Franklin India's ultra-short rises more than two-fold on credit plays

Most debt schemes, particularly those dealing with short-term money, have turned cautious on lower-rated papers following tighter liquidity in the debt markets. However, Franklin India Ultra Short Bond Fund seems to be following a different strategy with its exposure to less than AA papers rising more than twofold, compared to August-end levels.


The data sourced from Value Research shows that the fund’s exposure to less than AA papers (rated A, A+ or A-) stood at Rs 6,832 crore at the end of January, which was more than double the exposure at the end of August, before the Infrastructure Leasing & Financial Services crisis led to spike in yields in the bond markets. 


As on August 31, 2018, the fund’s exposure to less than AA papers stood at Rs 2,950 crore, accounting for 19 per cent of the fund’s assets. At the end of January, the share was up at 42 per cent.


E-mail query sent to Franklin Templeton Mutual Fund (MF) did not elicit any response.


Industry experts say while the current market conditions could pose some challenges, the credit strategy has worked well for the scheme so far. 


“Even though some of the Franklin Templeton MF’s schemes have taken higher exposure to lower-rated papers, the funds have managed to do reasonably well. A fund manager can still structure his exposures with better collateral even if the rating is lower,” said an analyst. 


Analysts add that as the Securities and Exchange Board of India’s re-categorisation norms don’t specify any limits on credit rating exposures for duration schemes, these schemes are within the regulatory framework when taking higher exposures to such papers.


The contrarian credit strategy could reward investors if the risk-reward assumptions play out as expected, say analysts.

“There is a contrarian approach in the investment process, with bets often taken against the grain as long as the risk/reward is favourable. Although a wrong bet can lead to significant underperformance, we believe the research-intensive approach helps with such a process,” Morningstar’s recent analyst note on the Franklin India Ultra Short Bond Fund, read. The research firm has given gold-rating to the fund.


The scheme has delivered highest trailing returns in both the short and longer periods in its category. In the six-month period, the scheme has given returns of 5.22 per cent (as on March 15, 2018). In the one-year period, the scheme has given returns of 9.3 per cent, shows Value Research data.


Aditya Birla Sun Life Savings Fund, which is close to the Franklin fund in terms of asset size, has delivered 4.5 per cent returns in the last six-month period. In the one-year period, the scheme has given returns of 8.1 per cent. The fund is also among the top-performers in the category.


While a few basis points of difference could be significant for institutional and high-networth investors, the sizeable asset base of Birla Sun Life Savings Fund (Rs 14,050 crore as on January 31, 2019) show certain set of investors have been more weary of the credit-related risks than opting for 70-100 basis points higher returns. The Birla Sun Life fund has no exposure to less than AA-rated papers as of January 31, shows data collated by Value Research.

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