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JM Income Fund

The fund has delivered the goods by offering high returns over its intermediate bond peers over the trailing one, two and three -year periods, without courting in volatility in the process.

JM Income Fund (erstwhile JM Liquid) an intermediate-term income fund seeks current income and capital preservation. In its initial days, the fund also had small equity exposure. However, JM Income is now managed as a 100 per cent debt fund without any equity allocation.

Leveraging high interest income from corporate bonds with active exposure to equity, the fund posted impressive returns in initial years. However, with interest rates on a downhill, JM Income shifted focus to lower rated bonds (below AAA) to augment returns. With a rising corpus, the fund manager also invested in gilts for liquidity and trading profits. In the current year, the fund has aggressively stretched its portfolio maturity to 5.56 years and posted an impressive return of 17.21 per cent for the one-year ended September 30, 2001. The fund also mitigated its losses in the current volatility with a one-month decline of only 0.05%. However, the assets base still fell by over Rs 150 crore to Rs 369 crore as investors redeemed in panic to cut losses. This is largely attributed to the absence of an exit load.

Simply put, this fund has delivered the goods. It has offered high returns versus its intermediate-bond peers over the trailing one, two and three -year periods, and it hasn't taken on a lot of volatility to achieve this record. The fund currently offers a prudent mix of gilt and corporate bonds. However, the absence of exit load makes it vulnerable sizable redemption.

Simply put, this fund has delivered the goods. It has offered high returns versus its intermediate-bond peers over the trailing one, two and three -year periods, and it hasn't taken on a lot of volatility to achieve this record.

Part of the credit for the fund's success goes to its emphasis on investment grade but not top rated corporate bonds. Rather than making duration bets, manager Nandkumar Surti has consistently focused on corporates and mortgages, which offer higher yields than Treasuries and agency bonds, throughout his eight-year tenure here. (Indeed, he devotes 73% of the portfolio to these areas at present.) These "spread" sectors have outperformed Treasury and agency bonds during most of the past decade, thanks to a strong U.S. economy.

Perhaps more important than this positioning has been the fund's crack bottom-up research. Because big duration and sector moves are infrequent here, Marthaler and his team spend most of their time on issue selection. Before buying, they run a bond through a quantitative model to assess its fundamentals and how it stands to perform in different environments. This rigor paid off for the fund in 2000. Even though corporates and mortgages struggled relative to Treasuries, smart picks such as American Airlines and Waste Management helped the fund to a top-third showing.

The fund doesn't always outshine the competition--in fact it has offered middling results in 2001, perhaps because it has been light in high-yield bonds, which have rallied. Nonetheless, its strong long-term record should be attractive to many investors.