With a dexterous management on the interest rate risk and the credit quality, Alliance Income has emerged as a middle of the road performer, while minimizing the risk in the process.
In its initial years, the fund was heavily invested in AA rated instruments. Although high on coupon income, these instruments run a credit risk also. The growing corpus has seen the fund change its track towards liquid AAA rated corporate debt and government securities. While the exposure to these instruments averages around 75% of the corpus, the allocation to AA instruments stretches in favorable market situations. The allocation to AA instruments, which stood at 19% in May this year, has been hiked to 30 percent in August.
The fund manager Vineet Udeshie is opinion that AA credit doesn't necessarily mean unsafe and it earns 50 basis points extra, with a potential upside with a rating upgrade on his AA bond holdings. His approach is to choose maybe be lower rated but quality bonds without adding risk. The other noticeable trend marginally benefiting the fund is some cash rich corporations retiring debt with bond buyback. A case the in point - Dr Reddy's Laboratories. An emerging trend with three such deals in pipeline.
As the bond prices gain with a interest rate cut and vice versa, a lower maturity portfolio is less susceptible to the price changes. Alliance Income has managed to keep the interest rate risk at bay, by maintaining a low maturity portfolio. While this conservative strategy shielded the portfolio in volatile times, the fund has also missed out on the rally for its short maturity. In recent times the fund has repositioned itself at the higher maturity of 5.2 years in May, it has been pruned down to 4.93 years in August. The fund manager views the current yield at its bottom and likely to reduce the portfolio duration.
With a relatively conservative strategy Alliance Income offered 16.79% in the trailing year ending August 31, 2001. An above average performance with low downside risk.