Thursday, March 19, 2009
Invest in Kotak Short Term bond
“Opportunity does not knock, it presents itself when you beat down the door”. This seems to be the case in the Indian bond markets as well. The flight
for safety factor has led to government securities rally across the world reaching all time lows. The treasury rates across the world – esp developed countries like the US, Japan, UK, EU are so low (practically 0 in some cases) that the investor. The investor looking out for some yield on his/her investment has now started looking out for some quality assets - not as safe as sovereign though high grade assets in the corporate bond segment. US treasuries have rallied from 3.75% to 2% in 6 weeks !!! (currently at 2.17%). Global investors are increasingly buying into the view that in such a financial climate it would be safer to own a companys bond than its shares. BHP Billiton shares were down 5% on a trading day last week, but BHPs bond was trading marginally higher on the same day. With companies deferring dividend payment and preserving cash to pay its debt in time, global money has started chasing yields – albeit in a small manner
In India during the interest rate rally in 2000-2003, spreads between the 5yr corporate bond and 5 yr gsec had touched a low of 30 bps…Likewise for a 3 yr segment, the spreads had touched a low of 15 bps !!!!!
Case for investment in Kotak Bond Short Term
The above factors form the plinth for investment in our Kotak Bond Short Term. The fund is positioned to reap the benefits of carry as well as spread compression in the corporate bond segment of the fixed income market. The current spreads are at 300 bps in the 3 and 5yr segment – which is significantly higher compared to the spreads we witnessed in the previous rate rally. While we do agree that there is general risk aversion in the credit segment – quality credit (combination of PSU and Pvt) does pose a huge investment opportunity. Most PSU are either partly or wholly owned by the Govt of India and therefore quasi sovereign entities. The spreads therefore present an imminent compression theory going forward. While the spreads may not come off in a hurry, in the initial phase, these would act as high carry on the portfolio. Also the 2,3 and 5 yr yield are largely flat (yielding the same). With expectations of reverse repo cut going forward and easy liquidity in the system, this curve could steepen .i.e shorter end could rally at a faster pace than the longer end, leading to a curve steepener.
This is what we endeavor to capture in bond short term, where corporate bonds varying from 2-5 yr maturity is held. The average maturity is capped at 3 yrs, with 25% allocated to cash for trading calls and positioned at the shorter end of the yield curve. This combination makes it ideal for being recommended from a 1 to 3m perspective.
Investors having beyond 3 month horizon should continue to look at investments in long term gilt and bond funds
The top holdings of Kotak Bond Short Term are :- ACC – 9.5%, IDFC – 9.37%, Grasim – 9.28%, REC (Rural Electrification Corporation) - 9.25%, EXIM – 9.16%, IRFC – 9.93%. Current avg maturity is at 2.50 years with a portfolio yield of 9%. The fund is rated mfAAA by ICRA *
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