The All-Weather Duration Fund
Fund Review: ICICI Prudential Long Term Plan
Investors who are concerned about which way bond yields are headed, have an easier option - put away their moneys into ICICI Prudential Long Term Plan and let the fund manager take the interest rate call instead. Debt Funds benefit from falling yields, whereas rising yields affect them negatively. Funds with higher average maturities are more sensitive to changes in yields.
Launched in 2009, the fund has built up an impressive track record of predicting interest rate cycles, translating into a noteworthy since inception annualized return of 10.56%.
Positioned as an "all weather" duration fund, ICICI Prudential Long Term Plan aims to provide reasonable returns in all kinds of market conditions. It invests into highly rated corporate and government bonds with reasonable market liquidity. As on date, 87% of its portfolio comprises of SOV and AAA rated bonds.
The fund's flexible mandate allows it to operate in a wide modified duration range of 1 year to 10 years. If yields are expected to fall, the fund increases its modified duration, and vice versa. Roughly speaking, the modified duration number represents the percentage fluctuation in a fund's NAV that would arise from a 1% change in yields. The fact that the fund currently maintains a modified duration of 6.93 years underscores the AMC's view that yields are set to fall further.
"We hold a moderately bullish stance on yields, as we believe that there is limited threat to persisting low inflation", says Manish Banthia, Senior Fund Manager, ICICI Prudential AMC. Under present conditions, the fund is poised to generate a capital gain of roughly 1.75% if yields were to fall by 25 bps.
ICICI Prudential Long Term Plan is subject to a rigorous and robust investment process, comprising of credit research, portfolio construction and portfolio monitoring. It takes duration calls based on an in-house Current Account Model and absolute G-Sec yield levels; when the CA index level moves higher, the fund increases its duration, and when the CA index is negative, the fund decreases its duration.
The model has worked well in the past. When the 10-year G Sec yields were close to 9% in 2015, the fund maintained a portfolio average maturity of nearly 20 years. Having reduced yields post demonetization, the fund deftly increased it in April, when yields rose to near 7% levels. That the call paid off well is evident from the fund's stellar 3-month absolute return of 4.35%.
End Note: The name ICICI Prudential Long Term Plan is really a bit of a misnomer. The fund is a medium-term savings solution, aimed at investors who prefer the relative safety of the debt markets, but are aiming to outperform traditional fixed return instruments. The fund's pedigree, track record and robust investment management processes make it a worthy choice in the current scenario.
