Dundee Corporate Bond Fund: Hold

Recommendation: Hold

B. Venkatesh

THE Dundee Corporate Bond Fund returned 6.47 per cent since launch in November 1999.

The returns are fair in comparison with fixed deposits, after adjusting for the better liquidity.

Portfolio: As on July 31, 2000 the Corporate Bond fund had a nearly 60 per cent exposure in corporate paper, about 27 per cent in public sector debt, and 13 per cent in call money and cash. Investors need to consider the following factors before buying into the fund.

First, the portfolio composition has undergone a significant change since this April. Consider the exposure to corporate paper. From zero exposure in April, the fund now has about 60 per cent of its investments in corporate paper. The fund may have primarily adopted such a strategy to take advantage of the credit spreads.

The short-term interest rates have been high in recent times, thanks to the measures adopted by the Reserve Bank of India (RBI) to arrest the fall in the rupee. This coupled with the uncertain medium-term interest rate outlook necessitated the fund's move into short-term paper. The investment avenues available at the short end are Treasury Bills (T-bills) and corporate commercial paper (CP). The fund appears to have chosen the latter. The upshot?

Investing in CP may have improved returns for the unit-holders. Consider, for instance, a decision to invest in 6-month CP over the 180-day T-bills. The excess return that unit-holders will have gained during June and July due to the credit spread and increase in CP yields is 3.55 per cent. This strategy of playing on the credit spread works well if the fund adopts a buy-and-hold strategy; for, the fund may otherwise find it relatively difficult to sell the CPs before maturity.

It needs to be mentioned here that despite playing on credit spreads, the return on (NAV) in July was just 0.41 per cent, compared to 6.32 per cent generated from investments in 180-day T-bills. This may be due to the effect of the fall in corporate bond prices which constituted nearly 50 per cent of the fund's portfolio.

The second important factor to be considered is the portfolio duration. While the fund has not disclosed its duration, the average portfolio maturity is available. There has been a conscious effort to reduce the average maturity in the last four months from 4.68 years to 2.19 years in July. This strategy has to be viewed in the light of the market expectations of a higher interest rate in the near term; a lower portfolio maturity helps the fund take advantage of any rise in interest rates.

On balance, while the fund has not generated handsome returns, the gains are fair, adjusted for the higher liquidity.

Background: The Dundee Corporate Bond Fund was launched in November, 1999. The fund offers the Appreciation Plan besides the Monthly and Quarterly Dividend Plans. There is no entry load but an exit load of 0.5 per cent is levied if the units are redeemed within six months of investment. The minimum investment required is Rs. 5,000. The fund's NAV as on August 30 was Rs. 10.67.