In This Issue:
- Editor’s Column – How Many More IL&FS are Lurking in MF Portfolios?
- Kotak Credit Risk Fund – Portfolio Analysis
- Weekly Issuer Data – AA and Below
- Rating Upgrades, Downgrades, and Other Data
- Current Quotes – Corporate Bonds
- Other Data
Editor’s Column – How Many More IL&FS are Lurking in MF Portfolios?
IL&FS that was rated AAA a few months ago was downgraded to junk recently, hitting MFs that hold the securities. The downgrade of IL&FS in turn casts a cloud on all other subsidiaries of the company and their ratings could be downgraded as well. click here for INRBONDS report on IL&FS downgrade.
The sudden turn in IL&FS ratings is a shock to investors who have invested in the MF schemes that hold the securities. The portfolios of these schemes would have reflected AAA ratings for IL&FS before being downgraded and the sudden sharp turn in ratings is a complete surprise, casting aspersions on all MF scheme portfolios, even if they are seemingly AAA rated portfolios.
Mfs also follow a herd mentality, many funds invest in securities that other funds have invested in, which gives them a crowd comfort. However, it is imperative that each fund does its own due diligence on credit and take their own investment decisions, not withstanding the fact that many other funds have either invested in or shunned an issuer.
Banks, with syndicate lending, are all deep in the red due to huge NPA’s. The smaller ones are fighting for survival while the bigger ones are protected by their size. It is similar for fund houses, the smaller ones are more likely to suffer the most on such rating debacles while the large fund houses will come out of these debacles without too much of injuries.
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Kotak Credit Risk Fund – Portfolio Analysis
Kotak credit risk fund portfolio is diversified through 12 sectors but 86.53% of fund holdings are in 5 sectors. The finance sector has 39.73% weight in the total portfolio (Financial sector includes Banks, Microfinance, HFCs ). Apart from the financial sector, power has second highest weight followed by construction, trading, and telecom sectors. Power has 20.34% weight, Construction has 10.92% and Telecom has 5.36% weight in the portfolio.
Fund holds 24 papers from the financial sector, but 12% of total portfolio holding is in PSU Banks papers, most of the PSU banks are under PCA, and all PSU banks are still struggling with NPAs. Although PSU Banks are backed by government and chance of default is minimum, a downgrade in credit rating can affect fund NAV. The long-term outlook for PSU Banks can improv, as deterioration in asset quality is expected to peak-out and recoveries from NCLT accounts will improve their profitability. Recapitalization of the public sector banks should help address the overhang of nonperforming loans. Insolvency and Bankruptcy Code (IBC) its implementation has made the resolution of stressed assets possible within a defined time frame and making it feasible for corporates to exit or attempt a revival of their businesses while preserving the economic value of the assets, thereby making a change in a non-performing asset for the banks.
In the power sector, the fund holds distribution, transmission, generation and renewable energy companies NCDs. Kotak credit risk fund holds 9.85% in UP Power Corporation, which is in power distribution space, but UPPCL NCDs is backed by the UP Government. Going forward, Ujwal Discom Assurance Yojana (UDAY Bonds) will gradually improve the financial conditions of state-owned distribution companies. (Click here to Read about UDAY Bonds).
Construction sector includes building construction and real estate companies, the outlook for the construction sector is improving as the government has taken several initiatives to encourage the development in this sector. Implementation of RERA & GST will make this sector more transparent and streamlined, which will improve the consumer & investor sentiment. The Smart City Project, where there is a plan to build 100 smart cities, is a prime opportunity for the real estate companies. SEBI has given its approval for the Real Estate Investment Trust (REIT) platform, which will help in allowing all kinds of investors to invest in the Indian real estate market.
Kotak credit risk fund portfolio has 46% of bonds with higher credit ratings (AA and above) while 53.18% of bonds are lower rated. The fund holds 29.59% in A+ rated instruments.
Kotak credit risk fund holds 0.65% in Jana Small Finance bond and 2.25% in Syndicate bank whose credit rating was downgraded recently, while it holds 2% in Piramal Capital & Housing bond whose credit rating was upgraded recently.
Expese Ratio- 0.99% (direct plan), 1.81% (regular plan).
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