With a middling performance across time periods, Temple-ton Short-term Income is an average performer. Though it hasn't always raced ahead when interest rates move down, the fund has displayed consistency in returns for one and three-month periods.
Its risk-adjusted returns are in the first half of the category. Deft management of credit risk and conservative handling of interest rate risk is the reason behind this. Till January 2003, Templeton Short-term Income's average maturity was between 0.25 years and 1.03 years. Since then the average maturity has been kept above one year so far.
Launched in early 2002, when AA and associated bonds yielded 1 per cent more than AAA bonds, one-fourth of its assets were invested in the former. With sizeable inflows and spreads reducing by June 2002, the fund reduced its below AAA bond exposure to 17 per cent. Getting quality-conscious in 2002, AAA bonds have accounted for an average 40 per cent exposure while allocation to below AAA bonds has averaged around 14 per cent.
Also, the fund has on occasions invested in short to medium-term gilts. While it was the only fund in its category to hold 2-3 per cent assets in gilts during the volatile month of May 2002, it managed to deliver strong returns in April and May 2002.
Like its peers, it managed to hold on to returns when interest rates moved up in January and March 2003. Its gilt exposure at 4-5 per cent was largely in line with that of the category. Thereafter, the fund exited gilts in May.
During volatile phases, it is short-term debt instruments (P1+ rating) that act as a liquidity buffer. But the fund's no-load feature makes it more susceptible to redemption pressure. For instance, during December 2002 and March 2003, as its asset base shrank by over 50 per cent, the fund could leverage on its 15 per cent exposure to commercial papers. Also, in a bid to enhance portfolio yields, it has often invested in securitised debt and floating rate instruments.
Templeton Short-term Income should suit investors who have an investment horizon of one to six months and attach importance to stability of returns. However, the only deterrent for small investors could be the steep minimum investment limit of Rs 1 lakh.
This article was originally published on September 08, 2003.
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