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Magnum Income

The fund is constantly aiming to strike a balance between interest rate and credit risk through excellent picks. Its 1-year return of 15.09% is superior to its average peer. Despite volatility, this fund's pursuit of credit quality is worth a mention

This fund's performance has been steady despite management changes. Its 2-year return at 13.28% against the category's 12.95% speaks out boldly. More so, Magnum Income's (previously Magnum Liqui Bond) year-to-date return of 5.39% till April 30, 2002 is much higher than the category's 4.30%. What is peculiar to this fund is that it's a great performer when the interest rates are down, but it struggles when the situation reverses. The reason: it aggressively moves in and out of interest rate-sensitive government securities.

This fund follows a middle path. It displays aggression while managing interest rate risks. Since government securities are actively-traded and carry long maturity, they respond sharply to the ups and downs in interest rates. With a new fund manager in place since February this year and the corresponding softening of interest rates, it indulged in heavy gilt trading. However, in a volatile September 2001, it lost heavily. During the month, while the portfolio maturity was reduced from 4.05 years to 2.5 years, in the ensuing month it was stretched to 5.5 years. The result: the fund trounced 84% over its peers in October.

However, it strives to sidestep awkward bumps by following a conservative credit risk management approach. To put it directly, the new fund manager claims that the fund has decided to sacrifice that extra yield for building a default-free portfolio. This indicates that it is moving away from its previous policy. During its salad years, it made good its investments in below AAA-rated bonds. But a rise in the asset base and the change of guard indicates that it will invest in top-rated manufacturing stocks which may offer yields 80-100 basis points lower than AAA-rated issues in other sectors. And the fund's decision to pick only quality instruments has started to reflect in its portfolio composition. For instance, the allocation to below-AAA rated bonds has come down from a high of 20% in February in 2001 to 11.31% today. Besides, a buy and hold strategy has seen some of its issues moving up on the credit quality ladder.

Overall, Magnum Income is constantly aiming to strike a balance between interest rate and credit risk through excellent picks in its portfolio. To maintain an above-average performance some consistency will have to be displayed. After all, frequent reshuffle in top management sends wrong signals to the market and the investor. This fund will be a good option for those seeking steady income, at the same time, are willing to endure intermittent turbulence.