This document discusses active duration management strategies for fixed income portfolios. It notes that interest rates are expected to become more volatile as the central bank normalizes liquidity. It recommends keeping portfolios nimble by actively managing duration across different debt schemes based on their investment horizon and objectives. Specific strategies discussed include running a barbell strategy in short duration funds and adding exposure to floating rate bonds and corporate bonds. The document also provides updates on duration positions across various ICICI debt mutual fund schemes.
Active Duration Management for Navigating Fixed Income Markets
1. Time to move outof Hibernation
Hibernation is a state of minimal activity in animals like bears characterized by low body-
temperature, slow breathing and low metabolic rate. It occurs commonly in winter months.
The important point is that after hibernation the animal should become active again so that it
can store enough energy by consuming food to last through the next winter. Similarly, we
believe at this juncture in fixed income market, the time has come where portfolios should
be managed actively to protect it from interest rate volatility and to benefit from high term
premium.
Why Active Duration now ?
• We are at the fag end of interest rate cut cycle. Hence, it is prudent to keep portfolios
nimble.
• We expect interest rate volatility due to moderation in RBI stance on liquidity*.
• Yield curve steepness : The gap between the long and short end yields of the curve
provides opportunity to create returns by active management of duration.
* Source : RBI Press Release
Time to be nimble footed :
Active Duration Management for navigating
fixed income markets
2. What our DebtValuation Index for Duration RiskManagement Suggests?
Data as on July 31, 2021. Debt Valuation Index considers Whole sale Price Index (WPI), Consumer Price Index (CPI),Sensex returns,Gold
returns and Real estate returns over G-Sec yield,Current Account Balance, Fiscal Balance and Crude Oil Movement for calculation.
We remain very cautious on duration as the interest rates are expected to remain volatile
due to RBI normalizing liquidity and upside risk to inflation due to economic recovery
Investment Approach forthe Current Market
A. Active Duration for benefitting from high term premium
Time to be nimble footed :
Active Duration Management for navigating
fixed income markets
Aggressive
Highly Aggressive
Very Cautious
Cautious
Moderate
Source: CRISIL Research, Data as on July 31, 2021. Pastperformance may or may not sustain in future
1.76
0
1
2
3
4
5
6
7
8
9
10
Very Cautious
Cautious
Moderate
Aggressive
Highly Aggressive
-3
-2
-1
0
1
2
3
4
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Jul-20
Jul-21
Term Premium (10 Yr Gsec - 1 Yr Tbill) % Long Term Average Premium %
Average 83 bps
253 bps
3. B. Accrual Strategy to benefit from higher carry provided by good quality spread assets
Time to be nimble footed :
Active Duration Management for navigating
fixed income markets
Avg. 91
bps
Avg.54
bps
S
P
R
E
A
D
Avg. 359bps
Source: CRISIL Research, Data as on July 31, 2021. Past performance may or may not sustain in future
Our Portfolio Positioning
• Across our portfolios we aim to manage duration actively
• In short duration schemes, we aim to run Barbell Strategy (combination of high duration
and low duration instrument) to benefit from term premium ((10 Yr Gsec yield over 1 Yr
Tbill yield) and to reduce interest rate volatility
• In Schemes which aim to invest in short end of the yield curve, we have added
exposure towards Floating Rate Bonds (FRB)
• We have added reasonable quality AA Corporate Bond in select portfolios, due to higher
spread premium
3
4
5
6
7
8
9
6 Months 1 Yr 3 Yr 5 Yr
Yields
(%)
AA AAA Gsec Repo Rate
4. Over the last 2-3 months we had added duration to our portfolios due to the following reasons:
1. GDP growth rate slashed: On the back of the outbreak of the second wave and its
connected implications on the overall economy
2. Accommodative stance to continue: RBI has unequivocally hinted that normalization in
monetary policy is not being thought about yet.
3. Yield Curve Control: RBI is actively managing the yield curve with its regular Open Market
Operations (OMOs) along with the recently launched G-Sec acquisition program or G-SAP
program which may not allow yields at the longer end to rise despite government borrowing
and inflation concerns
4. Benefit from Higher Term Premium: Currently, the term premium is at one of the highest
levels seen in the last 10 years at around 250 bps. We have tactically taken exposure on the
longer end of the curve to capture the term premium.
However, with the unlock phase beginning and covid cases declining, growth is expected to
improve and hence we have moderated duration in the month of July
Time to be nimble footed :
Active Duration Management for navigating
fixed income markets
Our Duration Management
Scheme Name
(A) (B) (C)
Changein Mod
Duration (C-B)
Mod Duration in Yrs
(Nov 30,2020)
Mod Duration in Yrs
(June 30 ,2021)
Mod Duration in Yrs
(July 31,2021)
ICICI Prudential Liquid Fund 0.10 0.12 0.09 -0.03
ICICI Prudential Money Market Fund 0.33 0.36 0.28 -0.08
ICICI Prudential Ultra Short Term Fund 0.39 0.4 0.33 -0.07
ICICI Prudential Savings Fund 0.89 0.97 0.82 -0.15
ICICI Prudential Floating Interest Fund 1.19 1.25 0.99 -0.26
ICICI Prudential Credit Risk Fund 2.09 1.96 1.92 -0.04
ICICI Prudential Short Term Fund 2.41 2.53 2.4 -0.13
ICICI Prudential Corporate Bond Fund 2.94 2.06 2.31 0.25
ICICI Prudential Banking & PSU Debt Fund 3.30 3.1 3.86 0.76
ICICI Prudential Medium Term Bond Fund 3.23 3.15 2.97 -0.18
ICICI Prudential Bond Fund 5.05 5.38 5.38 0
ICICI Prudential All Seasons Bond Fund 4.34 3.97 4.12 0.15
ICICI Prudential Long Term Bond Fund 7.82 8.74 8.72 -0.02
ICICI Prudential Gilt Fund 7.66 5.13 5.91 0.78
5. Time to be nimble footed :
Active Duration Management for navigating
fixed income markets
Scheme Recommendation – FixedIncome / Arbitrage
Approach Scheme Name Callto Action Rationale
Arbitrage ICICIPrudential Equity Arbitrage Fund
Invest with 3 Months
& above horizon
Spreads at
reasonable levels
Short Duration
ICICIPrudential Savings Fund
ICICIPrudential Ultra Short Term
Fund
ICICIPrudential FloatingInterest
Fund
Invest for parking
surplus funds
Accrual+
Moderate
Volatility
Accrual Schemes
ICICI Prudential Credit Risk Fund
ICICI Prudential Medium Term Bond
Fund
Core Portfolio with>1
Yr investment horizon
Better Accrual
DynamicDuration
ICICIPrudential All Seasons Bond
Fund
LongTerm Approach
with >3 Yrs
investment horizon
Active Duration
and Better
Accrual
6. Time to be nimble footed :
Active Duration Management for navigating
fixed income markets
Riskometers
ICICI Prudential Credit RiskFund (Anopenended debtschemepredominantlyinvestinginAAand
belowrated corporatebonds)is suitable for investors who are seeking*:
Medium term savings
A debt scheme that aims to generate income through investing
predominantly in AA and below rated corporate bonds while
maintaining the optimum balance of yield, safety and liquidity
ICICI Prudential Medium Term Bond 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. The Macaulay duration of the portfolio is 1 Year to 4 years under
anticipated) adverse situation is suitable for investors who are seeking*:
Medium term savings
A debt scheme that invests in debt and money market instruments with a view to
maximize income while maintaining optimum balance of yield, safety and liquidity
*Investors should consult their financial advisors if in doubt about whether the product is suitable for them.
ICICI Prudential Gilt Fund (An open ended debt scheme investing in government securities
across maturity) is suitable for investors who are seeking*:
Long term wealth creation
A Gilt scheme that aims to generate income through investment in Gilts of various
maturities.
*Investors should consult their financial advisors if in doubt about whether the product is suitable
for them.
ICICI Prudential Short Term Fund (An open ended short term debt scheme investing in
instruments such that the Macaulay duration of the portfolio is between 1 Year and 3
Years) is suitable for investors who are seeking*:
Short term income generation and capital appreciation solution
A debt fund that aims to generate income by investing in a range of debt and money
market instruments of various maturities.
*Investors should consult their financial advisors if in doubt about whether the product is
suitable for them.
ICICI Prudential LongTermBond Fund (An open ended debt scheme investing in
instruments such that the Macaulay duration of the portfolio is greater than 7 Years) is
suitable for investors who are seeking*:
Long term wealth creation
A debt scheme that invests in debt and money market instruments with an aim to
maximise income while maintaining an optimumbalance of yield, safetyand liquidity.
*Investors should consult their financial advisors if in doubt about whether the product is
suitable for them.
7. Riskometers
Time to be nimble footed :
Active Duration Management for navigating
fixed income markets
ICICI Prudential All Seasons Bond Fund (An open ended dynamic debt scheme investing
across duration)is suitablefor investors who are seeking*:
All duration savings
A debt scheme that invests in debt and money market instruments with a view to
maximize income while maintaining optimum balance of yield, safety andliquidity
ICICI Prudential Floating Interest Fund (An open ended debt scheme predominantly
investing in floating rate instruments (including fixed rate instruments converted to
floating rate exposures using swaps/derivatives) is suitablefor investors who are seeking*:
Short term savings
An open ended debt scheme predominantly investing in floating rate instruments
ICICI Prudential Ultra Short Term Fund (An open ended ultra-short term debt scheme investing
in instruments such that the Macaulay duration of the portfolio is between 3 months and 6
monthsis suitable for investors who are seeking*:
Short term regular income
An open ended ultra-short term debt scheme investing in a range of debt and
money market instruments
ICICI Prudential Savings Fund (An open ended low duration debt scheme investing in
instruments such that the Macaulay duration of the portfolio is between 6 months and 12
months) is suitable for investors who are seeking*
Short term savings
An open ended low duration debt scheme that aimsto maximize incomeby
investing in debt and moneymarket instruments while maintaining optimum
balance of yield, safetyand liquidity
ICICI Prudential Equity Arbitrage Fund (Anopenendedscheme investing inarbitrage
opportunities) is suitable for investors who are seeking*
Short Term Income Generation
A hybrid scheme that aims to generate low volatility returns by using arbitrage and
other derivative strategies in equity markets and investments in debt and money
market instruments
ICICI Prudential Banking & PSU Debt Fund (An open ended debt scheme predominantly
investing in Debt instruments of banks, Public Sector Undertakings, Public Financial
Institutions and Municipal Bonds. is suitable for investors who are seeking*:
Short term savings
An open ended debt scheme predominantly investing in Debt instruments of banks,
Public Sector Undertakings, Public Financial Institutions and Municipal Bonds
*Investors should consult their financial advisers if in doubt about whether the product is
suitable for them.
8. Riskometer and Disclaimers
Time to be nimble footed :
Active Duration Management key for
navigating fixed income markets
ICICI Prudential Corporate Bond Fund (An open ended debt scheme predominantly
investing in AA+ and above rated corporate bonds) is suitable for investors whoare
seeking*:
Short term savings
An open ended debt scheme predominantly investing in highest rated corporate
bonds
*Investors should consult their financial advisers if in doubt about whether the product is
suitable for them.
ICICI Prudential Money Market Fund (An open ended debt scheme investing in money
market instruments) is suitable for investors who are seeking*:
Short term savings
A money market scheme that seeks to provide reasonable returns, commensurate
with low risk while providing a high level of liquidity
*Investors should consult their financial advisors if in doubt about whether the product is
suitable for them.
ICICI Prudential LiquidFund (an open ended liquid scheme) is suitable for investors who are
seeking*:
Short term savings solution
A liquid fund that aims to provide reasonable returns commensurate with low risk
and providing a high level of liquidity
*Investors should consult their financial advisors if in doubt about whether the product is
suitable for them.
ICICI Prudential Bond Fund (An open ended medium to long term debt scheme investing in
instruments such that the Macaulay duration of the portfolio is between 4 Years and 7
Years. The Macaulay duration of the portfolio is 1 Year to 7 years under anticipated
adverse situation) is suitable for investors who are seeking*:
Medium to Long term savings
A debt scheme that invests in debt and money market instruments with an aim to
maximise income while maintaining an optimumbalance of yield, safetyand liquidity.
*Investors should consult their financial advisors if in doubt about whether the product is
suitable for them.
"Please note that the Risk-o-meter(s) specified above will be evaluated and updated on a monthly basis as per SEBI circular
dated October 05, 2020 on Product Labeling in Mutual Fund schemes - Risk-o-meter. Please refer to
https://www.icicipruamc.com/news-and-updates/all-news for more details."
Macaulay Duration :
The Macaulay duration is the weighted average term to maturity of the cash flows from a bond. The weight of each cash
flow is determined by dividing the present value of the cash flow by the price.
9. Riskometer and Disclaimers
Mutual Fund investments are subject tomarket risks, readallscheme related documents carefully.
All figures and other data given in this document are dated. The same may or may not be relevant at a future date. The AMC takes no
responsibility of updating any data/information in this material from time to time. The information shall not be altered in any way,
transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior
written consent of ICICI Prudential Asset Management Company Limited. Prospective investors are advised to consult their own legal,
tax and financial advisors to determine possible tax, legal and other financial implication or consequence of subscribing to the units of
ICICIPrudential Mutual Fund. Past Performance may or may not be sustained in future.
Disclaimer: In the preparation of the material contained in this document, ICICI Prudential Asset Management Company Ltd. (the AMC)
has used information that is pub- licly available, including Budget speech and information developed in-house. The stock(s)/sector(s)
mentioned in this slide do not constitute any recommendation and ICICI Prudential Mutual Fund may or may not have any future
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reasonableness and / or completeness of any informa- tion. We have included statements / opinions / recommendations in this
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expressions, that are “forward looking statements”. Actual results may differ materially from those suggested by the forward looking
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investments, the monetary and interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange
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Time to be nimble footed :
Active Duration Management for navigating
fixed income markets