The document discusses the current market environment of falling oil, gold and inflation prices, as well as slowing economic growth. It notes that this could lead to further reductions in policy interest rates. It then summarizes recent movements in key Indian interest rates and bond yields. The document advocates for investing in high accrual funds in this environment due to risks of reinvestment at lower rates. It describes the L&T Income Opportunities Fund strategy of focusing on high yielding corporate debt, including from infrastructure companies, and emphasizes the fund's rigorous credit selection process.
3. Growth slowdown accompanied by falling oil, gold and inflation
Moderating inflation
Falling crude pricesSharp correction in gold prices
Growth slowdown
Growth slowdown coupled with moderating inflation could stimulate further policy rate cuts
Source: Bloomberg, Gold and Crude prices data as on 15th May 2013.
4. Key Policy Rates and Yield
Movement
Rate
30-Mar-
12
29-Jun-
12
28-Sep-
12
31-Dec-
12
15-May-
13
Change
Since Mar-
12
3 months CD 10.70 9.05 8.40 8.49 8.07 -263 bps
6 months CD 10.50 9.30 8.67 8.73 8.18 -232 bps
1 year CD 10.15 9.52 8.92 8.82 8.41 -174 bps
10 year G-sec 8.54 8.18 8.15 8.05 7.46 -108 bps
Repo Rate 8.50 8.00 8.00 8.00 7.25 -125 bps
• RBI has cut repo rates thrice in this calendar year,
with a cumulative cut of 75 basis points
• Despite somewhat hawkish rhetoric in the May 3
policy, we expect the RBI will respond with 50-
75bps of rate cuts over the next 3-6 months
Source: Bloomberg, as on 15th May 2013.
Will RBI play along?
5. Bond markets celebrate…
• Short term as well as medium term corporate
bond yields have come off significantly
• Lower credits adequately compensating for the
added risk
Source: Bloomberg. Data as on 15-May-13
6. Why consider an accrual fund in such a scenario?
This is for illustrative purpose only and should not be construed as advice to subscribe to the schemes of L&T
Mutual Fund. Please consult your financial advisor before taking any investment decisions.
The above calculations are based on various assumptions given in the assumptions table above and the actual performance may vary depending on the market conditions and
actual change in the shape of the yield curve. For roll down calculation, the yield spread for duration fund is assumed to be 10 bps whereas for the accrual fund, it is assumed
to be 50 bps. Change in yields assumed to occur over first year, with yields steady in year 2.
Over a two year investment horizon, in the aforesaid illustration, accrual fund A delivers significantly better total returns
than duration fund B in each of the above scenarios. Reinvestment risks will become much more important given the low
level of interest rates
Assumptions
7. High accrual fund could form the core of investor’s portfolio
Given the current positive bond market environment, relatively aggressive investors could look
for tactical allocation to duration products, provided they are comfortable with the volatility
Products such as fixed maturity plans and conservative short term income funds have become
relatively less attractive on account of lower bond yields
On the other hand, elevated credit spreads provide an attractive opportunity to invest in well
researched credits
As a result, it may be advisable to increase allocation to higher yielding, accrual-oriented
products to boost overall yield of your portfolio
A high yielding, accrual fund with a balanced risk-reward approach as a core
investment in a portfolio, with tactical allocation to long duration bond funds
8. Click to edit Master title style
L&T Income Opportunities Fund
A high accrual fund with a unique proposition
9. L&T Income Opportunities Fund
An open-ended income scheme investing predominantly in corporate debt instruments
Current Strategy
Focus on yield enhancement through measured exposure to high yielding securities
• Focus on infrastructure sector: Leveraging on the expertise of L&T group in terms of
project execution and project financing, as well as industry knowledge and sourcing
abilities
Rigorous credit selection process to spot mispriced credit opportunities
Accrual-based, yield-enhancement strategy
A medium term debt fund with maximum average maturity of 3 years
An attractive investment option for investors with 2-3 year investment horizon
10. High accrual fund, with a focus on the infrastructure sector
Increased infrastructure funding needs across sectors such as roads, power, telecom, ports,
hospitals, etc
As a result, debt securities issued by infrastructure companies offer attractive yield spreads
over high quality bonds
However, a large number of infrastructure companies have weak balance sheets on account
of high leverage and poor cash flows
Hence, rigorous credit selection process is extremely important to choose mispriced credits in
the infrastructure sector
L&T group’s expertise in infrastructure project execution and financing coupled
with our strong in-house credit research capabilities gives us a solid advantage
while investing in the sector
11. Product Positioning (for illustrative purposes only)only
High yield medium term
funds / Credit opportunities
funds
aggressive short term funds,
medium term FMPs, medium
term open-ended debt funds
Long term bond funds, Long-
dated government securities
funds
cash / liquid / ultra short term
funds / floating rate funds
conservative short term
funds, High credit quality
Fixed maturity plans, short-
dated government securities
funds
Maturity / duration
Yield
Low Medium High
Low
Medium
High
L&T Income
Opportunities
Fund
For liquidity
management needs,
temporary parking of
surplus funds
Core / strategic fixed
income holdings
Tactical allocation to
play interest rate cycle
12. Indicative strategy
Asset Type Infrastructure sector Infrastructure sector Infrastructure sector
High yielding
securities in AA and
A category
AAA /AA Securities
Type of
company
Fully operational projects
as well as company
balance sheet funding
Projects owned by L&T
IDPL or other L&T group
entities
Balance sheet funding of
good quality, infrastructure
oriented companies /
SPVs
Balance sheet funding of
companies across
sectors, including NBFCs,
retail, auto and auto
ancillary etc.
May also include single
loan PTCs and retail ABS /
MBS transactions*
High quality assets, which
have sufficient tradability
to meet fund’s liquidity
requirements
Source
L&T Infrastructure
Finance, L&T Fincorp,
IDF**
L&T IDPL Directly from the Market Directly from the Market Directly from the Market
Instrument
type
NCDs and structured
obligations
NCDs and structured
obligations
NCDs and structured
obligations
NCDs or PTCs*
NCDs
Risk
Mitigation
Rigorous due diligence by
L&T Mutual Fund’s
investment team ;
Expertise and sector
knowledge of L&T infra
Rigorous due diligence by
L&T Mutual Fund’s
investment team ;
Expertise and sector
knowledge of L&T IDPL
Rigorous due diligence by
L&T Mutual Fund’s
investment team
Rigorous due diligence by
L&T Mutual Fund’s
investment team
Rigorous due diligence by
L&T Mutual Fund’s
investment team
adequate structures and
covenants to be put in
place ; credit enhancement
by higher rated companies
adequate structures and
covenants to be put in
place; credit enhancement
by higher rated companies
adequate structures and
covenants to be put in
place ; Tapping into the
expertise and knowledge
of L&T’s sector specialists
adequate structures and
covenants to be put in
place
NA
Allocation
Limits
(Indicative)
0 - 40% 0-25% 0-20% 0-40% 0-25%
Please note that this is an indicative strategy and is not to be construed as advising on / disclosing the actual construct of
the portfolio. The actual allocations may vary significantly due to changing market conditions / unavailability of securities.
* Securitization deals subject to regulations ** Other infrastructure financing entities within L&T group
13. Theme 1 – L&T IDPL’s road project
L&T IDPL is a 97% subsidiary of L&T Ltd and engaged in developing various infrastructure projects
A leading infra player with a wide portfolio of operational & under implementation projects ; rated ICRA AA / Stable
Strong execution capabilities, ability to securitize receivables: 12 of the 21 projects in road sector have already been
completed largely within stipulated time & cost
Strong linkages with the L&T Group: Majority of EPC contracts for L&T IDPL’s SPVs given to L&T’s construction division
High flexibility in providing financial support to SPVs: Strong financial metrics with strong networth & negligible external
debt
Road project
owned by L&T
IDPL
Fully operational infrastructure
projects with established revenue
stream ; no project execution risk ;
Visibility on cash flows
L&T IDPL as a primary contractor for
routine maintenance & major
maintenance of the project ; strong
visibility on routine maintenance
which is critical for timely cash flows
High financial flexibility: L&T
IDPL’s commitment to support
the SPVs in which the Fund invest
Majority ownership &
management control with L&T
IDPL ; Clarity on corporate
governance
Investment in such projects subject to put option on L&T IDPL ensuring timely payment of principal and interest
The aforesaid is an example given to illustrate the type of securities that the scheme may invest into. Please note that the actual
portfolio may or may not have investment in such securities
14. Theme 2: Co-investment with L&T infra finance
A large corporate group
Subsidiary company
A group company engaged
in power grid projects
Holding company
A leading global player in
optic fibers & power
transmission conductors
L&T Infrastructure has
been a lender on BOOM
basis
While L&T infra may have exposure to the lower rated project / subsidiary company, L&T mutual may consider
exposure in the higher rated parent company
Comfort on standalone credit quality by the mutual fund credit team a pre-requisite
L&T mutual to leverage on L&T infra team’s expertise and understanding of company and industry
Ability to continuously monitor the operating performance and underlying project progress greatly enhanced
Co-investment with L&T infra provides an added layer of comfort
Potential exposure for
L&T Income
opportunities fund
The aforesaid is an example given to illustrate the type of securities that the scheme may invest into. Please note that the actual
portfolio may or may not have investment in this security
15. Theme 3: Frontline infrastructure company with
strong parentage – ITNL
Strong Parentage of IL&FS Ltd (AAA rated by CARE, FITCH, ICRA) high financial flexibility.
Strong execution track record in road projects ; One of the top 3 road projects operators on BOOT basis
Balanced mix of annuity / traffic toll projects and also diversified across geographies reduces concentration risk
which is otherwise common in infra projects
Healthy pipeline of orders Revenue visibility for next 2 years
Many projects to become operational in next 12-18 months higher cash flow visibility
Strong covenants built in the instrument high visibility on IL&FS’s ownership, financial leverage & company’s
commitment to maintain external ratings
BSE / NSE listed company with a market cap of ~Rs 3,600 cr
Externally rated by 4 rating agencies (Fitch A/Stable, ICRA A/Stable, CARE A, CRISIL A/Negative ) higher scrutiny
on credit metrics
The aforesaid is an example given to illustrate the type of securities that the scheme may invest into. Please note that the actual
portfolio may or may not have investment in this security
16. Why L&T Income Opportunities Fund?
Active, but not trading
oriented approach
• Exit load for 2 years ; Stable flows
help reduce liquidity risk
Why invest in L&T
Income Opportunities
Fund?
High portfolio yield
• A high-yielding, accrual oriented
strategy with focus on
infrastructure sector
Moderate Duration Risk
• Average maturity not to exceed 3
years
Well researched credits
• Rigorous internal credit research process
to spot mispriced credits
Leveraging L&T group’s
expertise in infrastructure
• Project execution, project financing,
knowhow and sourcing abilities
within L&T ecosystem
A unique investment
proposition
• A well differentiated attractive
investment option for investors
with 2-3 year investment
horizon
17. Particulars Description
Scheme name L&T Income Opportunities Fund
Category Open ended Income Scheme
Benchmark CRISIL Short Term Bond Fund Index
Exit Load
2% if redeemed within 1 year ; 1% if redeemed between 1-2
years ; Nil if redeemed after 2 years
Fund Manager Shriram Ramanathan
Minimum investment Rs. 10,000
Fund Facts
18. 18
Investment Process – GEM - 3 stage process
Generation of
ideas
Manufacturing
and
monitoring of
Portfolios
Views
● Top-down
● Bottom-up
Types of Analysis
● Fundamental
● Macro
● Credit
● Market Technical
Sources of Alpha
● Duration
● Credit / Issuer
● Security / curve
Diversified sources
of ideas
Issuer Analysis based on
● Management contacts (company visits, conference calls)
● Annual reports
● Third-party research
● Proprietary company database
● Sector outlook
● Company Financials: Expected leverage and CF ratios
● Business & Environment: Market position, strategic focus and
implementation, management track record, quality of disclosure and
transparency
Periodic rating review based on
● Management, business model, balance sheet & liquidity risk, earnings
& cash flow risk, peer group analysis
Fundamental Credit Analysis
● Discussion in Investment
Committee
● Idiosyncratic risk
diversified through limits at
sector and issuer level
● Allocations to credit
ratings, sectors, issuers
done in accordance with
risk tolerance and limits
● Exposures are regularly
reviewed to ensure
portfolio exposures are
within investment
guidelines
Implementation
Fixed Income Investment Process - GEM
Evaluation
of issuers
19. Biography
Shriram Ramanathan
• Funds Managed / Co-Managed
L&T Liquid Fund, L&T Ultra Short Term Fund, L&T Low Duration
Fund, L&T Short Term Income Fund, L&T Income Opportunities Fund
and L&T Flexi Bond Fund
• Professional Experience
2012 – Present Head – Fixed Income
L&T Investment Management
2009 – 2012 Portfolio Manager
FFMPL, Mumbai, India
2006-2009 Senior Investment Manager – Global Emerging Market Debt (Asia),
ING Investment Management Asia Pacific, Hong Kong
2003 – 2005 Fixed Income Fund Manager
ING Investment Management, Mumbai
2001 – 2003 Fixed Income Research
Zurich Asset Management, Mumbai
2000 – 2001 Treasury
ICICI Limited
• Education and Qualifications
B.E., University of Mumbai
PGDBM, XLRI, Jamshedpur
CFA Charterholder
Shriram Ramanathan
Fund Manager Profile
20. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Disclaimer: This presentation is for general information only and does not have regard to specific investment objectives,
financial situation and the particular needs of any specific person who may receive this information. Investments in mutual
funds and secondary markets inherently involve risks and recipient should consult their legal, tax and financial advisors before
investing. Recipient of this document should understand that statements made herein regarding future prospects may not be
realized. He/ She should also understand that any reference to the securities/ sectors / indices in the document is only for
illustration purpose and may or may not form a part of the portfolio of the scheme and is not any indication of the portfolio of
the scheme. Neither this presentation nor the units of L&T Mutual Fund have been registered in any jurisdiction. The
distribution of this presentation in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who
come into possession of this document are required to inform themselves about, and to observe, any such restrictions.
CL00243
Disclaimer