · 2019-01-22 · however,...

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