In recent times, this fund has done a complete volte-face. If you have been tracking Alliance Income for long, its new look would stump you. For long, Alliance Income stuck like glue to AAA paper but lately it has been buying into AA bonds (capped at 20%). Also, after experimenting with high maturity (average 6 years) between December 2001 and March 2002, the fund has turned conservative again, with average maturity trimmed to 4.14 years, which is on the lower side in its category.
However, the fund seeking exposure to below AAA bonds would be out of line. No, says the fund manager. With the joyride for bond funds being over, he thinks that the only way one can outperform is by increasing exposure to below AAA paper, which can offer value, with economy picking up speed. Small wonder then that Alliance Income is topping the charts on a year-to-date basis, as on July 5, 2002.
In fact, in the initial years, these high-coupon, high credit risk bond picks were major propellers. Since they aren't actively traded, these instruments are less sensitive to rate changes. So, to get higher returns Alliance Income held on to them till maturity. A bloating asset base, however, saw the fund shift focus to high-quality bonds, including gilts. The fund's limited exposure to gilts (around 22% in April and May) came in handy when gilt prices went for a tailspin. Overall, the fund's gilt weightage has drastically been reduced from 46% in March 2002 to 26.4% now in favour of corporate bonds, as the fund manager doesn't see 'too much potential for appreciation of gilts'.
Asset re-allocation notwithstanding, fund manager has successfully managed to balance both interest rate and credit risks. For instance, despite the fund's maturity being in the narrow range vis-à-vis its peers during the bond rally in 2001, it managed to beat half its peers, finding adequate support in below investment grade bonds (24% on an average).
In all, Alliance Income's decent return and low volatility should be an eye-catcher. Besides, the fund's ability to guard against downside risk better than others makes it a suitable choice for conservative investors.
This article was originally published on July 08, 2002.
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