Unlike its sober cousin--Templeton India Income Fund, the Income Builder Account dons an aggressive image. In fact, it is the most volatile income fund. It has charted both adverse and favourable times with equal vigour--raking in maximum gains when interest rates fell as well as falling the most when interest rates rose. This is exactly what makes it one of the most volatile funds in the category, given its highest standard deviation.
But it wasn't the same when the fund started off its journey when interest rates were high in 1997. While steering away from government securities for the first few years, it managed to keep interest rate risk at bay. The returns came from a pure corporate bond portfolio, which had a mix of top rated as well as below AAA rated corporate bonds. The latter offered higher coupon income, with higher default risk in the fund.
Gradually, the fund shunned its conservative image and started courting gilts in 1999. As interest rates started marching south, the focus on interest rate risk management gained prominence. At the same time, a new fund manager took charge of the fund. After getting caught on the wrong foot during the July 2000 volatility, the fund maintained a cautious stance for the rest of the year. Till this time, its annual returns landed it in the middle rung of the category.
But since 2001, as interest rates fell further, its gilt allocation has usually been the highest among income funds. The aggressive strategy is reflected in its performance as the fund reached in the top quartile during the year and continued to maintain that position the next year as well. But during the volatile periods like that in January 2003, the fund tends to vulnerable. Its 1.11 per cent loss during that month was among the worst in the category, and is also its worst monthly performance.
As the fund continues to maintain a heavy tilt towards government securities, it is bound to be volatile. At the same time the fund has limited its credit risk exposure as the allocation to below AAA-rated bonds has come down from around 11 per cent in previous years to 6 per cent this year.
Templeton Income Builder Account has proved to be more volatile as well as rewarding when compared to other income funds. How this plays out when interest rates rise should govern future allocation to this fund.
This article was originally published on November 25, 2003.
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