It flip-flops between interest rate and credit risks. This fund has raked in a 13.05% return since launch. Despite average long-term performance and risk-return grade, its trailing 1-month loss of 0.37% has been the lowest vis-a-vis its peers. Except for Q-1 2002, Alliance Income usually avoids long interest rate bets. Rising bond prices, and its portfolio average maturity moving from 3.2 years (as was the case in last 22 months), saw it emerge among the top five in its category.
Launched in 1997, this fund has always courted different quality bonds, starting with AA instruments. As you know, below AAA-rated bonds pay higher coupon, but they come with attendant credit risks. Since they aren't traded actively, they respond to interest rate changes, but with a lag. A surge in the asset base saw the fund chase AAA bonds, including gilts. But it continued picking lower-rated instruments though in small numbers. During market rallies, the fund buys these instruments at relatively high yields. That's because it believes that lower-rated bonds have an upgrade potential. Case in point: Reliance Petroleum (+AA-rated), which accounts for 10% of the fund's portfolio, could be upgraded to AAA post-merger with Reliance Industries (AAA).
In 2001, the fund clocked a 16.45% return, beating 50% of its peers by skillfully managing interest rate risks. While it increased exposure to gilts, the portfolio maturity was dealt with more caution: ranging between 2.90 and 5.20 years. In 2002, the fund stretched the maturity beyond 6 years. However, with the fund manager anticipating rates to be 'stable', gilt exposure was reduced to half -- 22% -- in April. Current maturity reflects that the fund is conservative about where the rates are headed. Hence, it is again looking at lower-rated bonds to get better returns.
Overall, this fund has been a decent performer in all market conditions. Though an encore of 2001 is unlikely, but with a cautious stance, it could deliver average returns. So, conservative investors should find this fund palatable.
This article was originally published on June 03, 2002.
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