HDFC Medium Term Debt Fund (An open ended medium term debt scheme - - PowerPoint PPT Presentation

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HDFC Medium Term Debt Fund

(An open ended medium term debt scheme investing in instruments such that the Macaulay Duration^ of the portfolio is between 3 years and 4 years)

A Prudent & Disciplined Approach to Credit (Refer Slide 3)

February 2020

This product is suitable for investors who are seeking*:

• Income over medium term.
• to generate income/capital appreciation through investments in Debt and

Money Market Instruments * Investors should consult their financial advisers, if in doubt about whether the product is suitable for them.

Riskometer

^Please refer to Slide 10 on which the concept of Macaulay’s Duration has been explained.

Our Investment Philosophy for Credit

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• In-depth credit assessment / risk control is key to our credit investments
• Indian fixed income markets have limited liquidity, hence philosophy of SLR for credit,

generally prioritized in that order

• Safety – Superior credit quality
• Liquidity – Prefer securities with better liquidity; focused on portfolio liquidity
• Returns – Risk reward is the key & not yield alone
• Given that credit markets can deteriorate without much warning, even in the best of

credit environments, our endeavour is to be prudent on credit risk (risk control v/s risk avoidance)

How do we control risk?

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• Key strategies for risk control:
• Risk Assessment - Intense focus on underlying credit evaluation, focus on 4 C’s
• Risk Mitigation - Adequate covenants, right sizing, diversification, regular monitoring etc
• Risk Pricing – Take risk only when it pays
• Emphasis on Four C’s of Credit
• Character of Management (e.g. avoided exposure to a large distressed housing finance company)
• Capacity to Pay (e.g. avoided exposure to a large distressed infrastructure company)
• Collateral pledged to secure debt (e.g. recovered large portion of investment backed by shares of large media

company)

• Covenants of debt (e.g. recovered investment from a MFI player due to strong covenants)
• Risk Control achieved through conservative sizing of exposure based on proprietary

Credit Scoring Model which factors in – Parentage, Financials, Rating & Outlook.

• Risk Diversification across individual issuers, business groups and sectors

The current investment strategy is subject to change depending on the market conditions. For complete portfolio details refer www.hdfcfund.com. HDFC Mutual Fund/AMC is not guaranteeing/offering/communicating any indicative yields or guaranteed returns on investments made in the scheme nor investment advice in the scheme mentioned. (top 10 holdings account for ~26% of fund, >85 no. of issuers)

Credit Decision Tree

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Credit Evaluation High perceived Credit risk Avoid risk, irrespective of yield offered Acceptable Risk Risk mitigation using 4Cs, diversification, sizing etc

Risk management through active tracking of key variables/events for company & sector etc

• In the last few years banks have seen rise in GNPA,

peaking at over 15% in FY18^.

• However, credit stress* faced by Mutual funds (MFs)

has been much less.

• In our assessment, MFs have experienced instances of

credit stress* in nearly 17 companies / Groups

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• HDFC MF was not exposed to most such stressed cases. (Highlighted in Red above)
• Even in cases where HDFC MF had exposure, we recovered major portion of our investment due

to covenants, good business/collateral and parentage (Highlighted in Green above)

• Overall credit costs have been minimal for HDFC MF(Stressed exposures at ~0.54% of AUM of

affected schemes)$

• We think the worst phase of credit stress is behind us, while high credit spreads are

available

$ Principal exposure to IL&FS SPV and Simplex Infrastructure at time of credit stress was ~Rs. 358 cr. As of Jan’20, after the 50% haircut the market value of these exposure was ~Rs. 179 cr or ~0.54% of total AUM of affected schemes. *Stress is defined as companies whose ratings were eventually downgrade to BBB or below rating category ^ Total GNPA of banking Sector. $$ As of Jan’20, the market value of residual Zee Promoter Group exposure was ~Rs. 13.89 cr or ~0.09% of Total AUM of affected schemes. List of companies / Groups which faced stress* Deccan Chronicle Group Religare Group Dewan Housing Group Amtek Auto Limited Vodafone Idea Ltd. Anil Ambani Group Jindal Steel & Power - Group Sintex Group Cox & Kings Ltd Ballarpur (BILT) Group IL&FS Group (other than SPVs) Cafe Coffee Day Group IDBI Bank Jana Small Finance Bank Zee Promoter Group $$ IL&FS SPVs$ (backed by NHAI annuity) Simplex Infrastructures$

HDFC MF’s cautious approach to credit worked yet again in 2019 !

• AA & lower rated corporate bond spreads

are elevated at ~140 bps over 3 Y G-Sec and, AA rated corporate bond spreads offer greater value vs AAA rated bonds (Chart 1)

• NBFC

Spreads also widened significantly in 2019, specially for non-AAA rated bonds (Chart 2)

• Stronger NBFCs witnessed spread compression while

NBFCs’ with credit quality concerns saw spread widening

• NBFC situation is improving gradually:
• CP exposure as % of total borrowings of NBFCs is estimated at

~7% in Oct19 vs ~16% in Aug18

• Asset book growth of NBFCs has moderated and companies

have securitized/sold assets to improve liquidity

• Remedial measures taken by Government/ RBI
• Ample liquidity and low interest rates

Chart 1: Updated till Jan’20

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Chart 2: Updated till Feb’20

^ Average monthly spread of NIFTY Short term index of AAA, and Average of (AA+,AA, AA-) over 3 Yr benchmark Gsec yields. * AAA average spread is average spread of 3 Yr. bond yields for select large AAA rated NBFCs over 3 Yr benchmark Gsec. AA average spread is average spread of 3 Yr. bond yields for select large AA rated NBFCs over 3 Yr benchmark Gsec . If the rating on any NBFC is downgraded, it is removed from calculation of spread of that category. Source: Daily valuation provided by ICRA/CRISIL, Bloomberg, RBI

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100 150 200 250

Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20

AAA and AA spreads above 3Y G-Sec^

AA Rated spreads over 3Y Gsec in bps (RHS) AAA Rated spreads over 3Y Gsec in bps (RHS)

Attractive credit spreads create an opportunity; Worst is behind for NBFCs

HDFC Medium Term Debt Fund

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Small size and high spreads create an attractive opportunity !!!!

HDFC Medium Term Debt Fund – An attractive opportunity !!!

8 Chart 1 Chart 2

• Investment in debt securities such

that portfolio duration is between 3 to 4 years. Flexibility to reduce duration to 1 year based on adverse interest rate view.

• Twin advantages of duration and

relatively higher yield (Chart 1)

• Small size of the fund + Higher

Credit spreads provide an attractive

• pportunity (Chart 2)

5 6 7 8 9 10 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20

HDFC MTF YTM and 3Y G-Sec

HDFC MTF YTM 3Y- Gsec (BBM)

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100 150 200 250

Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20

AAA and AA spreads above 3Y G-Sec^

AA Rated spreads over 3Y Gsec in bps (RHS) AAA Rated spreads over 3Y Gsec in bps (RHS)

9 Range Distribution

• f returns

for last 5 years Less than 7% 8% More than 7% 92% More than 8% 60% More than 9% 33% 3 Year Daily Rolling Returns % Average 8.4% Maximum 10.8% Minimum 6.2% 3 Year Daily Rolling Returns from 1st Jan 2015 to 31st January 2020. Refer Slide 15 for complete performance. For complete portfolio please refer to our website www.hdfcfund.com

• Average
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3 year daily rolling returns is 8.4% and more than 7% returns achieved in ~92%

• f
• instances. (As of 31st January 2020)
• Current

high spreads

• ffer

attractive investment opportunity

• ~ 65% of allocation in AAA/ Sov/

Cash offers flexibility to increase credit exposures and take advantage of high spreads.

HDFC Medium Term Debt Fund – Consistent Performance

Jan-20 35.5 %

Jan'20 : 126 bps

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100 150 200 20 30 40 50 60 70 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 HDFC MTDF Non-AAA exposure vs AA Speads over 3Y GSec HDFC MTF - non-AAA% (LHS) AA Rated spreads over 3Y Gsec in bps (RHS)

3 Year Daily Rolling Returns

Portfolio Statistics – HDFC Medium Term Debt Fund

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Average Maturity* Macaulay Duration* Modified Duration* Yield To Maturity* 4.27 years 3.26 years 3.06 years 8.27%

For complete portfolio details refer www.hdfcfund.com. Portfolio details provided as on 31st January 2020. Based on long term rating. * Computed on the invested amount.

Portfolio Classification by Issuer Rating Class (%)

AAA & Equivalent, A1+ & Equivalent 45.3 AA+ 2.8 AA/AA- 25.8 A+ to BBB- 8.5 Sovereign 11.1 Cash, Cash Equivalents and Net Current Assets 6.4 AUM as on Jan 31st 2020 (In Rs. Cr.) 1241.95

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Macaulay Duration (Duration) measures the price volatility of fixed income securities. It is often used in the comparison of interest rate risk between securities with different coupons and different maturities. It is defined as the weighted average time to cash flows of a bond where the weights are nothing but the present value of the cash flows themselves. It is expressed in years. The duration of a fixed income security is always shorter than its term to maturity, except in the case of zero coupon securities where they are the same.

Key Credit Takeaways

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“Risk control is the best route to loss avoidance. Risk avoidance, on the other hand, is likely to lead to return avoidance as well.”

• Howard Marks

Why Invest Now?

• Attractive Credit spreads – Portfolio YTMs at current high spread over 3Y Gsec offer attractive risk

reward trade off.

• Improving credit environment – worst is behind.
• Good track record of credit management– minimal credit stresses/events during adverse

credit period of last fifteen months.

• Prudent risk control, but not risk avoidance – ideally positioned to take advantage of current

credit environment.

Returns are not assured / guaranteed. - HDFC Mutual Fund/AMC is not guaranteeing any returns on investments made in this Fund. In view

• f the individual circumstances and risk profile, each investor is advised to consult his / her professional advisor before making a decision

to invest in the Scheme. 11

Interest Rate Outlook

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Factors supporting lower yields

• Accommodative stance to remain till “it is necessary to revive

growth” - RBI

• Attractive term premium over repo rate; Operation TWIST
• Muted credit growth vs. deposit growth
• Ample liquidity in the system
• Capacity utilisation below long term average

Factors opposing lower yields

• Excess SLR securities holding of PSU banks
• Risk of fiscal slippage remains high
• Continued forex intervention can lead to lower OMOs
• Food prices may keep near term inflation over 6%
• Domestic growth possibly bottoming out

Yields are likely to remain within a range for the foreseeable future

* Month-end 10Y benchmark yield less headline inflation for the month

Interest Rates Outlook – Conflicting forces at play

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Key things to watch out for

• Improvement in economic growth and Inflation trajectory
• Strategic sale of BPCL, as it would not only ease immediate fiscal pressure but also set an important precedent
• Steps taken to augment revenues including GST rate changes
• Global yields movements and stance of major global central banks

Performance

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Scheme Performance

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Value of Rs 10,000 invested Scheme Returns (%) Benchmark Returns (%) # Additional Benchmark Returns (%) ## Scheme Benchmark (Rs)# Additional Benchmark (Rs)## Last 1 year 9.48 10.69 7.25 10,948 11,069 10,725 Last 3 years 6.75 7.14 6.70 12,166 12,298 12,149 Last 5 years 7.73 8.10 7.08 14,516 14,766 14,082 Since inception 7.95 7.89 6.11 39,642 39,226 29,059 Returns are of Regular Plan-Growth option. Returns greater than 1 year period are compounded annualized (CAGR). Performance of dividend option under the schemes for the investors would be net of Dividend Distribution Tax as applicable. The above scheme has been managed by Shobhit Mehrotra, the fund manager since September 1,2007. Past performance may or may not be sustained in the future. Returns greater than 1 year period are compounded annualized (CAGR). Load is not taken into consideration for computation of performance. Different plans viz. Regular Plan and Direct Plan have a different expense structure. The expenses

• f the Direct Plan under the Scheme will be lower to the extent of the distribution expenses / commission charged in the Regular Plan. Returns as on

31st January 2020. #NIFTY Medium Duration Debt Index ## CRISIL 1 year T Bill Index

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Performance Summary of other Scheme(s) managed by the Fund Manager

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Scheme Managing scheme since Performance 1 year (in %) 3 year 5 year CAGR (in %) CAGR (in %) Shobhit Mehrotra manages total 22 schemes which have completed 1 year Performance of Top 3 schemes managed by Mr. Shobhit Mehrotra HDFC Hybrid Debt Fund $ Dec 26, 03

7.60 5.32 6.45

NIFTY 50 Hybrid Composite Debt 15:85 Index

11.32 7.87 8.03

HDFC FMP 1136D June 2017 (1) Jun 08, 17

10.11 NA NA

CRISIL Composite Bond Fund Index

11.33 NA NA

HDFC Retirement Savings Fund - Hybrid- Equity Plan $$ Feb 25, 16

8.89 10.09 NA

NIFTY 50 Hybrid Composite Debt 65:35 Index

11.76 11.18 NA

Performance of Bottom 3 schemes managed by Mr. Shobhit Mehrotra HDFC FMP 3360D March 2014 (1) Mar 26, 14

11.07 7.36 8.23

CRISIL Composite Bond Fund Index

11.33 6.92 8.32

HDFC FMP 1133D July 2018 (1) (41 Jul 25, 18

8.40 NA NA

CRISIL Composite Bond Fund Index

11.33 NA NA

HDFC FMP 1124D June 2018 (1) (41) Jun 29, 18

8.71 NA NA

CRISIL Composite Bond Fund Index

11.33 NA NA

Past performance may or may not be sustained in the future. Returns greater than 1 year period are compounded annualised (CAGR). The above returns are of Regular Plan - Growth

• Option. Load is not taken into consideration for computation of performance. On account of difference in the type of the Scheme, asset allocation, investment strategy, inception

dates, the performance of these schemes is strictly not comparable. Top 3 and bottom 3 schemes managed by the Fund Manager have been derived on the basis of since inception returns vis-à-vis the benchmark. In case the benchmark is not available on the Scheme’s inception date, the returns for the concerned scheme is considered from the date the benchmark is available. Returns as on 31st January 2020. Different plans viz. Regular Plan and Direct Plan have a different expense structure. The expenses of the Direct Plan under the Scheme will be lower to the extent of the distribution expenses/ commission charged in the Regular Plan.$ The scheme is co-managed by Mr Prashant Jain and Mr Shobhit Mehrotra.$$ The scheme is co-managed by Mr Chirag Setalvad and Mr Shobhit Mehrotra. Performance of dividend option under the schemes for the investors would be net of Dividend Distribution Tax as applicable.

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Fund Facts

17 Type of Scheme An open ended medium term debt scheme investing in instruments such that the Macaulay Duration of the portfolio is between 3 years and 4 years (Refer slide 10 for definition of Macaulay Duration) Inception Date (Date of allotment) February 6th , 2002 Investment Objective To generate income/capital appreciation through investments in debt and money market instruments There is no assurance that the investment objective of the scheme will be realized. Fund Manager $ Shobhit Mehrotra (since September 01, 2007) Investment Plan Regular Plan & Direct Plan Investment Options Under Each Plan: Growth & Dividend. The Dividend Option offers Normal Dividend option and quarterly dividend option with Dividend Payout and Reinvestment facility Minimum Application Amount. (Under Each Plan/Option) Purchase: Rs. 5,000 and any amount thereafter Additional Purchase: Rs. 1,000 and any amount thereafter Load Structure Entry Load: Not Applicable. Exit Load: Nil Benchmark Additional Benchmark Nifty Medium Duration Debt Index CRISIL 1 Year T-Bill Index $ Dedicated Fund Manager for Overseas Investments: Mr Chirag Dagli For further details, please refer to the Scheme Information Document available on www.hdfcfund.com

Disclaimer & Risk Factors

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This presentation dated 26th February 2020 been prepared by HDFC Asset Management Company Limited (HDFC AMC) based on internal data, publicly available information and other sources believed to be reliable. Any calculations made are approximations, meant as guidelines

• nly, which you must confirm before relying on them. The information contained in this

document is for general purposes only. The current investment strategies are subject to change depending on market conditions. The document is given in summary form and does not purport to be complete. The document does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this

• document. The information/ data herein alone are not sufficient and should not be used for the

development or implementation of an investment strategy. The statements contained herein are based on our current views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Past performance may or may not be sustained in future. Neither HDFC AMC and HDFC Mutual Fund nor any person connected with them, accepts any liability arising from the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein. For complete portfolio/details refer to our website www.hdfcfund.com.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.

Thank You

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