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Citrus Analysis: SBI Dynamic Bond: Ideal for investors with moderate risk appetite
Wed, Dec 26, 2012
Source : Shoaib Zaman, Citrus Interactive

SBI Dynamic Bond Fund is a debt fund that allows its fund manager to invest up to 100 per cent in government securities, corporate debt or money market instruments. The fund's average assets under management stood at Rs 2,466.66 crore on September 30, 2012. It is benchmarked against the Crisil Composite Bond Index.

A dynamic bond fund is similar to an income fund except that the latter has a ceiling beyond which the fund manager cannot invest in a single type of securities. Managers of dynamic bond funds face no such restrictions. Thus, the fund’s design allows the fund manager to invest freely across the debt market, based on his views, in order to garner the maximum possible returns.

This flexibility allows dynamic bond funds to manage interest-rate risks better by moving across maturities. When interest rates are expected to rise, the fund manager moves to lower-maturity papers, and when they are expected to fall, he moves in the opposite direction. The risk, of course, lies in his ability to predict interest-rate movements correctly.

Interest-rate outlook: The current view on interest rates is that they have peaked and are likely to decline over the next three to six months.

Dinesh Ahuja, fund manager of SBI Dynamic Fund, had shared his views on interest rates with us on October 30, 2012. (Read full Interview: Click here)

Ahuja had said: "Our view is that rates will come down gradually. Just by holding on to positions we will make enough money."

In its monetary policy review on December 18, 2012, the Reserve Bank of India decided to leave key policy rates unchanged. However, the central bank indicated that it may cut rates in the early part of 2013.

Government securities in particular are attractively positioned from a demand-supply perspective. With demand for funds declining in a slowing economy and banks turning risk averse (due to rising non-performing assets), banks have been investing in government securities. Moreover, during the last quarter of the financial year, demand for these securities comes from insurance companies (who gather a lot of premiums) and provident funds. Hence, gilts are expected to rally.

(To read further click here)

Objective: According to its Scheme Information Document (SID), the scheme’s objective is to actively manage a portfolio of good-quality debt and money market instruments so as to provide reasonable returns while maintaining liquidity.

Peer Group: For the purpose of this analysis we have considered a set of 14 funds which, according to their SIDs, are dynamic bond funds.

Returns:

Scheme Name

3 Months

6 Months

1 Year

3 Years

SBI Dynamic Bond(G)

2.54

5.27

11.73

9.73

Crisil Composite Bond Fund Index

2.33

4.72

9.54

6.73

Category average-dynamic bond funds

2.20

4.69

10.34

7.67

* November 30, 2012

This fund has beaten its benchmark and category average in all the time periods mentioned above. (Note that only six funds out of the current 14 belonging to the peer group existed in 2009).

Scheme Name

2009

2010

2011

YTD*

SBI Dynamic Bond(G)

1.81

7.48

11.55

9.43

Crisil Composite Bond Fund Index

3.50

4.88

6.90

8.44

Category average-dynamic bond funds

0.52

5.01

9.07

9.02

* November 30, 2012

The fund was the best performer in its category in calendar years 2010 and 2011. Year-to-date (till November 30, 2012) it ranks fifth within its peer group of 14 funds.

Interest-Rate Risk. On November 30, 2012, the fund's modified duration stood at 77.52 months; the category average on that date was 59.45 months.

SBI Dynamic Fund's modified duration was 0.36 months at the end of May 2011. Next month, in June, it had shot up to 29.76 months. By August the fund's modified duration had risen further to 58.68 months. However, it was reduced to 15 months in September 2011 and even further to 0.96 months in October.

In 2012, the fund's modified duration has ranged from 9.96 months in March to 77.52 in November. Since June 2012, the fund's modified duration has been on the upswing, reflecting the fund manager’s expectation of declining rates.

Thus, one may conclude that the fund manages its duration or interest-rate risk aggressively.

Credit Quality: Next, let's examine the credit quality of the fund's portfolio. The fund's exposure to investment-grade bonds with different credit ratings is given below:

SBI Dynamic (% Exposure)

Category Average (% Exposure)

A1+

0.16

7.62

AAA

20.47

35.97

Cash & Equivalent

3.55

16.42

SOV

75.82

43.61

He November 30, 2012

Among corporate bonds, the fund only invests in securities rated AA+ or above. Currently the fund has a 75.82 per cent exposure to sovereign securities, based on the expectation that interest rates will decline.

Portfolio Composition: SBI Dynamic Bond Fund moves across investment papers based on the fund manager’s view. Currently the fund manager's view is that government securities will rally, hence he has invested heavily in government securities (seetable below).

Date / Instrument

Cash & Cash Equivalents

Certificate of Deposit

Commercial Paper

Corporate Debt

Government Securities

PSU & PFI Bonds

Jan-12

17.18

22.27

19.00

9.67

24.94

6.94

Feb-12

12.50

30.09

0.32

15.77

37.51

3.79

Mar-12

4.56

85.26

7.67

2.51

Apr-12

17.30

40.48

23.01

17.06

2.15

May-12

3.93

34.24

31.67

28.45

1.72

Jun-12

5.28

42.99

50.65

1.07

Jul-12

35.19

1.37

51.17

11.38

0.88

Aug-12

4.67

0.36

40.63

53.69

0.65

Sep-12

3.58

0.27

37.78

58.37

Oct-12

3.89

0.21

26.05

69.85

Nov-12

3.55

0.16

20.47

75.82

Expense Ratio. The fund’s expense ratio of 1.73 is the third-highest in its category. The average expense ratio among dynamic bond funds is 1.15. A lower expense ratio is a positive for investors.

Fund Manager: Dinesh Ahuja joined SBI Funds Management as fund manager in January 2011. He manages various fixed-income schemes. He has over 13 years of experience in the Indian financial services industry and capital markets in various capacities. Before joining SBIFMPL, Ahuja worked as fund manager with L&T Investment Management Ltd. In the past, he has also worked with Reliance Asset Management Ltd. and Reliance General Insurance Co. Ltd.

Some of the other funds that Ahuja also manages include SBI Magnum Income Fund, debt portion of balanced fund and MIP (check whether SBI has only one balanced fund and only one MIP or many, and make appropriate changes in the copy), and also gilt funds.

Exit Load. The fund's exit load is 1 per cent for redemption within 365 days.

Within the peer set, five funds have an exit load between withdrawn before 365 days, and five funds if it’s withdrawn before 180 days. Three have an exit load if withdrawn prior to 3-months and for one it states that withdrawal can be made after 30 days. The exit load varies from 0.25 per cent to 2 per cent.

The exit load is also in the higher bracket and so is the time period.

The fund has been a top performer within its category. Given the likely hood that interest rates might fall over the next one year, this fund is likely to be a good bet.

 
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