The fund’s average assets under management (AUM) for the quarter ended December 2012 rose to Rs 2,387 crores from Rs 128 crores as of the quarter ended December 2011. The long term income fund category itself saw a six fold jump in AUM primarily due to expectation of softening of interest rates in the economy. Bond prices (Fund NAVs) and yields move in opposite directions owing to which a fall in interest rates will result in a rise in bond prices and positively impact long-term debt fund NAVs (returns).
Investment style
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The fund intends to actively manage the portfolio through exposure to money market and debt instruments depending upon the market conditions. As per the stated asset allocation, IDFC Dynamic Bond Fund has the liberty to allocate 100% of the portfolio to money market securities and debentures with residual maturity of less than one year, as well as invest up to 90% in long-term debt instruments.
Risk-Return attributes
The fund has outperformed the benchmark (CRISIL Composite Bond Index) and the category over the past six months, one, two and three year time frames. The fund has delivered 13% returns over the past year as against 9% and 11% given by the benchmark and category, respectively.
Although the fund has been more volatile compared to peers, it has managed to outperform on a risk adjusted basis in the previous three year period, as shown by the Sharpe ratio of 2.83 of the fund against the category’s 2.69.
Duration management
The fund has actively (dynamically) managed its duration (maturity) across market cycles. In 2009, when the 10 year G-Sec yield rose from 6.26% to 7.73%, the fund reduced its maturity to 0.6 year from 14 years. With the hike in key policy rates by the Reserve bank of India (RBI) since March 2010, the fund reduced its average maturity from 8 years to 3.7 years at the end of December 2011. The fund has increased its maturity steadily from July 2012, in line with expectations of an interest rate cut by the central bank. This dynamic duration management has helped the fund outperform the peers.
Portfolio analysis
In terms of portfolio allocation, the fund invested in Collateralised Borrowing and Lending Obligation (CBLO) during May 2009 when the interest rates started heading upwards. In 2010 and 2011, the fund manager has invested across government securities, certificates of deposit (CDs) and non-convertible debentures and bonds based upon the prevailing market scenario. During 2011, when the 10 year G-Sec yield moved from 8.14% in March to 9.07% in October, the fund was mainly invested in CDs and NCDs and bonds.
In March 2012, when the 1-year CD rates were at their peak, the fund increased its exposure to certificates of deposits (CD) to 69%. The CD exposure was reduced to nil in August 2012. Since then, the fund has maintained high exposure to government securities in anticipation of an interest rate cut from the RBI. The RBI has subsequently reduced the repo rate by 25 basis points (0.25%) on January 29, 2013. During the three year period ended December 2012, the fund has invested 86% of its portfolio in the highest rated papers (AAA/A1+) and government securities.
CRISIL Research