Lt income opportunities fund presentation

L&T Income Opportunities Fund

(An Open Ended Income Scheme)

May 2013

Current Market Environment

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.

Key Policy Rates and Yield

Movement

Rate 30-Mar-

1229-Jun-

1228-Sep-

1231-Dec-

1215-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?

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

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 returnsthan duration fund B in each of the above scenarios. Reinvestment risks will become much more important given the low level of interest rates

Assumptions

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

Click to edit Master title style


A high accrual fund with a unique proposition


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

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

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 fundsLong 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

Yie

ld

Low Medium High

Low

Medium

High

L&T Income

Opportunities

Fund

For liquidity

management needs,

temporary parking of

surplus funds

Core / strategic fixed

income holdingsTactical allocation to

play interest rate cycle

Indicative strategy

Asset Type Infrastructure sector Infrastructure sector Infrastructure sectorHigh yieldingsecurities 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

obligationsNCDs or PTCs*

NCDs

Risk

Mitigation

Rigorous due diligence by

L&T Mutual Fund’s

investment team ;

Expertise and sector

knowledge of L&T infra


L&T Mutual Fund’s

investment team ;

Expertise and sector

knowledge of L&T IDPL


L&T Mutual Fund’s

investment team


L&T Mutual Fund’s

investment team


L&T Mutual Fund’s

investment team

adequate structures and

covenants to be put in

place ; credit enhancement

by higher rated companies



place; credit enhancement

by higher rated companies



place ; Tapping into the

expertise and knowledge

of L&T’s sector specialists



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

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

Theme 2: Co-investment with L&T infra finance

A large corporate group

Subsidiary companyA group company engaged

in power grid projects

Holding companyA 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

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

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

Particulars Description

Scheme name L&T Income Opportunities Fund

Category Open ended Income Scheme

Benchmark CRISIL Short Term Bond Fund Index

Exit Load2% 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

18Investment 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

BiographyShriram 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 IncomeL&T Investment Management

2009 – 2012 Portfolio ManagerFFMPL, 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 ResearchZurich Asset Management, Mumbai

2000 – 2001 TreasuryICICI Limited

• Education and Qualifications

B.E., University of MumbaiPGDBM, XLRI, JamshedpurCFA Charterholder

Shriram Ramanathan

Fund Manager Profile

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

Lt income opportunities fund presentation

Economy & Finance

Transcript of Lt income opportunities fund presentation