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In Debt We Trust

Standard Chartered Mutual Fund is India's only asset management company to concentrate entirely on debt funds. Its funds are targeted at investors who seek capital protection and stable returns

Standard Chartered Mutual Fund (SCMF) is a special case in the Indian mutual fund industry. It is the only asset management company in the country to be a dedicated debt fund house. In debt funds, it has carved a niche for itself since it started its first fund in 2000. It has been a front-runner in introducing new products to the market. The short-term debt fund, the dynamic fund and the medium-term plan in the debt category are some of the products that SCMF introduced in India. Its funds are targeted at investors who seek capital protection and stable returns.

The Story So Far
SCMF started as ANZ Grindlays Mutual Fund on December 29, 1999, and received SEBI registration 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 investors.

The asset management company launched a medium-term income fund in July 2000, which was followed by the short-term fund in December that year.

The next year, it launched only a cash fund. In 2002, it launched two gilt funds (short- and medium-term) and a dynamic bond fund.

In 2003, it launched eight funds, six of these were for the institutional segment; it also launched a short-term floating rate fund and a medium-term debt fund. In 2004, it launched ten other funds; of which the long-term floating and the All Seasons Fund stand out.

Performance
Most of the SCMF funds have been launched in the past two years where there is not enough history to track performance. Of the older funds that are rated, SCMF does not have any fund with an impressive performance as of December 2004. Its cash fund, the short-term floating rate fund and the Grindlays Super Saver Income Investment Plan are three-star funds. Grindlays Super Saver Income Short-term Fund and the Grindlays Government Securities Fund Short-term Fund are two-star funds.

Its flagship fund is the Supersaver Income Fund. The AMC favours consistency, and does not aim to make its funds chart-toppers. This fund has been a reasonably good performer since its inception in 2000 to 2003, but has faltered in 2004. This is due to the fund taking a higher exposure to corporate papers and reducing its government securities holding, a strategy that didn't work in 2004. SCMF is also a popular fund house with its cash fund. Grindlays Cash has provided returns, which are in line with the category average. Grindlays Dynamic Bond Fund was launched in June 2002.

This fund was sixth among 12 dynamic bond funds in 2003, but ranked twelfth among 19 funds in 2004. SCMF is a big player in fixed maturity plans. These are basically closed-end schemes which are floated with a specific objective and fixed duration.

How It Invests
SCMF uses the 3-D Factor Process, an objective decision making process, which looks at 14 factors that drive interest rates. It puts each factor into three different buckets: economic fundamentals, market psychology and market valuations. The fund develops a long-term perspective on interest rates based on economic fundamentals. Market psychology and market valuations provide the short-term perspective to interest rates. SCMF believes that economic fundamentals catch up over a longer period of time, but the market is driven by market psychology and market valuations in the short run. Based on these factors, SCMF provides weightage to each factor and tries to project interest rate movement. Following a weekly review, each factor gets a bullish/bearish rating and then an overall rating is developed. The method helps the fund in managing interest rate risk.

A Pioneer in Products and Service
SCMF has developed many a new product or a concept that other fund companies have followed up with. It was the first fund house to launch the country's first short-term fund in December 2000, with the next short-term fund being launched only in November 2001. Short-term funds are positioned between income funds and liquid/cash funds, and are suited for investors with a horizon of 60-180 days. It was the first fund house to launch the dynamic bond fund. This fund follows an extremely active management strategy and changes its portfolio with the winds in the market. It will become a long-term debt fund when interest rates are falling and a short-term debt fund when rates turn volatile. The fund does this by reducing the average duration of the portfolio (average duration is the average tenure of the overall portfolio) when interest rates move up and it increases the duration when rates soften. It has also been the first fund house to launch a medium-term plan of its income fund.

In February 2003, the fund house became the fourth AMC to launch a floating rate fund. In August 2004, it launched the All Seasons Bond Fund, the first fund of funds to invest only in debt funds. This fund invests in SCMF's various funds depending on what the fund manager expects. The investor does not have to bother moving between two funds, if the interest rate is likely to change. In service too, the fund has tried to set new standards. It was the first AMC to offer same day redemption for cash funds and next day redemption for income funds.

The Way Ahead
The past two years have been the worst times for debt fund investors. The interest rate started rising after three years of going down continuously. This has resulted in poor returns from debt funds. In such times, SCMF was proactive to launch new products and fill almost every need of a debt investor. While returns from debt funds have been poor, SCMF's performance has been mediocre, without a single four- or five-star fund in its stable. Given that its funds are all quite recent, SCMF has done very well in terms of its assets under management, though it still has to prove itself on the performance charts.

Strategy Note
Naval Bir Kumar, MD, Standard Chartered MF

Outlook on Debt Market
Year 2004 was not so bad for us. In terms of asset growth we did reasonably well, but the interest rate went up from about 5 per cent to as high as 7 per cent. I expect 2005 to be better as the interest rate is unlikely to go up much and returns will only improve.

Future Plans
We will continue to introduce new products, though there is nothing planned in the near future. We launched the Long Term Fixed Maturity Plan in November 2004. This product was targeted at high net worth individuals and retail investors, to meet the requirements of the previous tax-free RBI Relief Bonds. We lock in to AAA corporate bonds. We plan to launch more of these. We also launched the All Seasons Bond Fund that invests in different bond funds, taking away the investors' hassle of shifting between funds. We will push this product in 2005. We also plan to increase flows in existing schemes.

On Equity-free Strategy
The 100 per cent equity-free strategy has worked with us. Standard Chartered Mutual Fund does not have equity products elsewhere in the world. But if we find the need to introduce equity products in India, we will do it if we can build the same expertise in equities as we have in managing debt assets.

Advice to a Fixed Income Investor
Don't be opportunistic and chase returns. Work out an asset allocation plan and stick to it irrespective of market trends. If the asset allocation goes out of sync because of market trends, rebalance it.