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WF: When we last spoke about this fund in Aug 16 (Click Here), it had just crossed the Rs.1000 cr AuM milestone. In the last 5 months, AuM has doubled to Rs.2000 crores! What were the key drivers for this sharp increase in inflows?
Manish: ICICI Prudential Long Term Plan is an income fund that aims to dynamically manage duration in the range of 1 to 10 years based on an in-house Current Account model. The fund uses the model to take duration calls which will be decided on the basis of the direction of the CA index and absolute G-Sec yield levels.
An increased understanding and acceptance of this model strategy is the core driver for the increase in inflows. Also, with the robust performance history, the fund has a better track record of how the model has operated in various scenarios, especially over the last 12 to 18 months.
WF: In 2016, the modified duration was progressively reduced from around 9 years to around 6 years - and is currently being maintained around the same levels. Would this imply little or no near term possibilities of rate cuts on the horizon?
Manish: The modified duration call taken is in no way a comment on the rate cut probabilities, but what it indicates is the valuation of the fixed income market. In 2015, on valuation basis, the fixed income market was much more attractive and hence the fund was running a high duration strategy. However, currently, the valuation is neutral, and hence the fund is having a neutral duration. In case, if the valuations start to look rich, we may reduce duration further.
WF: Now that the entire heat and dust around demonetization has settled down, is there a case for bullishness on a steep fall in yields as was originally construed in the early weeks of demonetization? Is there a case for a sizeable structural decline in yields over the next 1-2 years?
Manish: Given the construct, the fund can follow different portfolio strategies in different market scenarios. Hence irrespective of the direction of yield movement, the product is designed to dynamically manage duration. Last year the portfolio was running an aggressive gilt strategy but right now corporate bonds have been increased in order to increase the portfolio yields. Going forward, the fund may adopt a pure carry strategy in case the investment scenario turns bearish. Simply put it's a multi strategy product.
WF: Over the next 1 year, what would you think will be the bigger source of returns from this fund - capital gains from a decline in yields or accruals from the growing corporate bonds book?
Manish: Being a model based fund, the structure allows the fund to trade market volatilities by buying low and selling high. This could be a significant alpha for the fund going ahead, given that it is running a neutral duration strategy. So the source of returns will be a combination of capital gains, carry benefits and gains accrued from market volatility.
WF: What is the investment argument for this fund at this juncture?
Manish: ICICI Prudential Long Term Plan is an all season fund. The fund being managed on model basis has a history of over three years, wherein the fund has seen a variety of fixed income market scenarios. The Current Account model followed allows the fund to make best out of the investment opportunities presented across the interest rate cycle. Additionally, the fund tries to play the volatility in the market to get trading benefit out of the volatile situations a well.
WF: How should distributors position this fund v/s the very popular ICICI Prudential Regular Savings Fund? Who would be the target investors for both these funds and how should distributors choose between the two?
Manish: RSF is a high yield credit opportunities fund whereas LTP is a multi-strategy dynamic income fund with a model based approach. The core area of differentiation lies in the ability of the fund to play various duration strategies. LTP can play long and short duration strategy whereas RSF is a short duration fund. Secondly, LTP has a Model based approach which helps the fund to position itself ahead of the market.
The target investor for RSF would be a conservative investor who doesn't want to take any interest rate risk while LTP if for investors who desire to earn returns from accrual + interest rate cycle by playing through duration.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
The information contained herein is solely for private circulation for reading/understanding of registered Advisors/ Distributors and should not be circulated to investors/prospective investors. All data/information used in the preparation of this communication is specific to a time and may or may not be relevant in future post issuance of this communication. ICICI Prudential Asset Management Company Limited (the AMC) takes no responsibility of updating any data/information in this communication from time to time. The AMC (including its affiliates), ICICI Prudential Mutual Fund (the Fund), ICICI Prudential Trust Limited (the Trust) and any of its officers, directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this communication in any manner.
Nothing contained in this communication shall be construed to be an investment advice or an assurance of the benefits of investing in the any of the Schemes of the Fund. Recipient alone shall be fully responsible for any decision taken on the basis of this document. .
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