From a conservative approach in the past, Sundaram Bond Saver has turned more aggressive as far as interest rate risk management is concerned.
A conservative approach didn't yield chart-topping returns when interest rates were falling sharply in 2001. But by being a little more aggressive since 2002, the fund has made up for the lost opportunity. Thus, while the fund has consistently courted a below average risk profile since 2001, its return profile has progressed from average to above average. With a below average risk and above average returns, Sundaram Bond Saver has the third highest risk-adjusted returns among all income funds.
During its formative years when interest rates were stable, the fund ranked in the top quartile of the category in 1998 and 1999. However, as interest rates started marching south from late 2000, the fund didn't get in the fast lane to boost returns. For instance during the two rate cuts in the first quarter of 2001, Sundaram Bond Saver's average maturity ranged between 1.7 years and 2.8 years against its average peer's 3.18 years and 3.8 years. Later on, it attempted to take interest rate risk by hiking the gilt component and could gain from the third rate cut during October 2001. Its 16.37 per cent return during 2001 was just in line with the category average.
Thus, it continues to don an aggressive look since 2002. The fund's average maturity has either been at the same level or higher than the average maturity of its peers. The fund ended up being the third largest gainer during 2002.
However, it is not to say that the fund has shed its conservative image altogether. It does turn conservative on volatile occasions such as January 2003, when yields rose sharply. The fund reduced its average maturity from 8 years in December 2001 to 5.46 years in January 2003, but couldn't escape the erosion in NAV. After the turmoil, the fund has once again courted gilts but in a limited way. Though its average maturity stretches beyond 6 years, it is relatively lower 8 years like some of its peers.
At the same time, the lowering of credit risk has mitigated the higher interest rate risk the fund bears today. As against an average 13-14 per cent exposure to AA rated corporate bonds during 2001 and 2002, the allocation to these bonds is around 3 per cent in 2003.
Sundaram Bond Saver may not be a top performer, but the fund's consistency could be a good trade-off for the marginal compromise in returns. For long-term investors, it can be a core holding.