Unifi High Yield Fund Preface Investor Predicament Unifi HYF - PowerPoint PPT Presentation

Unifi High Yield Fund

Preface Investor Predicament Unifi HYF Proposition High Yield Fund Conventional Equity Conventional Debt • Endeavour to generate net • High • Low post tax returns of 3% p.a / above average / below average over the rate of inflation return potential volatility (CPI) • Accompanied by extreme • Hardly any real returns • Minimal / below average volatility post tax and inflation volatility Cyclicality of asset values combined with misconstructed Risk adjusted arbitrage and risk-return expectations push investors to either fixed income opportunities arising from • settle for sub-par returns (or) • corporate events • macro-economic cycles • bear volatility beyond one’s temperament leading to ` • emerging credit capital loss

Overview Overview Inves Inv estment t Objec bjecti tive Unifi High Yield Fund (HYF) is a discretionary fund focusing on event arbitrage and fixed income investment opportunities in capital markets with an endeavor to generate net post tax returns of 3% p.a over the rate of inflation (CPI). The objective is to consistently generate superior compounded annual returns than conventional fixed income instruments with uncompromising emphasis on capital preservation. Fund Manager Unifi Capital Pvt . Ltd. Performance Monthly NAV & Quarterly Review Reporting Launch Date 04-Apr-2013. Open ended; Monthly subscription and Tenure AUM (INR Crs) INR 592 crores redemption 0.80% per annum fixed and 20% Min Investment INR 1 crore Fees performance over hurdle rate (Monthly Chargeable) Setup Fees None Non cumulative pre tax return of 10% per Hurdle Rate Exit load of 2% if redeemed annum Lock in period within 6 months. Independent Valuation S&P CRISIL Custodian & HDFC Bank Accountant

Overview Avg vg Avg Avg Indi Indicati tive e Stra St rate tegie ies Instrumen Instr ents All lloca cati tion All lloca cati tion All lloca cati tion All lloca cati tion FY FY 2019 FY FY 2018 FY 2017 FY Arbitrage opportunities in Listed Equities arising from open offers, Event Arbitrage 0 – 100% 11% 21% 26.2% delisting, mergers & de-mergers, IPOs, Cash-Futures Conventional AAA & AA bonds of Nominal Bonds various Indian Companies – 0 – 50% 22% 26% 23% Typically HTM Structured Secured Corporate Debt, Commercial Papers, short Structured & High yield term bonds and tax efficient 0 – 75% 65% 46% 46.3% Debt Preference Shares of NBFCs focusing on Housing, SME , CV, Agri and Micro Finance. Equity, G-Secs and AAA debt Directional Calls 0 – 10% 2.2% 1% 1.8% (duration calls) For liquidity purposes/ temporary Cash / Liquid -0.3% 6% 2.7% parking of funds.

Performance Comparison Our UNIFI High Yield fund returns have been significantly better than comparable debt mutual funds – both credit and dynamic bond funds not only in Financial Year 2019 but also in all earlier years since our inception. Fun Fund / / Retu turns FY20 FY2019 19 FY20 FY2018 18 FY2017 FY20 17 FY20 FY2016 16 FY20 FY2015 15 FY20 FY2014 14 Unifi High Yield Fund 10.75% 14.47% 13.70% 14.67% 16.82% 14.40% Debt MFs - Dynamic Bond Category Average 6.49% 4.69% 12.13% 6.55% 10.54% 5.86% (Duration MFs)- Dyn. Bond Category Topper 8.83% 7.98% 14.40% 8.07% 15.13% 10.36% Debt MFs - Corporate Bonds Category Average 6.06% 7.70% 10.65% 8.99% 9.28% 8.41% (Credit Funds)- Corp. Bonds Category Topper 8.51% 9.43% 11.50% 10.02% 11.87% 11.12%

Performance Comparison The graph hereunder shows the returns earned by Unifi HYF compared with a line that represents our target i.e. Inflation + real returns of 3% post tax HYF Monthly Post Tax Returns (In %) HYF Post Tax Returns Inflation + 3% Inflation 180 2.50 174 74.0 .03 170 2.00 160 1.50 164 64.9 .93 150 1.00 136 36.6 .68 140 0.50 130 0.00 120 -0.50 110 100 -1.00

Investment Strategy Fix Fixed Inc Income op opportunities – Nom ominal l & Hi High Yie Yield Deb ebt • The focus is on opportunities in the AA to Investment Grade segment to optimize after tax yields while balancing risks. • Typically, all debt investments are made with Hold to Maturity (HTM) mind set but some of it could be traded opportunistically to maximize capital appreciation or minimize risk. . Eve vent Arb rbitrag age op opport rtunities • Emerge from corporate events like mergers, acquisition, buybacks, regulation triggered / voluntary open offers made to the public by controlling shareholders, company delisting, declaration of special dividends etc. . • The risk- return pay-off in most of such deals is deal-specific and has limited correlation to market cycles.

Debt Investments – Approach and Strategy Investment Strategy - The focus would be on opportunities in the AA to Investment Grade segment to optimize after tax yields while balancing risks. Typically, all debt investments are made with Hold to Maturity (HTM) mindset but some of it could be traded opportunistically to maximize capital appreciation or minimize risk. Arbitrage opportunities emerging from the following possibilities will be actively pursued to enhance the overall portfolio yields. Tactic tical Calls - Consider macro-economy Subsidiary – Holding Company – Focus on 100% driven opportunities like softening of Yield Subsidiaries whose papers are rated lower than their Curve (duration play) due to fall in Interest highly rated Parent companies but offer an higher Rates and conducive Rating Upgrades cycle yield. resulting in capital gains. Whol olesale le to to Retai ail – Bulk Buying from Bank Aggregato tor of of Reta tail il Lots ts – Provide the much Treasuries / Primary Issuances at finer rates and needed liquidity channel for retail bond selling in smaller lots with a mark-up to HNIs / holders at market yields plus spread. Private Provident Fund Treasuries.

Debt Investments – Approach and Strategy Struct ctured Papers fr from Emergi ging Fina nanci cial Sect ctors- Consider high yield opportunities arising from well-capitalized and professionally managed Alternative NBFCs focusing on SME Fin Financing Commercial Vehicles Aff Affordable Ho Housing Mic icro Fin inancing back acked by Mortgages Fin inancing The following criteria is firmly applied for selection of investment opportunities in this segment -  Fundamentally sound and profitable business model  Management with proven track record  Robust process for credit evaluation, security creation, operations control and collections  Presence of seasoned Private Equity investors in the board  Recent round of promoter / private equity infusion strengthening the capital adequacy  Short Term Maturity and being in the top quadrant of the Company’s Liability Repayment profile thereby placing our exposure in a positive Asset Liability bucket.

Debt Investments – Approach and Strategy Case Case Stud Study – (SM SME Finan Finance) – Aye ye Fina Finance ce We invested in 13.86% 2 year Non-convertible debentures (quarterly amortisation) of Delhi based Aye Finance Limited. Aye is an NBFC focused on cluster-based approach of lending to micro-enterprises in rural and semi- urban areas. Its net-worth at that point was about Rs.250 crs , AUM - Rs.675+ crs and had the following attributes -  Good Robustness of In-house credit-underwriting systems demonstrated by low PAR90  82% of the company owned by credible PE and Foreign Institutions – LGT Capital, SAIF, Capital-G & Accion.  Diversified lender base – with 15+ domestic & foreign institutions.  Well capitalized NBFC & Comfortable Asset Liability Profile with huge surplus The NCDs were issued to the company to enable it to expand its AUM and leverage its balance sheet. We had included an additional covenant that cumulative Asset-Liability mismatch should always be positive to the extent of 10% or more in all the buckets up to 3 years . Subsequent to the NCD issue in Nov 2018, the management was able to expand its AUM and attracted further equity of Rs 230 Crs in Feb 2019. Rs. s. in n Cror rore Favo avourable Ass Asset Liab abilit ity Pro Profi file at at the time of Inv nvestment – Sep Sep 2018 <30 31 31 - 60 61-90 61 91 - 365 91 3-5 5 > 5 > 5 1 1 -3 years Total days da days days da days years years Total Ass Assets (a) 104.92 44.72 43.93 384.02 366.65 22.07 0.89 967.2 .20 Total Liab abil ilities (b) 28.32 12.93 11.15 102.03 246.35 206.33 360.10 967.2 .20 Mis ismatch (a-b) b) 76.60 31.80 32.79 281.98 120.30 (184.27) (359.21) Cum umulativ ive Mis ismatch 76.60 108.40 141.19 423.17 543.47 359.21 (0.00)