HDFC Corporate Bond Fund (An open ended debt scheme predominantly - - PowerPoint PPT Presentation

HDFC Corporate Bond Fund

(An open ended debt scheme predominantly investing in AA+ and above rated corporate bonds) July , 2020

This product is suitable for investors who are seeking*:

• Income over short to medium term
• To generate income/capital appreciation through investments predominantly in AA+ and above rated corporate

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

Riskometer

A portfolio of quality corporate bonds!^

^Please refer slide 8

1

Increase in risk aversion

• Since default of IL&FS in Sep’18 and subsequent default by Dewan

Housing Finance Corporation Limited, risk aversion towards lower rated issuers had risen significantly.

• Write-down of Additional Tier I bonds of Yes Bank in Q4FY20 added to

the prevailing risk aversion

• Disruption due to Covid-19, lockdown and lack of clarity on moratorium
• n debt taken by NBFCs led to risk aversion rising further; this led to

higher pace of redemptions in mutual fund schemes

• Subsequently, a Mutual Fund announced the winding up of 6 schemes,

leading to further rise in redemptions for credit risk fund category

• Due

to redemption pressure, non-AAA corporate bond and NBFCs/HFCs spreads over Gsec rose sharply in April-2020 but have moderated during May/June 2020 Corporate bond spreads over 3 Year Gsec

Source: Bloomberg

AAA average spread is average spread of 2-3 Yr. bond yields for select large AAA rated NBFCs over 3 Yr benchmark Gsec. AA average spread is average spread of 2-3 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. Refer disclaimer on slide 19 Source: Daily valuation provided by ICRA/CRISIL, Bloomberg, RBI

2

RBI Measures – Steps in right direction

• RBI announced large set of measures to counter the disruption due to COVID-19

Reduction in policy rates twice – Other major steps taken and their possible impact

Feb-2020 (%) June-2020 (%) Remarks Repo Rate 5.15 4.00 Spread between Repo and reverse repo rate increased to 65 bps from 25 bps Reverse repo rate 4.90 3.35 Cash Reserve ratio 4.00 3.00 For a period of one year ending March 26, 2021. This is likely to infuse liquidity of INR 1.37 lakh crore in the system. Steps taken Key Details & Rationale Impact, in our view Targeted Long Term Repos Operations (TLTROs) RBI conducted TLTROs for banks, of INR 1 lakh crore at floating and linked to repo rate. Amount availed under this facility has to be deployed in investment grade rated CPs and corporate bonds/NCDs It also announced TLTROs 2.0 of INR 50,000 crore to be deployed in CPs, NCDs and bonds issued by NBFCs, with 50% of amount carved out for small NBFCs and MFIs To improve the liquidity for higher rated corporates and NBFCs. AAA rated corporate bond spreads (over Gsec) to compress Limited impact on liquidity of lower rated corporates/NBFCs Moratorium

• n

term loans instalments and interest

• n

working capital All commercial banks, NBFCs, HFCs, MFIs etc. allowed to give moratorium of 6 months on term loans instalments and interest

• n

working capital facilities

• utstanding as on 1st Mar’20.

Bank and NBFC loans to commercial real estate (RE) have been given additional

• ne-year extension for RE projects delayed for reasons beyond the control of

promoters. This should ease immediate liquidity requirements of borrowers Special Refinance Facility for some PFIs A special refinance facility for a total amount of INR 50,000 cr to NABARD (INR 25000 cr), SIDBI (INR 15000 cr) and NHB (INR 10000 cr), to help meet sectoral credit needs. Limited impact as these institutions have adequate market

• access. To improve system liquidity and reduce market supply
• f bonds

Special Liquidity Facility for mutual funds (SLF-MF) RBI to conduct repo operations of 90 days tenor at the fixed repo rate. Amount availed under these scheme to be used for extending loan to MFs and /or purchasing securities from MFs. Total amount available under this scheme is INR 50,000 crores Initial response has been muted as risk aversion remains high.

Source: RBI. Refer disclaimer on slide 19

3

Interest Rates Outlook

Factors supporting lower yields

• Sharp rate cuts by RBI and major central banks; easing bias likely

to continue

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

growth & mitigate the impact of COVID-19 on the economy” - RBI

• Concerns over global growth due to disruption caused by spread of

coronavirus

• Weak growth and soft commodity prices likely to result in lower

inflation in medium term

• Unconventional tools used by RBI to improve transmission of rate

cuts (Operation TWIST, LTROs, Targeted LTROs)

• Muted credit growth vs. deposit growth; Ample global and domestic

liquidity

Factors opposing lower yields

• Excess SLR securities holding of PSU banks
• Large supply of dated securities by Central and State

Governments

• Food prices may keep near term inflation over RBI’s target
• f 4%
• Sharp reductions in oil production might lead to higher oil

prices over a year

Short to medium end of the yield curve offers better risk adjusted returns, in our judgement

4

Refer disclaimer on slide 19

Our Investment Philosophy for Fixed Income

• 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.

5

Refer disclaimer on slide 19

How do we control risk ?

• 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 covenants)

Risk Control achieved through conservative sizing of exposure based on proprietary Credit Scoring Model which factors in – Parentage, Financials, Rating & Outlook.

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 Yes Bank Altico Capital IDBI Bank Jana Small Finance Bank Zee Promoter Group IL&FS SPVs$ (backed by NHAI annuity) Simplex Infrastructures$

• Over last decade, in our assessment, MFs have experienced instances of credit stress* in

nearly 18 companies / Groups.

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

investment due to Covenants, good business/Collateral and parentage (Highlighted in Green)

• Overall credit costs have been minimal for HDFC MF (Stressed exposures at ~0.66% of AUM of

affected schemes as on 30th June 2020)

$ Principal exposure to IL&FS SPV and Simplex Infrastructure at time of credit stress was ~Rs. 358 cr. As of June’20 after the 50% haircut the market value of these exposure was ~Rs. 179 cr or ~0.66% of total AUM of affected schemes. *Stress is defined as companies whose ratings were eventually downgrade to BBB or below rating category Refer disclaimer on slide 19.

6

HDFC Corporate Bond Fund: Portfolio Positioning

• Portfolio is focused on maintaining higher credit quality. Minimum investment
• f 80% in AAA & AA+ rated corporate bonds. Currently*, 100% of the portfolio

is invested in AAA & Equivalent securities.

• HDFC MF’s in-depth internal credit evaluation is demonstrated by the fact that

it has till now avoided exposure to highly rated groups which subsequently experienced credit stress (Refer Table 1).

• Fund manager will seek to maintain the average maturity of the portfolio

between 1-5 years depending upon the interest rate outlook & term spreads.$ Currently*, the portfolio’s average maturity is 4.19 years.

*As on June 30, 3030 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. $The current investment strategy is subject to change. @Stress is defined as companies whose ratings were eventually downgraded to BBB or below rating category. 7 List of AAA companies / Groups which were avoided by HDFC MF and which faced subsequent stress@

Dewan Housing Group Anil Ambani Group IL&FS Group (other than SPVs) Vodafone Idea Ltd.

Table 1:

HDFC Corporate Bond Fund

8

Source: MFI Explorer, AAA includes Sovereign, Cash, Cash Equivalents and Net Current Assets. Add in footnote - HDFC Mutual Fund/AMC is not guaranteeing/offering/communicating any indicative yields or guaranteed returns on investments made in the scheme. For complete portfolio details refer www.hdfcfund.com. The portfolio composition as on June 30, 2020.

Quality Portfolio with range bound maturity

• Aims to maintain a quality portfolio.
• Disciplined and timely modulation of

maturity to optimize returns

• 10

20 30 40 50 60 70 80 90 100

Allocation to AAA & Equivalent Securities (% of NAV)

1 1.5 2 2.5 3 3.5 4 4.5 5.5 6 6.5 7 7.5 8 8.5 9 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 10 Y AAA 10 Y Gsec Average Maturity (RHS)

HDFC Corporate Bond Fund: Sources of Returns

• Interest accruals
• Capital gains/losses due to rate movements
• Capital Gains on account of Roll Down of the curve
• Tactical opportunities in Corporate Bond vs. Sovereign Bond spread (Up to a

maximum of 20% of the AUM)

HDFC Corporate Bond Fund primarily focuses on returns through interest accruals

HDFC Mutual Fund/AMC is not guaranteeing/offering/communicating any indicative yields or guaranteed returns on investments made in the scheme. The current investment strategy is subject to change depending on the market conditions. 9

Analysis of Distribution of Returns since inception

10

Annual Rolling - Since inception, the fund has given more than 6% returns approximately 91% of the times. 3 year Rolling - Since inception, the fund has given more than 7.5% returns – 97.15% of the times.

Inception Date: June 29, 2010. 1 year and 3 year Rolling returns are calculated since inception of the fund up to June 30, 2020, based on daily frequency. For complete performance details refer Slide 16. Past performance may or may not be sustained in the future. HDFC Mutual Fund/AMC is not guaranteeing/offering/communicating any indicative yields or guaranteed returns on investments made in the scheme.

Annual Returns (%) % of times More than 6% 91.09% More than 7.5% 77.78% More than 9% 50.48% Annual Returns(%) % of times More than 6% 100% More than 7.5% 97.15% More than 9% 45.72%

1 Year Rolling Returns 3 Year Rolling Returns

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• Attractive term spreads.
• Steep yield curve provides an opportunity for roll down

benefits

• The spread between the YTM of HDFC Corporate Bond Fund

and 91-day T-bills has widened and is at attractive levels, significantly higher than the long term average.

Steep yield curve and elevated term spreads

Source: Bloomberg HDFC Mutual Fund/AMC is not guaranteeing/offering/communicating any indicative yields or guaranteed returns on investments made in the scheme. 3.5 4.5 5.5 6.5 7.5 8.5

Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20

Repo Rate 10Y AAA 3Y AAA 1Y AAA

• 1

2 3 4

Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20

HDFC Corporate Bond Fund - Spread over 91-day T-bill (%)

2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 10Y 12Y 15Y 30Y %

Yield curve steepened significantly since 2019

29/Feb/20 31/Dec/20 30/Jun/20 Apr-19

Summary: HDFC Corporate Bond Fund

• Focus on in-depth credit assessment
• Prudent Risk Control: Track record of maintaining controlled duration
• Ideal for investors with focus on credit quality and having an investment

horizon of 12 months or more

12 HDFC Mutual Fund/AMC is not guaranteeing/offering/communicating any indicative yields or guaranteed returns on investments made in the scheme. The suggested investment horizon is based on current view and is subject to change. Investments must be tailored to investor’s individual situation and objectives and therefore, investors should consult their financial advisors to ascertain whether the products are suitable for them.

Portfolio Statistics

13

Average Maturity* Modified Duration* Yield To Maturity* 4.19 years 3.18 years 5.80%

*Computed on the invested amount. For complete portfolio details refer www.hdfcfund.com. Portfolio details provided as on June 30, 2020.

Portfolio Classification by rating class (%) Sovereign 16.57 AAA/AAA(SO)/A1+/A1+(SO) & Equivalent 80.07 Cash, Cash Equivalents and Net Current Assets 3.36

16.57 0.65 2.50 76.92 3.36 10 20 30 40 50 60 70 80 90 G-Sec, SDL Securitized Debt Instruments CD Credit Exposure Cash, Cash Equivalents and Net Current Assets

Allocation to asset class (% of NAV)

Type of Scheme An open ended debt scheme predominantly investing in AA+ and above rated corporate bonds Category of Scheme Corporate Bond Fund Inception Date (Date of allotment) June 29, 2010 Investment Objective To generate income/capital appreciation through investments predominantly in AA+ and above rated corporate bonds. There is no assurance that the investment objective of the Scheme will be realized. Fund Manager $ Anupam Joshi (since October 27, 2015) Investment Plan Regular Plan & Direct Plan Investment Options Under Each Plan: Growth & Dividend (Quarterly & Normal). The Dividend Option offers 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 Benchmark Additional Benchmark NIFTY Corporate Bond Index CRISIL 10 Year GILT Index

Fund Facts

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$ Dedicated Fund Manager for Overseas Investments: Mr. Chirag Dagli For further details, please refer to the Scheme Information Document available on website www.hdfcfund.com.

Asset Allocation

15

Under normal circumstances, the asset allocation will be as follows: Types of Instruments Minimum Allocation (% of Total Assets) Maximum Allocation (%

• f Total Assets)

Risk Profile of the instrument Corporate Bond (including Securitised Debt)# 80 100 Low to Medium Government Securities and Money Market Instruments 20 Low Units issued REITs and InvITs 10 Medium to High

#Minimum 80% of the total assets shall be invested in AA+ and above rated corporate bonds (including securitised debt)

The scheme may invest in the schemes of Mutual Funds in accordance with the applicable extant SEBI (Mutual Funds) Regulations as amended from time to time. The Scheme may invest up to a maximum 75% of the total assets in Foreign Debt Securities. The Scheme may invest up to 100% of its total assets in Derivatives. For further details, please refer to the Scheme Information Document available on website www.hdfcfund.com.

Scheme Performance Summary

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Period Scheme Returns (%) Benchmark Returns (%) # Additional Benchmark Returns (%) ## Value of Rs 10,000 invested Scheme (Rs) Benchmark (Rs)# Additional Benchmark (Rs)## Last 1 year

12.22 12.13 11.12 11,222 11,213 11,112

Last 3 years

8.90 8.37 6.87 12,917 12,729 12,208

Last 5 years

9.09 8.75 8.44 15,460 15,221 15,004

Since inception – June 29, 2010

9.10 8.78 7.18 23,912 23,227 20,018

Past performance may or may not be sustained in the future. Returns greater than 1 year are compounded annualized (CAGR). The above scheme has been managed by Anupam Joshi since October 27, 2015. The above returns are of Regular Plan - Growth Option. #NIFTY Corporate Bond Index. ##CRISIL 10 Year Gilt Index. 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. Returns as

• n June 30, 2020.

Scheme Performance Summary – SIP Returns

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Since Inception 15 year SIP 10 year SIP 7 year SIP 5 year SIP 3 year SIP 1 year SIP Total Amount Invested (Rs.) 1,210,000 N.A. 1,200,000 840,000 600,000 360,000 120,000 Market Value as on June 30, 2020 (Rs.) 1,961,186 N.A. 1,937,273 1,171,794 762,230 422,167 128,538 Returns (%) 9.26% N.A. 9.26% 9.36% 9.51% 10.64% 13.52% Benchmark Returns (%)# 9.03% N.A. 9.04% 9.00% 9.04% 10.03% 12.95% Additional Benchmark Returns (%)# # 8.05% N.A. 8.06% 8.58% 8.59% 10.29% 10.37%

Past performance may or may not be sustained in the future. The above data are of Regular Plan - Growth Option, assuming Rs. 10,000 is invested systematically on the first business day of every month over a period of time. CAGR returns are computed after accounting for the cash flow by using XIRR method (investment internal rate of return). The above investment simulation is for illustration purposes only and should not be construed as a promise on minimum returns and safeguard of capital. #NIFTY Corporate Bond Index. ##CRISIL 10 Year Gilt Index.

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Performance of other schemes managed by the Fund manager (Top 3 & Bottom 3)

Scheme Managing scheme since Cumulative Performance 1 year 3 year 5 year CAGR (in %) CAGR (in %) Anupam Joshi manages 19 other schemes which have completed 1 year Performance of Top 3 schemes managed by Anupam Joshi HDFC Liquid Fund Oct 27, 15 5.43 6.50 6.87 CRISIL Liquid Fund Index # 5.81 6.81 7.03 HDFC Low Duration Fund Oct 27, 15 8.19 7.21 7.47 NIFTY Low Duration Index # 8.03 7.58 7.74

HDFC FMP 1381D September 2018 Sept 19, 18 11.78 NA NA CRISIL Composite Bond Fund Index # 13.08 NA NA

Performance of Bottom 3 schemes managed by Anupam Joshi HDFC FMP 1208D March 2018 Mar 16, 18 9.60 NA NA CRISIL Composite Bond Fund Index # 13.08 NA NA HDFC FMP 1141D August 2018 Aug 14, 18 8.25 NA NA CRISIL Composite Bond Fund Index # 13.08 NA NA HDFC FMP 1487D August 2018 Sept 4, 18 9.92 NA NA CRISIL Composite Bond Fund Index # 13.08 NA NA

Past performance may or may not be sustained in the future. 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. Performance of close-ended schemes is not strictly comparable with that of open-ended schemes since the investment strategy for close-ended schemes is primarily

buy-and-hold whereas open-ended schemes are actively managed. Top 3 and bottom 3 schemes managed by the Fund Manager have been derived on the basis of returns since

• inception. 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 June 30, 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. NA – Not available. # Benchmark of the scheme

Disclaimer

This presentation dated July 14, 2020 has 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 only, which you must confirm before relying on

• them. The information contained in this document is for general purposes only. The document is given in

summary form and does not purport to be complete. The document does not have regard to specific investment

• bjectives, 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. HDFC Mutual Fund/AMC is not guaranteeing any returns on investments made in the Scheme(s). The data/statistics are given to explain general market trends in the securities market. Stocks/Sectors referred above are illustrative and not recommended by HDFC Mutual Fund / AMC. The Fund may or may not have any present or future positions in these sectors. The information herein has been prepared on the basis of information which is already available in publicly accessible

• media. The same should not be construed as an investment advice or a research report or a recommendation by

HDFC Mutual Fund/HDFC AMC to buy or sell the stock or any other security covered under the respective sector/s. 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.

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Thank You

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