l & t resurgent india corporate band fund
TRANSCRIPT
L&T Resurgent India Corporate Bond Fund
(An open-ended income scheme)
NFO opens: 22nd January 2015
NFO closes: 30th January 2015
For product labeling please refer to slide 19
Indian economy is on the verge of a turnaround…
Indian economy has seen a significant slowdown since 2010-11 on account of slowing
global growth, lack of domestic policy action and inflationary pressure
However, the new stable government’s thrust on policy actions & focus on
infrastructure & allied sectors is expected to drive the economic recovery going forward
RBI’s focus on maintaining a stable monetary policy to control retail inflation coupled
with benign commodity prices have led to significant improvement in country’s macro
fundamentals
With inflation largely under control, we are now likely to see RBI’s focus shifting
towards boosting sustainable growth while still keeping inflation under check
In a global context, we believe India is uniquely positioned to enjoy favorable
growth-inflation dynamics
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How this could influence fixed income market?
2014 2015 2016 2017 2018
Macro outlook
• Falling inflation, gradual pick-up in economic growth • Credit growth to pick-up only gradually due to slow turnaround in capex cycle and banks’ balance sheet issues
• Growth acceleration likely from 2016 • Credit growth also likely to gain momentum with rising economic activity
Interest Rates
• Expect RBI to cut rates by 50-100bps over the next 8-12 months. • As a result 10 yr G-Sec could move to 7.0% - 7.50% range
• Expect inflation to stabilize in 5 to 6% range • With a real rate of 1.5-2.0% indicated by RBI, limited room for further policy easing in 2016
Credit
• Credit environment likely to improve gradually with economic recovery • However, one needs to be cautious given high leverage & lack of cash flow visibility in certain sectors
• Better visibility on business with sustained economic recovery leading to balance sheet deleveraging & improving cash flow trajectory
• Bias towards credit upgrades likely
3 The aforesaid views are of L&T Investment Management . Before relying on these views please consult your financial
adviser.
So for investors with medium term investment
horizon (~ 3 years), what are the fixed income
investment options available to capitalize on the
prevailing conducive environment?
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12.50%
9.20%8.12%
0%2%4%6%8%
10%12%14%
Year 1 Year 2 Year 3
Cumulative annualised returnat the end of...
Option 1: Dynamic Bond Funds
Assume a dynamic bond fund investing predominantly in government securities
and highly rated corporate bonds and typically maintaining high duration in the
softening rate environment and then moving towards more conservative
positioning
While these funds could deliver strong near term performance, over a 3 year period cumulative performance could taper sharply on account of lower yield
accrual in 2nd / 3rd year and lack of further capital appreciation
Possible scenario
Fund type Current gross yield
Mod Duration in falling interest rate environment
Mod Duration in rising / flat interest rate environment
Dynamic Bond Fund 8.50% 6 2
The above calculations are based on various assumptions and actual performance may vary depending on the market conditions and actual change in the shape of the yield curve. This is for illustration purpose only. Please consult your financial advisor before taking any investment decisions. Annualized return shown above is assuming a total expense ratio (TER) of 150 bps. 5
-1.2%
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0 1 2 3
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Year
Interest rate movement
Option 2: Accrual / high yielding funds
Assume an accrual fund investing predominantly in higher yielding corporate bonds
including those in sensitive sectors like real estate and loan against shares and
typically maintaining modified duration of 2-3 years
Higher yield accruals could help these funds outperform in a flat / rising interest rate environment but due to their low duration they may be unable to capitalize
adequately in a falling rate environment
Possible scenario
Fund type Current gross yield
Mod Duration in falling interest rate environment
Mod Duration in rising / flat interest rate environment
Accrual Fund 10.25% 2.5 2.5
-1.2%
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0 1 2 3
Yie
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ove
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nt
Year
Interest rate movement
10.75%9.24% 8.74%
0%2%4%6%8%
10%12%
Year 1 Year 2 Year 3
Cumulative annualised returnat the end of...
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The above calculations are based on various assumptions and actual performance may vary depending on the market conditions and actual change in the shape of the yield curve. This is for illustration purpose only. Please consult your financial advisor before taking any investment decisions. Annualized return shown above is assuming a total expense ratio (TER) of 150 bps.
Option 3: Invest in long duration bond fund in falling rate
environment and switch to accrual fund when rates stabilize
Assume an investment strategy where investor invests in a long duration fund in a falling interest
rate environment and then switches to accrual / high yielding fund once interest rates stabilize
Likely to be the most inefficient strategy - Investments held for < 3 years attract short term capital gains tax impacting the return. Also timing the switch may be difficult.
Possible scenario
Fund type Current gross yield
Mod Duration in falling interest rate
environment
Fund Type Gross yield at the time of
switch
Mod Duration in rising / flat interest rate
environment
Duration Fund 8.50% 6.0 Accrual Fund 9.25% 2.5
-1.2%
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0 1 2 3
Yiel
d m
ove
men
t
Year
Interest rate movement
The above calculations are based on various assumptions and actual performance may vary depending on the market conditions and actual change in the shape of the yield curve. This is for illustration purpose only. Please consult your financial advisor before taking any investment decisions. Annualized return shown above is assuming a total expense ratio (TER) of 150 bps. Tax paid at the end of 1st year assumed to be 30.90%. Short term capital gains tax on investments in accrual fund not considered assuming investor will continue to stay invested for at least another year.
Switch from duration fund to accrual fund after 1 year
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8.64%
8.19% 8.05%3.86%
0.0%2.0%4.0%6.0%8.0%
10.0%12.0%14.0%
Year 1 Year 2 Year 3
Cumulative annualised returnat the end of...
Impact of STCG tax
In summary…
The above calculations are based on various assumptions and actual performance may vary depending on the market conditions and actual change in the shape of the yield curve. This is for illustration purpose only. Please consult your financial advisor before taking any investment decisions. Annualized return shown above is assuming a total expense ratio (TER) of 150 bps. In the 3rd strategy (first bond fund and then switch to accrual fund), tax paid at the end of 1st year assumed to be 30.90% ; However, short term capital gains tax on investments in accrual fund not considered assuming investor will continue to stay invested for at least another year.
8.12%8.74%
8.05%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Dynamic Bond Fund Accrual Fund First bond fund and then switch to accrual fund
-1.2%
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0 1 2 3
Yie
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ove
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nt
Year
Interest rate movement
Likely 3-year returns scenario in such environment
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Strategy Duration Multiplier
Attractiveness of portfolio yield
Tax efficient?
Dynamic bond funds High Low Yes
Accrual funds Low High Yes
Strategy to switch from duration to accrual Moderate to High Moderate to high No
How can an investor benefit from best of both worlds
to maximize post tax returns?
Duration + accrual strategy
L&T Resurgent India Corporate Bond Fund*
A fund that aims to combine best of duration and accrual
strategy to deliver superior medium term performance
Introducing…
* For product labeling please refer to slide 19 10
Resurgent India Corporate Bond Fund^
Duration Fund
- Capitalize on the interest rate rally
- But low underlying yields
- High liquidity
- Predominantly AAA/ Sovereign category
Accrual Fund
- High underlying yields
- But difficult to build high duration
-Low liquidity
- Predominantly AA to A category
Resurgent India Corporate Bond Fund (Duration +
accrual)
- Mod duration: closer to long bond funds (~4-5)*
- Yields closer to accrual funds (AAA+~125-150 bps in current environment)
- Moderate to high liquidity
- Predominantly AAA /AA category
^ For product labeling please refer to slide 19. * As per the scheme information document, the scheme could have
modified duration of up to 6 years. 11
Portfolio positioning in the current environment
Duration Fund Accrual Fund
High Low
7 2
8.25% 10.25%
Rating AAA
Rating A
Resurgent India
Corporate Bond Fund
(RICBF)^
Gross YTM:~125-150 bps over AAA in current environment
(closer to accrual funds)
Duration: ~4.5 to 5 years*
(closer to duration funds)
Credit quality: Predominantly AAA / AA category
(closer to duration funds)
Liquidity: Moderate to High
(closer to duration funds)
The above portfolio positioning is based on the current assessment of the market environment. The actual portfolio positioning may be different from what has been shown here and the actual YTM of the portfolio could vary accordingly. ^ For product labeling please refer to slide 19. * As per the scheme information document, the scheme could have modified duration of up to 6 years.
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Enablers for executing the strategy
Maturity / Duration
Yie
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Low Medium High
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Low
High Loan against shares
Real estate loans
Operating co / NBFCs
G-secs / SDLs*
Highest quality PSU / corporate
bonds
High quality
structured papers
Perpetual bonds
CMBS
Bank capital instruments
RICBF^ would look to predominantly
invest in this segment
Strategy in current environment would be to add duration while keeping credit risks at moderate levels without compromising much on portfolio yield
The strategy indicated above is based on the current assessment of the market environment and the actual portfolio positioning may be different from what has been shown here. ^ For product labeling please refer to slide 19. * please note that RICBF would not invest in g-secs and SDLs except as mentioned in the scheme information document.
AAA category
AA category
A category
Provides yield kicker
High duration help capitalize when interest rates fall
Help benefit from higher yields and also capitalize when interest rates fall
In the current environment, the fund would look to
predominantly invest in…
High Quality Long Tenor Bonds
Bank Tier I perpetual under Basel III
• Adequate universe of strong public and private sector banks
• Rating category: AA to AAA
Duration: 5.5-6 years
YTM: 9.5%-10%
Perpetual bonds of Corporates
• Issued by some of the large corporates like Tata Steel and Tata Power
• Rating category: AA
Duration: 5-6 years
YTM: 10%-10.5%
Commercial Mortgage Backed Securities
(CMBS)
• Fully operational commercial properties with strong corporate tenants
• Rating category: AAA
Duration: 2.5-3 years
YTM: 9.5%-10%
High Quality Structured Products / Bonds
• Sponsored by strong corporates like IOCL, HPCL, NHAI etc
• Rating category: AA to AAA
Duration: 4 - 6 years
YTM: 9.5%-10%
~20-30% ~15-25% ~15-25% ~20-30%
The above information is provided based on the current assessment of the market environment and the actual allocations and portfolio may be different from what has been shown here. * The actual YTM of the portfolio could vary accordingly. ^ As per the scheme information document, the scheme could have modified duration of up to 6 years.
Predominantly AAA/AA rated portfolio with YTM of 125-150* bps over AAA ; Duration of 4.5-5^ years
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However once interest rates stabilize, the fund would look to
trim duration exposure
2014 2015 2016 2017 2018
Macro outlook
• Falling inflation, gradual pick-up in economic growth • Expect RBI to ease monetary policy
• Growth acceleration and stable inflation • Limited room for further policy easing
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• Focus on generating returns using
combination of capital appreciation and yield
accruals
• Portfolio YTM of ~ 125-150* bps over AAA
• Modified Duration of 4.5-5 years
• Focus on return generation through yield
accruals while limiting interest rate risk by
lowering duration
• Portfolio YTM of ~ 150-200* bps over AAA
• Modified Duration of 2-3 years
The above information is provided based on the current assessment of the market environment and the actual allocations and portfolio may be different from what has been shown here. * The actual YTM of the portfolio could vary accordingly.
8.12%
8.40% 8.46%
8.74%
8.39%
9.24%
9.47% 9.51%
9.98%
7%
8%
9%
10%
Scenario 1 Scenario 2 Scenario 3
Scenario analysis
3-year scenario analysis
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-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0 1 2 3
Yie
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Year
Scenario # 1
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0 1 2 3
Yie
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Year
Scenario # 2
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0 1 2 3
Yie
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Year
Scenario # 3
Dynamic Bond Accrual Duration + accrual strategy
The above calculations are based on various assumptions and actual performance may vary depending on the market conditions and actual change in the shape of the yield curve. This is for illustration purpose only. Please consult your financial advisor before taking any investment decisions. Annualized return shown above is assuming a total expense ratio (TER) of 150 bps. Beginning YTM for dynamic bond fund, accrual fund and duration + accrual strategy is assumed to be 8.50%, 10.25% and 10% respectively and initial modified duration is assumed to be 6, 2.5 and 5 respectively. At the end of 1 year, it is assumed that modified duration of dynamic bond and duration + accrual strategy are revised to 2 and 2.5 respectively. The numbers shown above are based on a 3 year investment horizon and they could vary for different investment time periods.
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L&T Resurgent India
Corporate Bond Fund
Adequate duration exposure
• Adequate duration to capture upside potential in falling interest rate environment ; flexibility to cut back duration once rates stabilize
Why L&T Resurgent India Corporate Bond Fund*?
* For product labeling please refer to slide no 19. The above information is provided based on the current assessment of the market environment and the actual allocations may be different from what has been shown here. ^ The actual YTM of the portfolio could vary accordingly. 17
Tax efficient • A combination of
duration and accrual strategy in one product allows investors to stay invested for over 3 years to earn better post tax returns
Stable investor base
• Exit load for 3 years to ensure stability of flows / avoid abrupt flows which can impact existing investors
A strategy that can: • Maintain high duration to capitalize on softening interest rate trend • Strategically lower duration once interest rates stabilize • Own securities which provide adequate yield pick-up over AAA • Offer tax efficient returns
Attractive portfolio yields
• Portfolio that would aim to have portfolio yield of 125-150^ bps over AAA
Product Features
Type An open - ended income scheme
Exit Load For redemptions: - On or before 1 year from the date of allotment or Purchase applying First in First Out basis: 2% - After 1 year but on or before 2 years from the date of allotment or Purchase applying First in First Out basis: 1.5% - After 2 years but on or before 3 years from the date of allotment or Purchase applying First in First Out basis: 1.0% - After 3 years: NIL
Scheme benchmark CRISIL Composite Bond Fund Index
Minimum initial application amount
Rs. 5000 per application and in multiples of Re. 1 thereafter
Options available Growth, Dividend Payout and Dividend Re-investment
Plans available Direct Plan and non - Direct Plan
Fund Manager Shriram Ramanathan
NFO opens: 22nd January 2015 NFO closes: 30th January 2015
18 For product labeling please refer to slide no 19.
Important Information
This presentation is for general information only and does not have regard to specific investment objectives, financial
situation and the particular needs of any specific person who may receive this information. The views expressed herein
are solely of L&T Investment Management Limited. The data/information used/disclosed in this presentation is only for
information purposes and not guaranteeing / indicating any returns. Recipient of this presentation should understand
that statements made herein regarding future prospects may not be realized. He/ She should also understand that any
reference to the securities/ sectors / indices in the document is only for illustration purpose and are NOT
recommendations from the author or L&T Investment Management Limited, the asset management company of L&T
Mutual Fund or any of its associates. Neither this presentation nor the units of L&T Mutual Fund have been registered
in any jurisdiction. The distribution of this presentation in certain jurisdictions may be restricted or totally prohibited and
accordingly, persons who come into possession of this presentation are required to inform themselves about, and to
observe, any such restrictions. Please consult your investment adviser before making investments.
Mutual Fund investments are subject to market risks, read all scheme related documents
carefully.
CL01501
This product is suitable for investors who are seeking:*
• Generation of income over medium to long term
• Investment primarily in debt and money market securities of fundamentally strong corporates/ companies in growth sectors which
are closely associated with the resurgence of domestic economy
• Low risk (BLUE)
Note: Risk may be represented as: (BLUE) investors understand that their principal will be at low risk; (YELLOW)
investors understand that their principal will be at medium risk; (BROWN) investors understand that their principal will be at
high risk.
* Investors should consult their financial advisers if in doubt about whether the product is suitable for them.
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