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

Unifi High Yield Fund

Preface

Investor Predicament

Conventional Equity

• High

/ above average return potential

• Accompanied by extreme

volatility Conventional Debt

• Low

/ below average volatility

• Hardly

any real returns post tax and inflation Cyclicality of asset values combined with misconstructed risk-return expectations push investors to either

• settle for sub-par returns (or)
• bear volatility beyond one’s temperament leading to

capital loss

Unifi HYF Proposition

High Yield Fund

• Endeavour to generate net

post tax returns of 3% p.a

• ver the

rate of inflation (CPI)

• Minimal / below average

volatility ` Risk adjusted arbitrage and fixed income opportunities arising from

• corporate events
• macro-economic cycles
• emerging credit

Overview

Inv Inves 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

• ver 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.

Unifi Capital Pvt. Ltd. Fund Manager

Min Investment INR 1 crore Performance Reporting Monthly NAV & Quarterly Review Independent Custodian & Accountant HDFC Bank Lock in period Exit load of 2% if redeemed within 6 months. Tenure Open ended; Monthly subscription and redemption Fees 0.80% per annum fixed and 20% performance over hurdle rate (Monthly Chargeable) Valuation S&P CRISIL Launch Date 04-Apr-2013. AUM (INR Crs) INR 592 crores Hurdle Rate Non cumulative pre tax return of 10% per annum Setup Fees None

Overview

St Stra rate tegie ies Instr Instrumen ents Indi Indicati tive e All lloca cati tion Avg vg All lloca cati tion FY FY 2019 Avg All lloca cati tion FY FY 2018 Avg All lloca cati tion FY FY 2017 Event Arbitrage Arbitrage opportunities in Listed Equities arising from open offers, delisting, mergers & de-mergers, IPOs, Cash-Futures 0 – 100% 11% 21% 26.2% Nominal Bonds Conventional AAA & AA bonds of various Indian Companies – Typically HTM 0 – 50% 22% 26% 23% Structured & High yield Debt Structured Secured Corporate Debt, Commercial Papers, short term bonds and tax efficient Preference Shares

• f

NBFCs focusing on Housing, SME , CV, Agri and Micro Finance. 0 – 75% 65% 46% 46.3% Directional Calls Equity, G-Secs and AAA debt (duration calls) 0 – 10% 2.2% 1% 1.8% Cash / Liquid For liquidity purposes/ temporary parking of funds.

• 0.3%

6% 2.7%

Overview

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 FY20 FY2017 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

• ur target i.e. Inflation + real returns of 3% post tax
• 1.00
• 0.50

0.00 0.50 1.00 1.50 2.00 2.50 100 110 120 130 140 150 160 170 180

HYF Monthly Post Tax Returns (In %) HYF Post Tax Returns Inflation + 3% Inflation 174 74.0 .03 136 36.6 .68 164 64.9 .93

Investment Strategy

• 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. .

Fix Fixed Inc Income op

• pportunities – Nom
• minal

l & Hi High Yie Yield Deb ebt

• 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.

Eve vent Arb rbitrag age op

• pport

rtunities

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.

Whol

• lesale

le to to Retai ail – Bulk Buying from Bank Treasuries / Primary Issuances at finer rates and selling in smaller lots with a mark-up to HNIs / Private Provident Fund Treasuries. Aggregato tor of

• f Reta

tail il Lots ts – Provide the much needed liquidity channel for retail bond holders at market yields plus spread. Subsidiary – Holding Company – Focus on 100% Subsidiaries whose papers are rated lower than their highly rated Parent companies but offer an higher yield. Tactic tical Calls - Consider macro-economy driven opportunities like softening of Yield Curve (duration play) due to fall in Interest Rates and conducive Rating Upgrades cycle resulting in capital gains.

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 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.

Aff Affordable Ho Housing SME Fin Financing back acked by Mortgages Commercial Vehicles Fin inancing Mic icro Fin inancing

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

• f 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 da days 31 31 - 60 days 61 61-90 da days 91 91 - 365 days 1 1 -3 years 3-5 5 years > > 5 5 years Total 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)

Event Arbitrage

In a typical open offer, the price movement during the period between public announcement and the offer closure is largely insulated from market volatility and delivers a debt like absolute return.

Parti articulars FY19 Y19 FY18 Y18 FY17 Y17 FY16 Y16 FY15 Y15 FY14 Y14 FY13 Y13 Total no. of

• ffers

26 45 51 73 60 60 74

• No. of offers

participated 2 1 2 7 9 12 16 Average offer size (in crs) 1071 70 186 161 287 3941 523 Largest Offer invested (in crs) 923 0.91 415 1621 11449 29200 5222 Smallest Offer invested (in crs) 329 0.91 115 26 251 30 40

175 185 195 205 215 225 10000 20000 30000 40000 14/07/2015 14/08/2015 14/09/2015 14/10/2015 14/11/2015 14/12/2015 Sh Shar are e Pri Price ce Vo Volume e (in n 00's)

IIFL IIFL Ope pen Off ffer

Volumes (in 00's) Share Price

Similar to Debt Returns PA Date: 14 Jul 2015 Purchase Date: 25 Aug 2015 Purchase Date: 185 Offer Price: 195 Payment Date: 8th Dec 2015 Acceptance: 100% Return: 5.40% Annualized Returns: 18.79%

20 40 60 80 100 120 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

His Historical No

• of
• f Op

Open Of Offers

Merger Arbitrage

Case Case Stud Study – (HC HCL – Geo Geomet etric ic Merg erger er) HCL-Geometric merger was announced in Apr 2016 wherein for every 43 shares of Geometric, its shareholder would get 10 shares of HCL Tech and 43 preference shares of 3DL PLM (7% redeemable) with a face value of Rs.68 each. We started tracking the spreads and entered into the trade in April 2016 where we reckoned that we could make 14% per annum. We bought shares of Geometric and sold HCL Tech in the futures market. HCL Tech being a highly liquid F&O scrip enabled us to hedge our Geometric exposure completely and lock-in the desired spreads. All the deal related approvals were

• btained by Jan 2017 and the spreads had also narrowed to 8% p.a by then. As we had realized the

intended holding period return of 14% p.a, we exited the trade during February month just before the record date for share swap and moved into another opportunity with better yield. . Below is the timeline

• f approvals and respective spreads.

Event Date Annualized return Merger Announcement date 1-Apr-16 25.22% Unifi Entered the trade 4-Apr-16 14.97% NOC approval from exchange 8-Jun-16 13.61% CCI Approval 21-Aug-16 14.10% Shareholders approval 4-Oct-16 16.50% High Court Approval 14-Dec-16 11.55% Copy of High court approval submitted to exchange 18-Jan-17 12.05% Unifi Exit prior to record date of 15-03-17 28-Feb-17 7.83%

80.00 90.00 100.00 110.00 120.00 130.00 140.00

HCL - Geometric Price Movement

HCL Tech Geometric

Ratings Migration

Fi Financial Year Name of the the Co Company Upg pgra rade / / Downgra rade Fr From To To FY 2019 Spandana Sphoorty Financial Limited Upgrade BBB+ A- FY 2019 Esskay Fincorp Upgrade A A+ FY 2019 Five Star Business Finance Upgrade A- A FY 2019 Suryoday Small Finance Bank Limited Upgrade A- A FY 2018 Cholamandalam Finance Upgrade AA AA+ FY 2017 Zee Entertainment Preference Shares Upgrade AA+ AAA FY 2017 IDBI Downgrade AA- BBB FY 2017 Aspire Home Finance Upgrade A+ AA- FY 2017 Equitas Small Finance Bank Upgrade A A+ FY 2017 Grama Vidiyal (due to Merger with IDFC Bank) Upgrade BBB AAA FY 2016 IKF Finance Upgrade A- A FY 2016 Five Star Business Fin Ltd Upgrade BBB- BBB FY 2016 Utkarsh Micro Finance Upgrade BBB BBB+ FY 2015 Satin Credit Care Upgrade BBB BBB+ FY 2015 IFMR Capital Upgrade A- A+ FY 2015 Vistaar Financial Services Upgrade A3 A2

• To

Total Upg pgrades – 15, , To Total Downgrades – 1 , Def efaults ts – 0

• Sin

Since e in ince cepti tion of f the e fu fund, , there e has as bee een onl nly one ne rat rating do downgrade - ID IDBI BI pe perpetu tual bonds fr from AA- to BB BBB

• Th

Three e of f the e in inves estee ee com companie ies hav ave e bee een aw awar arded Sm Small all Fi Fina nance e Ba Bank Lic Licen ences (Su (Suryoday mic icro ro fi finance, , Eq Equit uitas Ho Hold lding ings, Ujj jjiv ivan Mic icro fi fina nance)

Latest Holdings – Key Attributes

Av Average Ex Exposure Fixed Income (Debt) 94.8% Event Arbitrage 6.6% Directional Calls 1.0% Cash / (Leverage)

• 2.4%

Deb ebt Qua uants as as on n Jul July 2019 Weighted Average Maturity 1.85 Yrs Carry Yield 12.43% Rat atin ings Ex Expo posure AAA & AA 18% A 43% BBB 29% Total 90% Liqu quidit ity Pro Profi file of the Po Portfo folio io Less than 1 week 8.92% Between 1 week & 1 month 16.29% Between 1 month & 3 months 15.35% Greater than 3 months 59.43% Total 100.0 .00 %

Ke Key Attributes as s of

• f August

st 2019 2019

Latest Holdings – Key Attributes

AIF Performance

UNIFI AIF vs Debt Fund’s

• 4%
• 3%
• 2%
• 1%

0% 1% 2% 3% 4% 5% 50 70 90 110 130 150 170 190 210 230 250 Apr/13 Jun/13 Aug/13 Oct/13 Dec/13 Feb/14 Apr/14 Jun/14 Aug/14 Oct/14 Dec/14 Feb/15 Apr/15 Jun/15 Aug/15 Oct/15 Dec/15 Feb/16 Apr/16 Jun/16 Aug/16 Oct/16 Dec/16 Feb/17 Apr/17 Jun/17 Aug/17 Oct/17 Dec/17 Feb/18 Apr/18 Jun/18 Aug/18 Oct/18 Dec/18 Feb/19 Apr/19 Jun/19 Aug/19 Monthly Returns Value of Rs.100 Invested Monthly R Ret eturn rns UNIFI AIF Bir irla Sh Sh. . Ter erm Opp. . Fu Fund Fra ran T Temp C

• Corp. B

Bond BSL D Dynamic ic Bond F Fund(G (G) Relia iance e Dynamic ic B Bond(G)

Mo Monthly y Pe Perfo rformance ce in n (%) Ye Year ar Ap Apr May May Jun un Jul ul Aug Aug Se Sep Oc Oct Nov De Dec Jan an Feb Mar Mar Ann Annual FY1 Y14 0.92% 1.56%

• 0.70%

1.60% 1.02% 0.87% 1.18% 1.07% 2.84% 0.79% 2.20% 0.95% 14.40% FY1 Y15 1.15% 1.43% 1.22% 1.44% 1.13% 1.20% 1.14% 1.36% 1.48% 1.28% 1.38% 1.83% 16.82% FY1 Y16 0.92% 1.14% 0.75% 1.58% 1.26% 0.87% 1.24% 0.82% 1.31% 1.12% 0.59% 2.51% 14.67% FY1 Y17 1.00% 1.14% 0.83% 1.24% 1.10% 1.38% 0.79% 1.28% 0.77% 0.90% 0.80% 1.97% 13.70% FY1 Y18 1.60% 0.32% 1.00% 1.15% 1.42% 2.25% 0.90% 1.40% 0..80% 0.63% 0.81% 1.60% 14.47% FY1 Y19 0.65% 0.31% 0.41% 0.84% 0.92% 0.22% 0.64% 0.71% 1.02% 0.84% 0.85% 3.01% 10.75% FY2 Y20 0.49% 1.15% 0.66% 0.93% 0.89% 4.43% Return rns

UNI UNIFI AIF Birl rla Sh. . Opp pp. . Fund nd(G) Fra ran. . Corp rp. . Bond nd fund( nd(G) BSL Dyna namic ic Bond nd Fund nd(G) Re Relia iance e Dyna namic ic Bond nd(G) Average Monthly Return 1.12% 0.75% 0.76% 0.71% 0.71% CAGR 14.05% 9.39% 9.42% 8.70% 8.78% Cumulative Returns 135.06% 77.88% 78.18% 70.79% 71.61% Largest Monthly Gain 3.01% 2.34% 3.06% 4.85% 4.28% Largest Monthly Loss

• 0.70%
• 1.17%
• 2.10%
• 3.63%
• 3.81%

% of positive Months 98.70% 93.51% 89.61% 76.62% 74.03% Risk Standard Deviation (Annualised) 1.92% 2.04% 2.31% 4.42% 4.66%

AIF Performance

Investment Allocation & Returns Attribution

Re Returns Attribution Inv Investment Alloc llocation

9% 14% 11% 9% 6% 10% 5.2% 2.2% 2.5% 3.6% 5.0% 0.6%

• 2.0%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% FY 14 FY 15 FY 16 FY 17 FY 18 FY 19

Fixed Income Event Arbitrage Directional Calls Liquid Funds / (Leverage)

71% 84% 75% 69% 72% 87% 16% 11% 16% 26% 21% 11% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% FY 14 FY 15 FY 16 FY 17 FY 18 FY 19

Fixed Income Event Arbitrage Directional Calls Liquid Funds / (Leverage)

Investment Process

Idea Origination Opportunity validation, review and evaluation of risk / return scenarios Investment Committee Review Initiation of Investment

Unif nifi Cap Capita tal (P) Ltd td – Fund und Mana nage ger to the Tr Trust ust

Post Investment Monitoring and Risk Management

CIO CIO, Head ad-Rese search ch and and Head Head-Relation

• nship

AIF IF Tr Trust stees Inte Internal Revi view St Stat atutory Audit ditors

Portfolio Parameters

Pre-trade

Ongoing Surveillance

Post-trade

Firm Infrastructure

In-depth bottom-up review of all investment

• pportunities

by documented and well seasoned evaluation process Sensible Exposure Limits:

• Theme Specific
• Company Specific (not more than 10%)

‘Marketable Liquidity’ Assessment Rigorous due-diligence on structure and security w.r.t debt investment opportunities Maximum Leverage limit including derivative exposures capped at 1.5 times the fund corpus Daily Mark-to-Market assessment including detailed review of extreme movements Real-time monitoring of economic developments, corporate communications to stock exchanges and methodical tracking of economy and company specific developments Periodical meeting / calls with management of all the investment companies to measure progress, review results and revalidate assumptions Opportunistic hedging/tactical trading to respond to short-term, counter-theme market moves Best-in-class IT infrastructure with back-up Documented Process Flow Reputed Trustees, Custodian, Valuer etc Research Access to premium databases capturing economic, sector and company specific trends Periodical Internal Review and Statutory Audit

Risk Management Framework

• Avoid becoming too large too soon

We periodically close the fund to new subscriptions so that we have adequate time to “cherry-pick” our investments and maintain a healthy funnel of investible ideas. This strategic calibration allows us to complete proper homework and offers the flexibility to say “no” to investments that we find sub-optimal. Since our commercial interest is aligned to generate higher return on capital, we don't unduly prioritise growing the fund itself.

• Avoid long duration

We invest in shorter maturity bonds of fundamentally strong corporates at an attractive absolute yield. This protects us from having to forecast interest rates; a challenge that trips- up most professional investors most of the time. Equally important is the fact that short tenor also offers the enormous benefit of not having to predict the prospects of a business far into the future. Since uncertainties rise exponentially with time, we logically prefer to settle for a slightly lower yield than expose our capital to the risk of permanent loss due to potential disruptions over the longer term. We bear in mind that our upside is in any case capped by the bond's contracted yield, unlike the case of an equity investor who accepts long duration in the hope of earning an out-sized upside.

Key tenets Fo Four key te tenets of f our ur inv investment an and ris risk mit itigation fra framework :

• Avoid placing too much value on credit ratings

Credit events from the last year validate the fact that securities of highly rated and larger firms are not necessarily safer than those issued by smaller companies. The fund welcomes

• pportunities from relatively new issuers by leveraging our in-house capability to analyse

businesses from a fundamental bottom-up perspective. These emerging firms require smaller sums and it takes us considerable time and resources for a thorough due-diligence. Precisely for this reason the big institutions are not equipped to operate in this space, allowing us to earn superior yields.

• Embrace Illiquidity

The bond market is dominated by large mutual funds that are managed by small teams. In the interest of efficiency they tend to prefer investing in large and well established firms whose bonds are perfect for quick large scale deployment and offer liquidity at short notice. On the contrary, the issue with emerging company bonds is that they tend to be less liquid and we as investors should be clear in our mind about holding them till they mature in 18 to 30

• months. In this aspect we are particularly well placed. Despite being an open-ended fund

(monthly window), we are uniquely positioned to buy illiquid bonds in exchange for higher yield due to the stability of our diversified corpus from 195+ clients.

Key tenets (Contd.) Fo Four key te tenets of f our ur inv investment an and ris risk mit itigation fra framework (C (Contd.)

Our quick access to institutional borrowings against the bond portfolio and a well-defined liquidity management policy further strengthen us. The following table provides you a glimpse of our diversity: We respect and appreciate the faith you have reposed in Unifi. We will continue to be innovative and disciplined as we work on sustaining the higher returns that this fund has generated.

Key tenets (Contd.) Fo Four key te tenets of f our ur inv investment an and ris risk mit itigation fra framework (C (Contd.)

Pa Part rticulars Co Corp rpus % Pa Part rticulars Co Corp rpus % Top 3 clients 12% Direct Clients 63% Top 5 clients 17% Top 2 distributors 19% Top 10 clients 26% Top 5 distributors 31%

Why Unifi High Yield Fund

• Successful and consistent track record of achieving superior returns than the benchmark

credit and dynamic bond mutual funds in all the 6 years since inception.

• Open-ended fund with no entry load. No exit load post 6 months of investment.
• Historical volatility has been less than 2%. Portfolio construction with uncompromising

emphasis on capital preservation.

• Core high yield debt portfolio with flexibility to participate in event arbitrage opportunities

with high returns potential.

• Complete bottom-up in-house research of all deals and rigorous monitoring mechanism post
• investment. No outsourcing of research or undue reliance on credit ratings.
• Calibrated raising of fresh capital according to deployment potential. Not looking to scale

beyond INR 1000 crores so as to remain nimble and deliver performance across market and economic cycles.

P . S . - The Power of Compounding

The power of compounding is the eight wonder of the world – Einstein. A portfolio with consistent above average compounded returns over years creates more wealth than a one offering high returns at a higher volatility. See the example below – Even one bad year in a 5 yr time period could significantly bring down the returns and dilute the power of compounding.

Year 1 Year 2 Year 3 Year 4 Year 5 Portfolio A 100 18% 16% 17% 19% 15% 219 Portfolio B 100 40% 27%

• 38%

24% 22% 167

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www.unificap.com

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