Fund Call. Birla Sun Life Treasury Optimizer: Consistent returns across rate cycles - Buy

Since the RBI began its rate cut in early 2015, debt funds have had a lot to cheer. In fact, the yields on 10-year G-Secs started trending lower in mid-2014 itself, leading to tidy gains for investors.

After a spectacular rally in 2014 and somewhat moderate returns in the following year, 2016 was yet another stupendous year for debt funds. From the 7.7 per cent levels in the beginning of the 2016, yields fell by nearly 125 basis points by the end of the year.

But since the RBI’s February policy this year, yields have been on the rise. The central bank’s indication that there was limited headroom to lower rates from hereon saw yields spike to 6.8 per cent levels; yields on G-Secs still hover in the 6.7-6.8 per cent range. The RBI’s policy last week, only re-iterates the end of the rate cut cycle. .

Bond investors should, hence, stay clear of duration calls (betting on rate movements) and, instead, invest a chunk of their debt fund investments in short-term income funds that carry less volatility in returns.

Birla Sun Life Treasury Optimizer is one such fund that investors can consider. It has been a chart-topper, delivering above-category returns across cycles and time periods.

The short-term income fund also carries relatively lower risk, investing predominantly in government bonds and AAA rated corporate bonds. Over the last three- and five-year periods, the fund has delivered over 10 per cent return annually.

Over the past one to one-and-a-half years, Birla Sun Life Treasury Optimizer has invested 40-50 per cent of its portfolio in government bonds and 30-35 per cent in AAA rated corporate bonds.

AA rated bonds have been capped at 10-13 per cent of portfolio. This mitigates the credit risk to some extent, which is a key factor to consider, in light of recent downgrades of debt instruments by rating agencies. The fund runs an average duration of 2-4 years, which mitigates the rate risk.

However, prior to 2013, the fund has mostly invested in very short-term debt papers such as certificate of deposits.

The fund has consistently delivered above-category returns across time periods. Its annual compounded average long-term return of 9.6 per cent over the past seven years is over one percentage point higher than the category average.

The fund has also delivered consistent returns across all rate cycles. Even in the lacklustre 2015 market, the fund gave a healthy 8.5 per cent return.

Birla Sun Life Treasury Optimizer has currently (as of February 2017) invested about 44 per cent of its portfolio in government bonds, 36 per cent in ‘AAA’-rated bonds and 12 per cent in AA rated bonds.

Top ‘AAA’-rated bond holdings include Reliance Jio Infocomm, Indiabulls Housing Finance, Dewan Housing, and LIC Housing. The fund’s exposure to ‘AA’-rated debt paper of Tata Capital Financial Services is 3.5 per cent.

Currently, the yield-to-maturity of the fund is around 7.5 per cent. Its duration of four years is at the higher end of the range it has maintained in recent years, possibly as a wait-and-watch approach until more clarity emerges on the rate front.

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