This fund may not have had a great start, but its recent performance has been quite impeccable. After a mediocre run till 2000, Alliance Income Fund produced a category-beating performance for the first time in the year 2001. Year 2002 has been the best in the scheme's existence so far. Active portfolio management through the year helped the fund turn in a 16.4 per cent return in 2002, beating many of its peers.
The fund's portfolio quality has undergone a significant change over the years. In 2001, Alliance Income's portfolio had relatively higher exposure to AA and associated papers, as compared to AAA instruments. But since then it has been tapping high- quality instruments. Today, its portfolio has 40 per cent exposure to AAA paper and only 16 per cent to AA+ and associated paper. This move was not directly related to reducing credit risk.
The fund believed that with interest rates being volatile, more returns could be generated from duration (interest rate) management rather than credit management. However, if interest rates stabilise, Alliance Income may again turn to credit management to fetch higher returns. Therefore, Alliance Income will not shy from courting low-rated paper if need be.
With interest rates on a decline, debt funds have been able to turn in handsome returns. However, Alliance Income failed to capitalise fully on rate cuts. For instance, before the bank rate cuts of February 2001 (0.5 per cent) and March 2001 (0.5 per cent), the fund had relatively low average maturity compared to its peers.
This year though Alliance Income has sharply increased its gilt exposure from 27 per cent (as on January 31, 2003) to 46 per cent (as on March 31, 2003). Hence, the fund's average maturity has risen to 6.6 years (as on March 31, 2003)—the highest since last three years. This was done in anticipation of reduction in both CRR cut and the bank rate cut in the Credit Policy. (The policy announced a 25 basis point cut each in the bank rate and the CRR.)
This fund—which is relatively less volatile than its peers—may be the right choice for investors who want capital preservation and are looking to benefit from an actively managed portfolio of debt instruments.