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Potential of High Accruals Through Managed Credits
This document presents an overview of high accrual debt mutual funds and Franklin Templeton's accrual-led debt fund products. It discusses how accrual-led strategies can generate returns through managing credit and interest rate risk while providing lower volatility than capital appreciation strategies. Franklin Templeton's short-term, medium-term and long-term accrual funds are positioned based on their investment horizon and risk-return profile. The funds invest across the yield curve in corporate bonds, PTCs and other fixed income securities to generate income and potential capital appreciation.
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Potential of High Accruals Through Managed Credits
- 1. September 2014 Potential ofHigh Accrual through Managed Credit We recommend you read the presentation in entirety
- 2. 1 Why does aninvestor invest? The Prudent Investor manages risk in order to generate return Aim of an Investor: To generate returns so as to grow his purchasing power Investment Returns Inflation Destroy purchasing power Investment Returns Inflation Maintain purchasing power Investment Returns Inflation Enhance purchasing power < < CLICK HERE TO INVEST NOW
- 3. This riskis less apparent to an investor as it is an indirect risk. India has seen high levels of Consumer Price Inflation in the past 2.5 years. 2 What are the key Risks, an investor needs to be aware of? 7.55% 11.24% 7.31% 6.00% 7.00% 8.00% 9.00% 10.00% 11.00% 12.00% 1-Jan-12 1-Mar-12 1-May-12 1-Jul-12 1-Sep-12 1-Nov-12 1-Jan-13 1-Mar-13 1-May-13 1-Jul-13 1-Sep-13 1-Nov-13 1-Jan-14 1-Mar-14 1-May-14 CPI Inflation in India CPI Inflation (Y-o-Y) An obvious risk from the perspective of an investor. In case of some investment products, the value of investment can rise or fall depending on the market conditions. Volatility of Capital is the risk that value of investment may fall when the investor needs the capital While making investment decisions, investors should take into account both risks: The Volatility of Capital and The Risk of Inflation reducing the purchasing power. Source (latest available date): CPI Inflation RBI – from Jan 2012 – June 2014 VOLATILITY OF CAPITAL RISK OF INFLATION REDUCING THE PURCHASING POWER CLICK HERE TO INVEST NOW
- 4. What are theComponents of Return? 3 The Invested Capital Remains constant, income is earned in the form of regular payments The Value of Invested Capital fluctuates with no regular income For a detailed explanation of Accrual and Capital Return, please refer Appendix Capital Gain/Loss Accrual Income Total Return The Accrual – Capital Appreciation Spectrum TOTAL RETURN The Accrual Component of Return The Capital Gain/Loss on the Invested Capital ACCRUAL CAP GAIN/LOSS CLICK HERE TO INVEST NOW
- 5. 4 What are theInvestment Options available? Typical Investment Options Bank Fixed Deposits Where do these Investments lie along the Accrual – Capital Appreciation Spectrum? Public Provident Fund National Savings Certificate Corporate Deposits Corporate Bonds Government Bonds Debt Mutual Funds Debt Equity Real Estate Gold Listed Shares Equity Mutual Funds Private Equity Self-Occupied Let-out Property Physical Gold Gold ETFs CLICK HERE TO INVEST NOW
- 6. 5 Accrual – CapitalGains Spectrum TOTAL RETURN ACCRUAL CAP GAIN/LOSS Increased Volatility of Capital • Debt Mutual Funds • Corporate Bonds • Government Bonds • Bank Fixed Deposits • PPF • NSC • Corporate Deposits • Listed Shares • Equity Mutual Funds • Private Equity • Self-Occupied Real Estate • Physical Gold & Gold ETFs Potential to Generate Higher Returns Dividend component of Equity Products CLICK HERE TO INVEST NOW
- 7. 6 How do DebtMutual Funds Generate α? By Managing Risks ManagingCreditRisk Managing Interest Rate Risk Accrual Return can be generated by investing in fixed-income securities with Higher Yield Capital Gains can be generated by actively managing portfolio* in line with Interest Rate movement *Actively managing Maturity of the portfolio to capitalize on opportunities. For example, • if market yields are expected to fall, increase the portfolio maturity with an aim to benefit from the rise in value of the bonds. • If market yields are expected to rise, reduce the portfolio maturity with an aim to minimize capital losses This slide is for illustration purposes only and should not be construed as an investment strategy / investment advice. CLICK HERE TO INVEST NOW
- 8. Duration – ameasure of Interest Rate Risk Duration measures the sensitivity of the price of a fixed-income security to the change in Market Interest rate Understanding Interest Rate Risk 1.00 7.25 10.60 0.00 2.00 4.00 6.00 8.00 10.00 12.00 1 3 5 7 9 11 13 15 17 19 Duration Maturity Duration vs Maturity As Maturity Increases Duration Also Increases But the relationship is non linear as duration also considers cash flows ` YIELD 8% ` YIELD 9% BOND Issued when market interest rate was 8% Now, assume that Market Interest rate increases to 9%. What will happen to the value of the Bond? This slide is for illustration purposes only and should not be construed as an investment strategy / investment advice. 7 CLICK HERE TO INVEST NOW
- 9. 8 Popular Strategies followedby Debt Mutual Funds to generate α High Accrual-led Strategies aim to generate α by managing Credit Risk while minimizing Interest Rate Risk High Accrual Led Strategies TOTAL RETURN Primary objective is to generate returns by actively managing portfolio duration based on market outlook without taking substantial credit risk Higher Yield is obtained by Managing Credit Risk through bottom-up security selection Capital Gains are obtained by Managing Interest Rate Risk through top-down Macro analysis Buy & Hold – Investments are generally held till Maturity Active Management based on Market Outlook Accrual strategies are generally market timing agnostic Capital appreciation strategies focus on market timing ACCRUAL CAP GAIN/LOSS TOTAL RETURN CAPITAL GAINSACCRUAL Primary objective is to generate accrual returns by investing in securities with higher yields and potential for capital gains over the long term. Capital Appreciation Led strategies This slide is for illustration purposes only and should not be construed as an investment strategy / investment advice. CLICK HERE TO INVEST NOW
- 10. 9 Why High AccrualLed Strategies? • Bank Fixed Deposits • PPF • NSC • Dividend Paying Stocks • Equity Mutual Funds • Private Equity • Self-Occupied Real Estate • Physical Gold & Gold ETFs Increased Volatility of Capital • Debt Mutual Funds • Corporate Bonds • Government Bonds TOTAL RETURN ACCRUAL CAP APP High Accrual Led Strategies Capital Appreciation Led Strategies Anchor Your Portfolio Managed Credit Helps identifying securities with Higher Yields Potential of generating less Volatile Returns across Market Conditions Potential of Capital Gains in the Long Term Advantages of High Accrual Led Strategies Potential to Generate Higher Returns CLICK HERE TO INVEST NOW
- 11. 10 Higher Yields throughManaged Credit But isn’t Managed Credit inherently Risky? Source of α Level of Risk Credit Risk Interest Rate Risk Capital Gains Low High CreditRisk Interest Rate Risk Source of α Level of Risk Higher Yield + Capital Gains Credit Risk Interest Rate Risk Medium Low to Medium High Accrual Led Strategies Capital Appreciation Led strategies through G-Sec/AAA bonds Level of Risk for High Accrual Led strategies may be relatively lower than the risk for High Credit (through G-Sec/AAA bonds) Capital Appreciation Led funds CLICK HERE TO INVEST NOW
- 12. 11 High Accrual LedStrategies tend to generate stable Returns The aforesaid portfolios are for illustration purposes only and should not be construed as investment strategies / investment advice. Investors should consult their investment advisor and construct their portfolios based on their risk appetite, time horizon, investment goals, etc. Returns – High Accrual Led vs Capital Appreciation Led Strategies Hypothetical Returns over an Interest rate Cycle assuming that Interest Rates increased by 50bps in Years 4,8,10 and decreased by 50 bps in Years 2,5,6 and remained constant in other years. Due to lower volatility of Capital and Higher Yields, High Accrual Led Strategies aim to deliver less volatile returns -10% -5% 0% 5% 10% 15% 20% Year1 Year2 Year3 Year4 Year5 Year6 Year7 Year8 Year9 Year10 Accrual Led Strategy Accrual Return Capital Return Total Return -10% -5% 0% 5% 10% 15% 20% Year1 Year2 Year3 Year4 Year5 Year6 Year7 Year8 Year9 Year10 Capital Appreciation Led Strategy Accrual Return Capital Return Total Return Lower Volatility of Capital Gains/Losses Higher Yields Compounded Annual Return: 9.55% Standard Deviation: 0.71% Compounded Annual Return: 9.55% Standard Deviation: 5.28%
- 13. 12 Accrual Led Strategies CapitalAppreciation Led Strategies Interest Rate Risk Low to Moderate Higher Credit Risk Moderate Low Active Duration Management Not Required Required to Some Extent Volatility Lower Higher High Accrual vs Capital Appreciation Led Strategies The Bottom-line CLICK HERE TO INVEST NOW
- 14. Factor Open-Ended Closed-Ended LiquidityManagement Does the fund need active liquidity management to meet redemptions? Yes No Portfolio Management Does the fund manager have flexibility to benefit from market opportunities? Yes Limited (buy & hold strategy) Maturity profile constraints Does the constraint of maturity date restrict the investment opportunities? No Yes Relative ease of redemption Can an investor redeem in case of emergency? Yes Limited (has to be sold over the stock exchange) Open-Ended Accrual Led Debt Funds – Stand to benefit In light of the recent tax-amendments in Union Budget FY15 The change in holding period for Long Term Capital Gain benefit will reduce liquidity pressures/risk, especially for short term debt funds. 13 Open-ended debt funds: Offer liquidity and LTCG benefit (for >36 months) without any re-investment hassles Close-ended debt funds: Require re-deployment of maturity receipts for minimum 36 months to qualify for LTCG. CLICK HERE TO INVEST NOW
- 15. 8.00% 8.50% 9.00% 9.50% 10.00% 10.50% 11.00% 0 1.5 34.5 6 7.5 9 Duration YieldtoMaturity Franklin Templeton’s Fixed Income Product Range YTM and Duration as of 28-August-2014 14 Past performance may or may not be sustained in the future. Depending on the investment horizon and risk appetite, an investor can choose any of Franklin Templeton’s Accrual Led Products Accrual Led Products FILDF FIUBF FISTIP FIIOF FICBOF FIIBA FIINCF FIGSF-LT FIBPDF FIGSF - CP/PF FISPF FITMA CLICK HERE TO INVEST NOW
- 16. Product Labels 15 BROWN: Investorsunderstand that their principal will be at high risk YELLOW: Investors understand that their principal will be at medium risk BLUE: Investors understand that their principal will be at low risk *Investors should consult their financial advisers if in doubt about whether the product is suitable for them. **Note: Risk may be represented as: Historical Fund Name Name w.e.f. June 30, 2014 This product is suitable for investors who are seeking* (level of risk) Templeton India Income Fund (TIIF) Franklin India Income Fund (FIINCF) • Medium term capital appreciation with current income • A long bond fund investing in quality fixed income instruments across segments. Templeton India Income Builder Account (TIIBA) Franklin India Income Builder Account (FIIBA) • Medium term capital appreciation with current income • A long bond fund – focuses on Corporate/PSU Bonds. Templeton India Short-Term Income Plan (TISTIP) Franklin India Short Term Income Plan (FISTIP) • Regular income for medium term • A fund that invests in short term corporate bonds including PTCs Templeton India Ultra-short Bond Fund (TIUBF) Franklin India Ultra Short Bond Fund (FIUBF) • Regular income for short term • A fund that invests in short term debt and money market instruments Franklin India Savings Plus Fund (FISPF) - • Regular income for short term • A fund that invests primarily in floating and short term fixed rate debt instruments Templeton India Government Securities Fund (TGSF) Franklin India Government Securities Fund (FIGSF) • Medium term capital appreciation with current income • A fund that invests in Indian government securities Templeton India Low Duration Fund (TILDF) Franklin India Low Duration Fund (FILDF) • Regular income for short term • An income fund focusing on low duration securities. FT India Monthly Income Plan (FTIMIP) (with no assured returns) Franklin India Monthly Income Plan (FIMIP) (with no assured returns) • Medium term capital appreciation with current income • An MIP investing predominantly in debt instruments with marginal equity exposure Templeton India Income Opportunities Fund (TIIOF) Franklin India Income Opportunities Fund (FIIOF) • Medium term capital appreciation with current income • A fund that invests across the yield curve - focusing on high accrual securities Templeton India Corporate Bond Opportunities Fund (TICBOF) Franklin India Corporate Bond Opportunities Fund (FICBOF) • Medium to long term capital appreciation with current income • A bond fund focusing on corporate securities Templeton India Treasury Management Account (TITMA) Franklin India Treasury Management Account (FITMA) • Regular income for short term • A liquid fund that invests in short term and money market instruments Franklin India Banking & PSU Debt Fund (FIBPDF) - • Regular Income for medium term • An income fund that invests predominantly in debt and money market instruments issued by Banks and Public Sector Undertakings.
- 17. 16 Franklin Templeton’s AccrualLed Products Overview Franklin India Short Term Income Plan Franklin India Income Opportunities Fund Franklin India Corporate Bond Opportunities Fund Positioning Matrix Investment Objective Nature of Scheme Risks: Interest Rate Risk Risks: Credit Risk 12-15 Months 18-21 Months >30 Months To Provide Stable returns by investing in fixed income securities Regular income and capital appreciation by investing in fixed income securities across the yield curve Regular income and capital appreciation by investing predominantly in corporate securities Regular Income Capital appreciation with current income Capital appreciation with current income Low to Moderate Low to Moderate Moderate Low to Moderate Moderate Moderate Indicative Investment Horizon CLICK HERE TO INVEST NOW
- 18. 17 Summary Advantages of AccrualLed Debt Mutual Funds? Anchor your portfolio Lower volatility of Returns Accrual Income with potential for capital appreciation Liquidity Investors can invest long term in order to generate higher returns through accrual + capital appreciation. Franklin Templeton’s Accrual Led Products Fund Investment Horizon Product Positioning Franklin India Short-Term Income Plan (FISTIP) 12-15 months • Invests in short term corporate bonds including PTCs . • Positioned between a long bond fund and liquid fund. • Invests in predominantly short term debt securities. Franklin India Income Opportunities Fund (FIIOF) 18-21 months • Invests across the yield curve and has the flexibility to take concentrated exposure to a particular security class based on macro/micro analysis. • Invests in PTCs/ corporate debt and money market securities . Franklin India Corporate Bond Opportunities Fund (FICBOF) >30 months • Primarily invests in medium and short term securities issued by corporates, thus the fund will not take exposure to dated government securities. • A bond fund focusing on corporate securities with a moderate maturity and offering relatively higher accrual. • FICBOF will not have an average portfolio maturity of more than 3 years. CLICK HERE TO INVEST NOW
- 19. 18 The information containedin this presentation is not a complete representation of every material fact regarding any industry, security or the fund and is neither an offer for units nor an invitation to invest. This communication is meant for use by the recipient and not for circulation/reproduction without prior approval. The views expressed by the portfolio managers are based on current market conditions and information available to them and do not constitute investment advice. Scheme Classification and Objective: Franklin India Short Term Income Plan (FISTIP) is an open end income scheme with an objective to provide stable returns by investing in fixed income securities. Franklin India Income Opportunities Fund (FIIOF) is an open end income fund that seeks to provide regular income and capital appreciation by investing in fixed income securities across the yield curve. Franklin India Corporate Bond Opportunities Fund (FICOBF) is an open-end income fund which seeks to provide regular income and capital appreciation through a focus on corporate securities. Load Structure: The investors are requested to check the prevailing load structure of the scheme before investing. Please refer website/latest SID/addenda for the latest load structure of the respective schemes. Risk Factors: Mutual Fund investments are subject to market risks, read all scheme related documents carefully. The NAVs of the schemes may go up or down depending upon the factors and forces affecting the securities market. The Mutual Fund is not guaranteeing or assuring any dividend under any of the schemes and the same is subject to the availability and adequacy of distributable surplus. The past performance of the mutual funds managed by the Franklin Templeton Group and its affiliates is not necessarily indicative of future performance of the schemes. Investors are requested to review the prospectus carefully and obtain expert professional advice with regard to specific legal, tax and financial implications of the investment/participation in the scheme. Risk Factors 18
- 20. © 2014 FranklinTempleton Investments. All rights reserved. Franklin Templeton Asset Management (India) Pvt. Ltd. Indiabulls Finance Centre, Tower 2, 12th and 13th floor, Senapati Bapat Marg, Elphinstone (W) Mumbai 400013 Tel (91-22) 6751 9100 Fax (91-22) 6639 1281 www.franklintempletonindia.com 19