HDFC Medium Term Debt Fund (An open ended medium term debt scheme investing in instruments such that the Macaulay Duration^ of the portfolio is between 3 years and 4 years) A Prudent & Disciplined Approach to Credit (Refer Slide 3) ^ Please refer to Slide 10 on which the concept of Macaulay’s Duration has been explained. Riskometer This product is suitable for investors who are seeking*: Income over medium term. • • to generate income/capital appreciation through investments in Debt and Money Market Instruments * Investors should consult their financial advisers, if in doubt about whether February 2020 the product is suitable for them. 1
Our Investment Philosophy for Credit In-depth credit assessment / risk control is key to our credit investments • Indian fixed income markets have limited liquidity, hence philosophy of SLR for credit, • generally prioritized in that order Safety – Superior credit quality Liquidity – Prefer securities with better liquidity; focused on portfolio liquidity Returns – Risk reward is the key & not yield alone Given that credit markets can deteriorate without much warning, even in the best of • credit environments, our endeavour is to be prudent on credit risk (risk control v/s risk avoidance) 2
How do we control risk? Key strategies for risk control: • Risk Assessment - Intense focus on underlying credit evaluation, focus on 4 C’s Risk Mitigation - Adequate covenants, right sizing, diversification, regular monitoring etc Risk Pricing – Take risk only when it pays Emphasis on Four C’s of Credit • Character of Management (e.g. avoided exposure to a large distressed housing finance company) Capacity to Pay (e.g. avoided exposure to a large distressed infrastructure company) Collateral pledged to secure debt (e.g. recovered large portion of investment backed by shares of large media company) Covenants of debt (e.g. recovered investment from a MFI player due to strong covenants) Risk Control achieved through conservative sizing of exposure based on proprietary • Credit Scoring Model which factors in – Parentage, Financials, Rating & Outlook . Risk Diversification across individual issuers, business groups and sectors • The current investment strategy is subject to change depending on the market conditions. For complete portfolio details refer www.hdfcfund.com. HDFC Mutual Fund/AMC is not guaranteeing/offering/communicating any indicative yields or guaranteed returns on investments made in the scheme nor investment advice in the scheme mentioned. (top 10 holdings account for ~26% of fund, >85 no. of issuers) 3
Credit Decision Tree Credit Evaluation High perceived Acceptable Risk Credit risk Risk mitigation Avoid risk, using 4Cs, irrespective of diversification, yield offered sizing etc Risk management through active tracking of key variables/events for company & sector etc 4
HDFC MF’s cautious approach to credit worked yet again in 2019 ! List of companies / Groups which faced stress* In the last few years banks have seen rise in GNPA, • Dewan Housing Deccan Chronicle Group Religare Group peaking at over 15% in FY18^. Group Vodafone Idea Anil Ambani Amtek Auto Limited Ltd. Group However, credit stress* faced by Mutual funds (MFs) • Jindal Steel & Power - Sintex Group Cox & Kings Ltd has been much less. Group IL&FS Group Cafe Coffee Day Ballarpur (BILT) Group (other than Group In our assessment, MFs have experienced instances of • SPVs) credit stress* in nearly 17 companies / Groups Jana Small Zee Promoter IDBI Bank Group $$ Finance Bank IL&FS SPVs $ Simplex (backed by NHAI Infrastructures $ annuity) HDFC MF was not exposed to most such stressed cases. (Highlighted in Red above) • Even in cases where HDFC MF had exposure, we recovered major portion of our investment due • to covenants, good business/collateral and parentage (Highlighted in Green above) Overall credit costs have been minimal for HDFC MF (Stressed exposures at ~0.54% of AUM of • affected schemes)$ We think the worst phase of credit stress is behind us, while high credit spreads are • available $ Principal exposure to IL&FS SPV and Simplex Infrastructure at time of credit stress was ~Rs. 358 cr. As of Jan’20, after the 50% haircut the market value of these exposure was ~Rs. 179 cr or ~0.54% of total AUM of affected schemes. *Stress is defined as companies whose ratings were eventually downgrade to BBB or below rating category ^ Total GNPA of banking Sector. $$ As of Jan’20, the market value of residual Zee Promoter Group exposure was ~Rs. 13.89 cr or ~0.09% of Total AUM of affected schemes. 5
Attractive credit spreads create an opportunity; Worst is behind for NBFCs AA & lower rated corporate bond spreads are elevated • AAA and AA spreads above 3Y G-Sec^ at ~140 bps over 3 Y G-Sec and, AA rated corporate 250 AA Rated spreads over 3Y Gsec in bps (RHS) bond spreads offer greater value vs AAA rated bonds AAA Rated spreads over 3Y Gsec in bps (RHS) 200 (Chart 1) 150 100 NBFC Spreads also widened significantly in 2019, • specially for non-AAA rated bonds (Chart 2) 50 - Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Stronger NBFCs witnessed spread compression while • NBFCs’ with credit quality concerns saw spread Chart 1: Updated till Jan’20 widening NBFC situation is improving gradually: • CP exposure as % of total borrowings of NBFCs is estimated at ~7% in Oct19 vs ~16% in Aug18 Asset book growth of NBFCs has moderated and companies have securitized/sold assets to improve liquidity Remedial measures taken by Government/ RBI Ample liquidity and low interest rates Chart 2: Updated till Feb’20 ^ Average monthly spread of NIFTY Short term index of AAA, and Average of (AA+,AA, AA-) over 3 Yr benchmark Gsec yields. * AAA average spread is average spread of 3 Yr. bond yields for select large AAA rated NBFCs over 3 Yr benchmark Gsec. AA average spread is average spread of 3 Yr. bond yields for select large AA rated NBFCs over 3 Yr benchmark Gsec . If the rating on any NBFC is downgraded, it is removed from calculation of spread of that category. Source: Daily valuation provided by ICRA/CRISIL, Bloomberg, RBI 6
HDFC Medium Term Debt Fund Small size and high spreads create an attractive opportunity !!!! 7
HDFC Medium Term Debt Fund – An attractive opportunity !!! HDFC MTF YTM and 3Y G-Sec • Investment in debt securities such 10 HDFC MTF YTM 3Y- Gsec (BBM) that portfolio duration is between 3 to 4 years. Flexibility to reduce 9 duration to 1 year based on adverse 8 interest rate view. 7 6 • Twin advantages of duration and relatively higher yield (Chart 1) 5 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Chart 1 • Small size of the fund + Higher Credit spreads provide an attractive AAA and AA spreads above 3Y G-Sec^ opportunity (Chart 2) 250 AA Rated spreads over 3Y Gsec in bps (RHS) AAA Rated spreads over 3Y Gsec in bps (RHS) 200 150 100 50 - Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Chart 2 8
HDFC Medium Term Debt Fund – Consistent Performance 3 Year Daily Rolling Returns • Average of 3 year daily rolling returns is 8.4% and more than 7% Distribution 3 Year Daily of returns returns achieved in ~92% of Range Rolling % for last 5 instances. (As of 31 st January 2020) Returns years Less than 7% 8% Average 8.4% More than 7% 92% Maximum 10.8% More than 8% 60% Minimum 6.2% More than 9% 33% HDFC MTDF Non-AAA exposure vs AA Speads over 3Y GSec 70 200 • Current high spreads offer attractive investment opportunity 60 150 50 Jan'20 : 126 bps 100 • ~ 65% of allocation in AAA/ Sov/ 40 Cash offers flexibility to increase 50 30 credit exposures and take Jan-20 35.5 % advantage of high spreads. 20 - Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 HDFC MTF - non-AAA% (LHS) AA Rated spreads over 3Y Gsec in bps (RHS) 3 Year Daily Rolling Returns from 1 st Jan 2015 to 31 st January 2020. Refer Slide 15 for complete performance. For complete portfolio please refer to our website www.hdfcfund.com 9
Portfolio Statistics – HDFC Medium Term Debt Fund Portfolio Classification by Issuer Rating Class (%) AAA & Equivalent, A1+ & Equivalent 45.3 AA+ 2.8 AA/AA- 25.8 A+ to BBB- 8.5 Sovereign 11.1 Cash, Cash Equivalents and Net Current 6.4 Assets AUM as on Jan 31 st 2020 (In Rs. Cr.) 1241.95 Average Maturity* Macaulay Duration* Modified Duration* Yield To Maturity* 4.27 years 3.26 years 3.06 years 8.27% For complete portfolio details refer www.hdfcfund.com. Portfolio details provided as on 31 st January 2020. Based on long term rating. * Computed on the invested amount. Macaulay Duration (Duration) measures the price volatility of fixed income securities. It is often used in the comparison of interest rate risk between securities with different coupons and different maturities. It is defined as the weighted average time to cash flows of a bond where the weights are nothing but the present value of the cash flows themselves. It is expressed in years. The duration of a fixed income security is always shorter than its term to maturity, except in the case of zero coupon securities where they are the same. 10 10
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