Unifi High Yield Fund - unificap.com AIF Present… · FY 2017 Event Arbitrage Arbitrage...
Transcript of Unifi High Yield Fund - unificap.com AIF Present… · FY 2017 Event Arbitrage Arbitrage...
Unifi High Yield Fund
Preface
Investor Predicament
Conventional Equity
•High / above averagereturn potential
•Accompanied by extremevolatility
Conventional Debt
•Low / below averagevolatility
•Hardly any real returnspost 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 netpost tax returns of 3% p.aover the rate of inflation(Core-CPI)
•Minimal / below averagevolatility
`
Risk adjusted arbitrage andfixed income opportunitiesarising from
• corporate events
• macro-economic cycles
• emerging credit
Overview
Investment Objective
Unifi High Yield Fund (HYF) is a discretionary fund focusing on fixed income and event arbitrageinvestment opportunities in capital markets with an endeavor to generate net post tax returns of 3% p.aover the rate of core inflation (CPI). The objective is to consistently generate superior compoundedannual returns than conventional fixed income instruments with uncompromising emphasis on capitalpreservation.
Unifi Capital Pvt. Ltd.Fund Manager
Min Investment INR 1 crore
Performance Reporting
Monthly NAV & Quarterly Review
Independent Custodian & Accountant
HDFC Bank
Lock in periodExit load of 2% if redeemedwithin 6 months.
TenureOpen ended; Monthly subscription andredemption
Fees1% per annum fixed and 20% performanceover hurdle rate (Monthly Chargeable)
Valuation S&P CRISIL
Launch Date 04-Apr-2013.
AUM (INR Crs) INR 463 crores
Hurdle RateNon cumulative pre tax return of 10% perannum
Setup Fees None
Overview
Strategies InstrumentsIndicative Allocation
Avg Allocation FY 2020
Avg Allocation FY 2019
Avg Allocation FY 2018
Avg Allocation FY 2017
Event Arbitrage
Arbitrage opportunities in Listed Equities arising from open offers, delisting, mergers & de-mergers, IPOs, Cash-Futures
0 – 100% 8% 11% 21% 26.%
Nominal Bonds Conventional AAA & AA bonds of various Indian Companies –Typically HTM
0 – 50% 16% 22% 26% 23%
Structured & High yield Debt
Structured Secured Corporate Debt, Commercial Papers, short term bonds and tax efficient Preference Shares of NBFCs focusing on Housing, SME , CV, Agri and Micro Finance.
0 – 75% 72% 65% 46% 46%
Directional CallsEquity, G-Secs and AAA debt(duration calls)
0 – 10% 1% 2% 1% 2%
Cash / LiquidFor liquidity purposes / temporary parking of funds.
3% -0.3% 6% 3%
Overview
Performance Comparison with MF’s
Despite the tough environment, we are pleased to submit that our HYF has generated a pre-taxreturn of 13.18% p.a in FY2020. The CAGR returns since inception of the fund is about 14.27%p.a (pre-tax) with a volatility (standard deviation) of less than 2%. We are also quite satisfiedthat our HYF returns have been significantly better than comparable debt mutual funds – bothcredit funds and duration driven dynamic bond funds not only in this year but also in all ourearlier years as well.
HYF vs. Debt MF returns FY2020 FY2019 FY2018 FY2017 FY2016 FY2015 FY2014
Unifi HYF – Pre Tax 13.18% 10.75% 14.47% 13.70% 14.67% 16.82% 14.40%
Debt MFs - Dynamic Bond Category Average
8.49% 6.49% 4.69% 12.13% 6.55% 10.54% 5.86%
Debt MFs-Dynamic Bond Category Topper 13.83% 8.83% 7.98% 14.40% 8.07% 15.13% 10.36%
Debt MFs - Credit Funds Category Average
-0.60% 6.06% 7.70% 10.65% 8.99% 9.28% 8.41%
Debt MFs - Credit Funds Category Topper 9.43% 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 representsour target i.e. Inflation (Core CPI*) + real returns of 3% post tax.
*Core CPI reflects the actual inflation trend in an economy as it adjusts the excessive price volatility seen in few food and energyproducts from time to time.
-1.00
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HYF Monthly Post Tax Returns (In %) HYF Post Tax Returns Core CPI + 3% Core CPI
188.65
146.18
181.84
Investment Strategy
• The focus is on opportunities in the AAA to Investment Grade segment to optimizeafter tax yields while balancing risks.
• Typically, all debt investments are made with Hold to Maturity (HTM) mind set butsome of it could be traded opportunistically to maximize capital appreciation orminimize risk. .
Fixed Income opportunities – Nominal & High Yield Debt
• Emerge from corporate events like mergers, acquisition, buybacks, regulation triggered/ voluntary open offers made to the public by controlling shareholders, companydelisting, declaration of special dividends etc. .
• The risk- return pay-off in most of such deals is deal-specific and has limitedcorrelation to market cycles.
Event Arbitrage opportunities
Debt Investments – Approach and Strategy
Investment Strategy - The focus would be on opportunities in the AAA 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.
Wholesale to Retail – 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.
Aggregator of Retail Lots – 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.
Tactical 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
Structured Papers from Emerging Financial Sectors- 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.
Affordable HousingSME Financing
backed by MortgagesCommercial Vehicles
FinancingMicro Financing
Debt Investments – Approach and Strategy
Case Study – (SME Finance) – Aye Finance
We invested in 13.86% 2 year Non-convertible debentures (quarterly amortisation) of Delhi based Aye FinanceLimited. 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 followingattributes -
➢ 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 hadincluded an additional covenant that cumulative Asset-Liability mismatch should always be positive to the extentof 10% or more in all the buckets up to 3 years . Subsequent to the NCD issue in Nov 2018, the management wasable to expand its AUM and attracted further equity of Rs 230 Crs in Feb 2019.
Rs. in Crore Favourable Asset Liability Profile at the time of Investment – Sep 2018
<30
days
31 - 60
days
61-90
days
91 - 365
days1 -3 years
3-5
years
> 5
yearsTotal
Total Assets (a) 104.92 44.72 43.93 384.02 366.65 22.07 0.89 967.20
Total Liabilities (b) 28.32 12.93 11.15 102.03 246.35 206.33 360.10 967.20
Mismatch (a-b) 76.60 31.80 32.79 281.98 120.30 (184.27) (359.21)
Cumulative Mismatch 76.60 108.40 141.19 423.17 543.47 359.21 (0.00)
Event Arbitrage
In a typical open offer, theprice movement during theperiod between publicannouncement and the offerclosure is largely insulatedfrom market volatility anddelivers a debt like absolutereturn.
Particulars FY20 FY19 FY18 FY17 FY16 FY15 FY14
Total no. of offers
19 26 45 51 73 60 60
No. of offers participated
3 2 1 2 7 9 12
Average offer size (in crs)
740 1071 70 186 161 287 3941
Largest Offer invested (in crs)
2262 923 0.91 415 1621 11449 29200
Smallest Offer invested (in crs)
448 329 0.91 115 26 251 30
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14/07/2015 14/08/2015 14/09/2015 14/10/2015 14/11/2015 14/12/2015
Shar
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rice
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n 0
0's)
IIFL Open Offer
Volumes (in 00's) Share Price
Similar to Debt Returns
PA Date: 14 Jul 2015Purchase Date: 25 Aug 2015Purchase Date: 185Offer Price: 195
Payment Date: 8th Dec 2015Acceptance: 100%Return: 5.40%Annualized Returns: 18.79%
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Historical No of Open Offers
Merger Arbitrage
Case Study – (HCL – Geometric Merger)
HCL-Geometric merger was announced in Apr 2016 wherein for every 43 shares of Geometric, itsshareholder 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 2016where we reckoned that we could make 14% per annum. We bought shares of Geometric and sold HCLTech in the futures market. HCL Tech being a highly liquid F&O scrip enabled us to hedge ourGeometric exposure completely and lock-in the desired spreads. All the deal related approvals wereobtained by Jan 2017 and the spreads had also narrowed to 8% p.a by then. As we had realized theintended holding period return of 14% p.a, we exited the trade during February month just before therecord date for share swap and moved into another opportunity with better yield. . Below is the timelineof approvals and respective spreads.
Event DateAnnualized
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%
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120.00
130.00
140.00HCL - Geometric Price Movement
HCL Tech Geometric
Ratings Migration
Name of the CompanyUpgrade /
DowngradeFrom To Financial Year
Aye Finance Private Limited Upgrade BBB BBB+ FY 2020
Cholamandalam Finance Upgrade AA AA+ FY 2018
Equitas Small Finance Bank Upgrade A A+ FY 2017
ESAF Small Finance Bank Upgrade A- A FY 2019
Esskay Fincorp Upgrade A A+ FY 2019
Five Star Business Finance Upgrade BBB- A FY16 & FY19
Grama Vidiyal (Merger with IDFC Bank) Upgrade BBB AAA FY 2017
IFMR Capital Upgrade A- A+ FY 2015
IKF Finance Upgrade A- A FY 2016
Satin Credit Care Upgrade BBB BBB+ FY 2015
Spandana Sphoorty Financial Limited Upgrade BBB+ A- FY 2019
Suryoday Small Finance Bank Limited Upgrade A- A FY 2019
Utkarsh Micro Finance Upgrade BBB BBB+ FY 2016
IDBI Downgrade AA- BBB FY 2017
Western India Transport Finance Downgrade BBB- D FY 2021
• Three of the investee companies have been awarded Small Finance Bank Licences (Suryoday micro finance, Equitas Holdings, Utkarsh Micro finance)
Latest Holdings – Key Attributes
Average Exposure
Fixed Income (Debt) 71.3%
Event Arbitrage 25.0%
Directional Calls 2.0%
Cash / (Leverage) 1.7%
Debt Quants
Weighted Average Maturity 1.78 Yrs
Carry Yield 11.80%
Latest Ratings Exposure
AAA & AA 24%
A 24%
BBB 20%
Total 68%
Liquidity Profile of the Portfolio
Less than 1 week 30%
Between 1 week & 1 month 33%
Between 1 month & 3 months 7%
Greater than 3 months 30%
Total 100%
Key Attributes of the portfolio
Latest Holdings – Key Attributes
Latest Holdings – Key Attributes
Portfolio as of 31st August 2020
High Yield Fund Portfolio
High Yield Fund Portfolio % of
PortfolioConstituents
Listed AAA hybrid & Equity Arbitrage
36%India grid Invit, WABCO, JB Chemicals, , Majesco & Liquid MFs.
Highly Liquid & Well Rated Debt
28%Cholamandalam, Indusind, Muthoot Finance, TVS Credit Services, Avanse & Tata Steel.
High Yield Debt 36%
Investments in Emerging NBFCs – monthly and quarterly amortising structure. [70% of this portfolio is getting redeemed within 12 months]
Total Portfolio value 100%
AIF Performance
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Monthly Returns UNIFI AIF
Birla Sh. Term Opp. Fund Fran Temp Corp. Bond
BSL Dynamic Bond Fund(G) Reliance Dynamic Bond(G)
UNIFI AIF vs Debt Fund’s
Monthly Performance in (%)
Year Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Annual
FY14 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%
FY15 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%
FY16 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%
FY17 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%
FY18 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%
FY19 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%
FY20 0.49% 1.15% 0.66% 0.93% 0.89% 0.72% 0.94% 1.35% 1.03% 1.23% 1.22% 1.87% 13.18%
FY21 0.38% 0.61% 0.92% 1.43% 1.52% 4.92%
Returns
UNIFI AIFBirla Sh. Opp.
Fund(G)Fran. Corp.
Bond fund(G)
BSL Dynamic Bond
Fund(G)
Reliance Dynamic Bond(G)
Average Monthly Return 1.12% 0.75% 0.58% 0.62% 0.71%
CAGR 14.27% 9.35% 7.14% 7.60% 8.73%
Cumulative Returns 168.09% 94.07% 66.75% 72.20% 86.05%
Largest Monthly Gain 3.01% 2.34% 3.06% 4.85% 4.28%
Largest Monthly Loss -0.70% -1.17% -3.76% -3.83% -3.81%
% of positive Months 98.88% 91.01% 84.27% 73.03% 74.16%
Standard Deviation (Annualised) 1.88% 2.15% 3.58% 4.78% 4.49%
AIF Performance
Latest Holdings – Key AttributesAverage Allocation & Return Attribution
16%11%
16%26%
21%11% 8%
71% 84% 75%
69%72%
87%88%
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FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
Liquid Funds / (Leverage)
Directional Calls
Fixed Income
Event Arbitrage
Average Allocation Return Attribution
5%
2% 3%4%
5%
1%
3%
9%14%
11% 9% 7%
10%
10%
0%
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FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
Liquid Funds / (Leverage)
Directional Calls
Fixed Income
Event Arbitrage
Investment Process
Idea Origination
Opportunity validation, review and evaluation of risk / return scenarios
Investment Committee Review
Initiation of Investment
Unifi Capital (P) Ltd –Fund Manager to the Trust
Post Investment Monitoring and Risk Management
CIO, Head-Research and Head-Relationship
AIF Trustees
Internal Review
Statutory Auditors
Portfolio Parameters
Pre-trade
Ongoing Surveillance
Post-tradeFirm Infrastructure
In-depth bottom-up review of all investment
opportunities 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. Thisstrategic 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 togenerate 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 attractiveabsolute 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 tenoralso offers the enormous benefit of not having to predict the prospects of a business far intothe future. Since uncertainties rise exponentially with time, we logically prefer to settle for aslightly lower yield than expose our capital to the risk of permanent loss due to potentialdisruptions over the longer term. We bear in mind that our upside is in any case capped bythe bond's contracted yield, unlike the case of an equity investor who accepts long durationin the hope of earning an out-sized upside.
Key tenets
Four key tenets of our investment and risk mitigation framework :
• Avoid placing too much value on credit ratings
Credit events from the last year validate the fact that securities of highly rated and largerfirms are not necessarily safer than those issued by smaller companies. The fund welcomesopportunities from relatively new issuers by leveraging our in-house capability to analysebusinesses from a fundamental bottom-up perspective. These emerging firms require smallersums and it takes us considerable time and resources for a thorough due-diligence. Preciselyfor this reason the big institutions are not equipped to operate in this space, allowing us toearn superior yields.
• Embrace Illiquidity
The bond market is dominated by large mutual funds that are managed by small teams. In theinterest of efficiency they tend to prefer investing in large and well established firms whosebonds are perfect for quick large scale deployment and offer liquidity at short notice. On thecontrary, the issue with emerging company bonds is that they tend to be less liquid and we asinvestors should be clear in our mind about holding them till they mature in 18 to 30months. 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 higheryield due to the stability of our diversified corpus from our clients.
Key tenets (Contd.)
Four key tenets of our investment and risk mitigation framework (Contd.)
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 7 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 createsmore wealth than a one offering high returns at a higher volatility. See theexample below –
Even one bad year in a 5 yr time period could significantly bring down the returnsand 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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