Fund Pick: Reliance Dynamic Bond Fund

Better duration management, asset allocation boost returns

Reliance Dynamic Bond Fund, an open-ended income fund, has been ranked CRISIL Fund Rank 2 (in the top 30 percentile of its peer group) over the past six quarters - as per the CRISIL Mutual Fund Rankings - in the long-term income funds category. The fund has seen an increase in its assets under management (AUM) during the same period - from Rs 589 crore for the quarter ended June 2012 to Rs 8,302 crore for the quarter ended September. The fund has been renamed as Reliance Dynamic Bond Fund from Reliance NRI Income Fund since May 31, 2010, and is managed by Prashant Pimple from January 2008.

Investors can take advantage of a secular decline in interest rates by investing in long-term income funds as yields and bond prices/fund NAVs (net asset values) are inversely correlated. When yields fall, bond prices or NAVs rise and such funds give superior returns, while the opposite is true when yields rise. This uncertainty in the interest rate scenario creates an opportunity for dynamic bond funds, which enjoy the flexibility to lower their maturity if interest rates are expected to be high. Dynamic bond funds can generally invest 100 per cent of their portfolio into either debt or money market instruments based on the prevailing interest rate scenario.

Risk/return attributes
The fund has outperformed its benchmark (CRISIL Composite Bond Fund Index or CRISIL CompBex) and the category represented by CRISIL-Amfi Income Fund Performance Index across various time frames (see chart). The fund has been managed like a long-term income fund since May 31, 2010. An investment of Rs 1,000 since May 31, 2010 in the fund would have grown to Rs 1,320 as on October 23, 2013 at a CAGR of 8.50 per cent. An equal amount invested in the benchmark would have returned a much lower Rs 1,232 at 6.33 per cent, while CRISIL-Amfi Income Fund Performance Index (category) would have yielded Rs 1,263 at 7.10 per cent, during the same period.

Dynamic duration management
The fund management team intends to take an active view of the interest rate movements by keeping a close watch on various parameters of the Indian economy, as well as global markets. Since May 31, 2010, the fund has taken actively managed duration (interest rate risk) based on the changing market environment for bond yields.

For instance, the fund lowered its average maturity from 10.23 years as of December 2010 to 0.23 years as of May 2011 when the 10-year benchmark government security yield rose from 7.91 per cent to 8.41 per cent. The average maturity of the fund was kept more than 7.5 years between October 2011 and February 2012 when yield softened from 8.88 per cent to 8.20 per cent. The fund reduced its average maturity to 3.67 years in April 2012, when yield peaked to 8.67 per cent and gradually increased its average maturity to over 10 years as yields declined to below eight per cent as of January 2013.

While this has led to higher volatility as compared to peers, the fund has given a higher Jensen's Alpha of 2.29 per cent compared to 1.58 per cent for the category over the past three years period ended October 23, 2013. A positive Jensen's alpha means a fund manager has delivered excess risk-adjusted return over benchmark.

Portfolio analysis
The fund is more diversified as compared to the category with exposure to average 21 securities compared to 17 for the category, over the past three years, among an average of 13 issuers.

The fund has also changed its asset allocation based on market scenario. The fund increased the allocation to certificates of deposits (CD) when the long term yields started rising. Between January and June 2011, the fund kept an average 40 per cent exposure to CDs to take advantage of short term interest rates. During this period, the three-month CD rates were between 8.35 per cent and 10.17 per cent. The fund subsequently reduced its CD exposure to 25.43 per cent when the 10-year government securities' yield was about to peak. In a similar scenario, the fund again maintained more than 40 per cent exposure to CDs in March 2012 and April 2012 when the three-month CD rates were between 9.20 per cent and 11.43 per cent. While the fund has dynamically managed its asset allocation, it has maintained a good portfolio credit quality too. Over the past year, an average 97 per cent of its debt portfolio has been invested in highest rated papers and government securities.

CRISIL Research