Besides gold, gilt is the other category of funds that has caught the investors’ fancy in the recent past. While gold grabbed attention being a safe haven, gilt funds’ reasons for coming into the limelight was the sudden resurgence in performance. In 2008, when equity was coping with negative returns, gilt funds were able to deliver a return of 25.33 per cent.
Gilt funds were non-performers for most part of 2008. This changed when the Reserve Bank of India (RBI) got into the act to combat the liquidity crisis with a series of rapid cuts in the repo rate between October and December 2008. With a cut of 2.5 per cent in repo rate and a cut of 3.5 per cent in cash reserve ratio, gilt funds’ returns just shot through the roof. The category returns were 20.69 per cent in the last quarter. In December alone, the yields were 12.43 per cent. But since the beginning of the year 2009, the category has once again started losing sheen. Some fund managers were anticipating further reduction in interest rates. They were caught by surprise when it didn't happen.
In fact, gilt fund managers are often guilty of doing too much. There are plenty of funds that increase or decrease maturity violently at the slightest sign of rate movements. A gilt fund manager’s job is to take calls on rates and yields, but that doesn’t mean that a call has to be taken all the time. Nor does it mean that maturity must always be changed from one extreme to the other whenever a call is taken. In unpredictable times, like today, the calls have to be taken with a lot caution. Keeping this in mind, we have selected three funds that are not the top-performers of the past few months. However, they are consistent performers.
CANARA ROBECO GILT PGS: STEADY PERFORMER
In the last five years, since 2004, this fund has more than kept pace with its peers, either outperforming gilt funds, or lagging by a small margin. All in all, Rs 1 lakh invested in this fund would be Rs 1.42 lakh today, as against Rs 1.26 lakh in an average fund. In fixed income category, this difference is quite significant.
During 2008, which has been a signature year for the gilt fund category, the fund’s returns were an astounding 35.17 per cent. This puts Canara Robecco Gilt in the 6th position for the year. However, what is more impressive is the fund’s progression through the exceptionally turbulent 2008. During the first three quarters, the fund was ahead of the category average by 2.64 per cent every quarter. In the last quarter, it exploited Reserve Bank of India's (RBI’s) interest rate bonanza just as well as the rest, with returns of 20.63 per cent for the three months (October-December).
Even in the beginning of the current year, all gilt funds have suffered. However, this conservative fund has kept the maturity of its portfolio low. This helped the fund in containing the fall in January and February.
ICICI PRUDENTIAL GILT INVESTMENT PF: AGGRESSIVE
Make no mistake, this is an aggressive fund. Fund manager Rahul Goswami has been running the show since October 2005 and his reign has been marked by generally long maturities, aggressive calls and quick movements. This has worked out well, especially in the recent past. While 2008 was a great year for practically all gilt funds, this fund was shining much brighter than all others. During the year, its returns were 45.44 per cent, far higher than the average of 24.94 per cent. Even the number two fund was way behind at 36.98 per cent.
However, the next two months showed investors the flip side of the approach. In January and February 2009, the fund manager expected interest rate to go down further and increased the average maturity to 20.19 years (February) while its peers reduced it to 10.82 years. However, when the yield moved up from 5.25 per cent (December) to 6.40 per cent (February) the fund lost money. Its losses in January and February too were in line with the category average. During January and February, the fund held a rank of 18 out of 47 funds in the category. The bottom-line is that this is a smartly-run fund, albeit an aggressive one.
TEMPLETON INDIA GSF LONG-TERM: BALANCED
Templeton IGSF Long-Term is a gilt fund that has managed to implement a remarkably balanced approach. It has never raced ahead leaving other funds in the dust; but it has never suffered a severe reversal either. In the seven years since it was launched, annual returns have always been ahead of the category average. Also, they’ve always been positive. Even in 2004 when the going was tough, the category as a whole lost money (-0.40 per cent), this fund made a reasonable gain of 2.95 per cent.
The most interesting fact about this fund’s performance history is that it has done well during both rising and falling interest rate regimes.
When yields came down from 9.33 per cent (July 2008) to 8.67 per cent (August 2008), the fund increased its maturity profile from 9 months to 12 years. As interest rates kept falling the fund manager Vivek Ahuja increased maturity further to 18.16 years by the end of December 2008. At that point, the average maturity of the other funds of the category was an average of 13.70 years. This gap led to the stellar performance of the fund.
In January, when yields rose to 6.21 per cent, the fund was down by 0.35 per cent. And the category was down 6.23 per cent. The average maturity of the fund was 7.61 years, while the category was 12.54 years. Incidentally, during this period (in June 2008), Ahuja replaced Ninad Deshpande as the fund manager. Over all, it manages to deliver the better aspects of gilt while filtering out the worst.
Investors should always keep in mind that, notwithstanding the credit quality, medium and long-term gilt funds are the most unpredictable animals in the fixed-income zoo. Invest at least for a year and be prepared for short-term shocks.
