Corporate bonds have always dominated the portfolio of LIC Bond. And within corporate bonds, the fund does not hesitate to take higher exposure to lower rated papers to squeeze some extra returns.
Gilts have found little favour. In fact since November 2004, the fund has completely ignored them. While it has managed to beat most of its peers, the fund has paid a price for ignoring gilts. For example in 2001, when gilts yielded superb returns, its strategy of relying on bonds (putting 50 per cent of its corpus in bonds against just 10 per cent in gilts) meant that its 16.2 per cent return was not one of the hottest that year.
In 2002, the fund's aggressive approach helped it in the falling interest rates scenario. Though it continued with its corporate bonds tilted portfolio, a higher maturity helped it post a top quartile return of 17.28 per cent.
In 2003, the fund suffered because of a poor performance during the volatile first quarter-it lost 0.35 per cent as against the category average return of negative 0.10 per cent. This marked a radical shift in the fund's strategy. It turned relatively defensive and cut the average maturity. Though this strategy restricted the upward movement, it helped the fund reduce the downside risk. The fund managed volatile 2004 quite well-it landed a place in the top half. The performance could have been much better had the fund not slipped 1.42 per cent in the second quarter against 0.99 per cent loss of the average peers. The fund has performed reasonably well this year. As on August 9, 2005, it's up 2.97 per cent. The portfolio, though still dominated by quality AAA papers (an average 64 per cent), looks a tad aggressive due to the presence of an average 28 per cent AA and below papers. However, the average maturity (1.19 years as on July 31, 2005) is below the category average of around 2 years.
Interestingly, though the fund has often adopted a bolder-than-average approach, it has successfully kept its standard deviation under check. The fund's low expenses ensure a sustainable advantage over peers.
This article was originally published on August 11, 2005.
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