This fund house clearly doesn't believe in having its fingers in several pies. That perhaps explains why Standard Chartered Mutual Fund focuses exclusively on debt instruments. And this focus, at a time when debt markets have been on a roll, has helped the fund house to become the sixth-largest asset management company in the country.
Background
Standard Chartered Mutual (previously ANZ Grindlays Mutual Fund) was constituted as a trust on December 29, 1999, and was incorporated (registered with the Securities & Exchange Board of India) on March 13, 2000. While Standard Chartered Bank holds a 75 per cent stake in the AMC, the remaining 25 per cent is with domestic partners. In spite of low margins in the debt fund category, this AMC has kept its focus on profitability in the Indian markets. Claims Naval Bir Kumar, managing director, Standard Chartered Mutual: ''We have made profits from year one. This is the reason we have been extremely focused and haven't needlessly spent money on large ad campaigns that do not in any way add value to our investors.''
Performance
Since the AMC is a relatively new entry to the Indian mutual fund landscape, most of its funds have a short history. Only two funds—Grindlays Super Saver Income Fund and Grindlays Cash Fund—are more than 18 months old. Launched in July 2000, Grindlays Super Saver Income gave impressive returns of 18.55 per cent in 2001 and was ranked third in the category. It was because before the rate cut in February 2001, this fund had the highest average maturity. During the rate cut in March 2001, the fund continued to maintain high maturity. In 2002 too this fund produced a category-beating performance. Grindlays Cash Fund, which was launched in July 2001, has had a decent performance till now and beat the category in 2002.
As for Grindlays Dynamic Bond Fund, it was launched in June 2002. By December 2002 the fund's average maturity had reached 11.8 years—the highest for any medium-term debt fund. In the same quarter, the fund returned 6.87 per cent while the medium-term debt category generated a 5.22 per cent return. Though Grindlays Dynamic performed better than the category average it was surpassed by a few top-performing funds. The fund's dynamic nature was visible in January and subsequently in February 2003 when its average maturity moved down sharply to 4.4 years and then moved up to 8.6 years. While active calls helped the fund turn in a return 0.16 per cent in the first quarter of 2003, an average medium-term debt fund lost 0.14 per cent.
Strategies and Risk Control Measures
Since it focuses all its energy on debt funds, interest rate risk and credit risk are two things that this fund house would be worried about. To combat this, Standard Chartered Mutual has developed two proces-ses: 3D Factor Process and Credit Risk Monitor Process. While the former is developed to track interest rate changes, the latter ensures credit worthiness of the portfolio. Under the 3D Factor Process, the fund has identified 14 factors that affect the interest rate, broadly divided into three categories: Economic Fundamentals, Market Psychology and Market Valuation. Certain weightage is assigned to these factors based on time. Following a weekly review, each factor gets a bullish/bearish rating and then an overall rating is developed. The method helps the fund in active duration (interest rate risk) management. The 3D Process complements the Credit Risk Monitor Process, which is aimed at capital preservation. ''The endeavour is to use disciplined processes and thus institutionalize investment management. This also serves to protect us from undue market noise and accordingly provide consistent good quality returns over the long term…amply reflected in funds' performance over the last two-and-a-half years,'' says Kumar.
Innovations
Standard Chartered Mutual was the first fund house to launch a short-term fund in the country, as early as December 2000. The next short-term fund was launched only in November 2001. Short-term funds—which are positioned between income funds and liquid/cash funds—are suited for investors with a horizon of 60-180 days.
Another first to this fund house's credit is the Grindlays Dynamic Bond Fund. This fund—which follows an extremely active management strategy—tries to be like a long-term debt fund when interest rates fall and a short-term fund when rates turn volatile. Grindlays Dynamic does this by reducing the duration when interest rates move up and by increasing the duration when interest rates fall. Hence, to protect returns from interest rate volatility, the duration of Grindlays Dynamic can undergo a change rapidly (days/months/ years). This fund believes in 'micro management' of the portfolio—it tries to optimise returns in the short term unlike an income fund that maximises returns in the long run.
In February this year, the fund house became the fourth AMC to launch a floating-rate fund. This fund invests 65 per cent into floating-rate instruments while the remaining 35 per cent is parked in fixed debt instruments. The coupon (interest) of floating-rate instruments is periodically adjusted based on the prevailing interest rate environment. The advantage of this instrument is that as the coupon is reset, the price of the security does not have to change to bring the yield in line with that of other instruments. Thus, floating-rate instruments are less volatile than conventional debt securities, which have a fixed coupon. The objective of the fund thus is to minimise interest rate risks and reduce volatility. This fund has assets worth Rs 248 crore under management, as on March 31, 2003.
The way ahead
In the past three years interest rates have been continuously falling, and in all probability any further fall will not be very substantial. Therefore, expecting debt funds to turn in handsome returns as they did in the past would perhaps be too much to ask for. However, this hasn't deterred Standard Chartered AMC from continuing its commitment to debt funds. The fund house believes that the Indian mutual fund industry is growing at a fast pace, which will provide it an opportunity to build on its core competence. So, will the AMC look at equity funds in the immediate future? ''We have no plans on the anvil of launching equity funds. We will do so when the group has built relevant experience in this area and when we are confident of providing sustainable returns to investors,'' says Kumar.
This article was originally published on July 17, 2003.
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