FundsIndia Recommends: DSP BlackRock Credit Risk Fund

In its monetary policy last week, the Reserve Bank held policy rates, lowered inflation forecasts but still cited several risks to inflation. A couple of weeks prior, the government announced a more cautious borrowing programme for the first half of the current fiscal year. This favours a steady – if not lower – policy rate scenario. Bond yields, which had risen sharply from the last quarter of 2017, declined over the past few weeks, triggering a rally in bond market. In other words, the yields have been see-sawing for the past several months now.

With this changing and indecisive interest rate picture, accrual funds that take some credit risk stand to deliver well. Papers rated lower down the credit scale come with higher yields.

DSP BlackRock Credit Risk fund (formerly DSP BlackRock Income Opportunities) is a prudent option in this space. The fund has a careful approach to credit risk, refraining from taking excessive exposure to the very low-rated set. Even with this, the fund has generated returns above the average of credit risk funds.

Therefore, what DSP BlackRock Credit Risk presents is a good balance of risk and return. It suits investors who want higher returns from their debt funds in exchange for some risk. It needs a minimum holding period of three years.

Measured approach

DSP BlackRock Credit Risk is a medium-term accrual fund, i.e., it depends on interest income from its bond holdings to generate returns and does not time the interest rate cycle. Its average maturity has ranged around 3 years.

The fund has, in the past few years, treaded the middle ground between the income fund category and the credit opportunity category. To conform to SEBI’s categorisation rules, the fund has now classified itself as a credit risk fund. This category requires a minimum 65% exposure to papers rated below AA+.

For DSP BlackRock Credit Risk, this category change is unlikely to involve a severe strategy deviation. Between September 2016 and October 2017, credit exposure averaged 45%. The fund has been slowly increasing the credit exposure since November last year; the average exposure to papers rated below AA+ (i.e., lower-rated credit) is now at 52%.

The bulk of this credit exposure and the hike were in AA and AA- papers, and not in the A-rated set. From around 25% of the portfolio, papers rated AA and AA+ climbed to 31%. Papers belonging to the A-rated set have so far remained within its historical average of 24%.

This suggests that the fund, even with the new categorisation, will remain cautious with the risks it takes. This compares favourably with other funds in the credit risk category, such as Franklin India Corporate Bond Opportunities and ICICI Prudential Regular Savings which have much higher credit exposures. So, while risks are set to go higher for this fund, it is still likely to remain the lower risk option within the credit space. The fund has a history of generating higher returns even with a measured risk approach. This holds it in good stead for future return potential as well.

Steady returns

DSP BlackRock Credit Risk has been reasonably steady in its returns. The volatility in returns has been within the range of income funds. Volatility is marginally higher than the average for credit risk funds, but that comes from the fund’s comparatively higher AAA share. When rolling 1-month returns for 3 years, DSP BlackRock Credit Risk delivered negative returns 3% of the time. The credit category had a higher proportion of negative returns.

The fund’s 1-year return may look low at 6.82%, and especially when stacked against credit risk funds. This again stems from the AAA holding, where yields shot higher in the last quarter of 2017 causing bond prices to dip. The fund’s February portfolio yield is at 9.36% with an average maturity of 2.83 years, which is more indicative of its return potential.

When rolling 3-year returns over 5 years, DSP BlackRock Credit Risk averaged 9.32%. This is higher than what income funds generated on an average. More, returns are on par with credit risk funds and have beaten their average returns half the time. This is commendable given that the fund has historically a much lower exposure to high-yield papers.

Even its worst 3-year return of 7.5% was on par with the credit risk category’s 7.7%. In shorter timeframes too, a similar story plays out. One-year average returns of 9.4% rolled over 3 years is above the income category’s 8.65% and on par with the credit category’s 9.4%.

The fund does not have high exposure to any single instrument apart from a couple AAA-rated papers. In many papers, the fund has secured guarantees, or has backing of the company’s shares, receivables or other assets, or has other protective covenants in place. The AMC has also had a history of seeing more paper upgrades than downgrades; for the fiscal year 2017-18, there were six upgrades and two downgrades.

Pankaj Sharma and Laukik Bagwe are the fund’s managers.

FundsIndia’s Research team has, to the best of its ability, taken into account various factors – both quantitative measures and qualitative assessments, in an unbiased manner, while choosing the fund(s) mentioned above. However, they carry unknown risks and uncertainties linked to broad markets, as well as analysts’ expectations about future events. They should not, therefore, be the sole basis for investment decisions. To know how to read our weekly fund reviews, please click here.