UTI Bond Fund is a long-term income fund with average assets under management (AUM) of Rs 519 crore as of March 2012, and is managed by Amandeep S Chopra. The fund’s AUM has increased by almost 30 per cent over the past six quarters as against a five per cent increase in the AUM of income funds.
Income funds, typically, invest in longer tenure debt paper and benefit in a declining interest rate scenario. Thus, the recent interest rate cuts by the central bank are likely to benefit long-term bond funds. This is because when yields fall, bond prices / NAVs rise (inverse relationship) and portfolios with higher maturities earn superior returns.
UTI Bond Fund has been ranked CRISIL Fund Rank 1 (in the top 10 percentile of its peer group) according to the CRISIL Mutual Fund Rankings over the past four quarters. The consistency in the ranks can be attributed to superior performance generated by the fund on the back of effective portfolio management and dynamic duration calls.
Investment style
The fund has the flexibility to invest in the entire range of debt and money market instruments. The fund can invest up to 25 per cent in money market instruments. The fund follows active duration management strategy by investing in medium- to long-term maturity corporate bonds and government securities.
Risk-return attributes
The fund has outperformed its benchmark (CRISIL Composite Bond Fund Index) and the category across various time frames – three months, six months as well as one, two, three and five years.
Over the past year, the fund has delivered an annualised return of 12 per cent, higher than that of the benchmark (nine per cent) and category (10 per cent). The fund has managed to generate a significant alpha over the benchmark.
An investment of Rs 1,000 in the fund since its inception would have grown to Rs 2,013 as on May 23, 2012, yielding a compounded annual growth rate (CAGR) of 7.14 per cent. In comparison, a similar investment in the benchmark and category would have grown to Rs 1,816 and Rs 1,975, respectively –CAGR of 6.06 per cent and 6.93 per cent, respectively.
Dynamic duration management
The fund has actively managed its duration or interest rate risk by increasing the maturity of the portfolio when long-term yields fell and reduced it when they hardened. Compared to the category, the fund has dynamically managed its duration over the past five years. This has helped the fund outperform its peers across timeframes. At the same time, the fund’s volatility over the same period has been higher than the category.
Portfolio analysis
The fund is more diversified compared to the category, as the top five holdings of the fund form 54 per cent of its portfolio, compared to 65 per cent for the category over the past year. During the same period, the fund held an average 19 securities in its portfolio, compared to an average of 15 securities by the category. A diversified portfolio helps reduce concentration risk in any particular security.
The fund has dynamically managed its asset allocation, based on market scenario. The average allocation to certificate of deposits (CDs) and non-convertible debentures and bonds (NCDs & bonds) has been nine per cent and 51 per cent, respectively, over the past three years. However, the fund increased exposure to CDs to an average 14 per cent over the past year to gain from the increase in short term CD rates, and reduced the exposure to NCDs and bonds to 41 per cent.
Over the past three years, the fund’s exposure to AA rated papers was 16 per cent, compared to 12 per cent for the category. A relatively higher exposure to AA rated papers has helped the fund generate better returns.
CRISIL Research
