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(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 event arbitrage and fixed incomeinvestment opportunities in capital markets with an endeavor to generate net post tax returns of 3% p.aover the rate of inflation (CPI). The objective is to consistently generate superior compounded annualreturns 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

IL&FS Securities Services Ltd

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 588 crores

Hurdle RateNon cumulative pre tax return of 10% perannum

Setup Fees None

Investment Allocation

Strategies InstrumentsIndicative Allocation

Avg Allocation FY 2019

Avg Allocation FY 2018

Avg Allocation FY 2017

Event Arbitrage

Arbitrage opportunities in ListedEquities arising from open offers,delisting, mergers & de-mergers,IPOs, Cash-Futures

0 – 100% 11% 21% 26.2%

Nominal Bonds Conventional AAA & AA bonds ofvarious Indian Companies –Typically HTM

0 – 50% 22% 26% 23%

Structured & High yieldDebt

Structured Secured CorporateDebt, Commercial Papers, shortterm bonds and tax efficientPreference Shares of NBFCsfocusing on Housing, SME , CV,Agri and Micro Finance.

0 – 75% 65% 46% 46.3%

Directional CallsEquity, G-Secs and AAA debt(duration calls)

0 – 10% 2.2% 1% 1.8%

Cash / LiquidFor liquidity purposes/ temporaryparking of funds.

-0.3% 6% 2.7%

Performance Comparison

Our UNIFI High Yield fund returns have been significantly better than comparable debtmutual funds – both credit and dynamic bond funds not only in Financial Year 2019 but also inall earlier years since our inception.

Fund / Returns FY2019 FY2018 FY2017 FY2016 FY2015 FY2014

Unifi High Yield Fund 10.75% 14.47% 13.70% 14.67% 16.82% 14.40%

Debt MFs - Dynamic Bond Category Average 6.49% 4.69% 12.13% 6.55% 10.54% 5.86%

(Duration MFs)- Dyn. Bond Category Topper 8.83% 7.98% 14.40% 8.07% 15.13% 10.36%

Debt MFs - Corporate Bonds Category Average 6.06% 7.70% 10.65% 8.99% 9.28% 8.41%

(Credit Funds)- Corp. Bonds Category Topper 8.51% 9.43% 11.50% 10.02% 11.87% 11.12%

The graph hereunder shows the returns earned by Unifi HYF compared with a line that representsour target i.e. Inflation + real returns of 3% post tax

Performance Comparison

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

100

110

120

130

140

150

160

170

HYF Monthly Post Tax Returns (In %) HYF Post Tax Returns Inflation + 3% Inflation

171.12

133.74

160.21

Investment Strategy

• The focus is on opportunities in the AA to Investment Grade segment to optimize aftertax 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 AA 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

Case Study – (SME Finance) – Capital Float

We invested in a 13.85% interest yielding medium term (2 years) Non-convertible debentures of Bengalurubased Capital Float, an NBFC pursuing SME finance business with the support of fintech. Its current net-worth isabout Rs.460 crs and its present AUM is about Rs.617 crs.

Run by professional and experienced Management (Ex- Bajaj Finance, Ex-Deutsche Bank) 50+% of the company owned by credible PE and Foreign Institutions – Sequioa, SAIF, Creations Diversified lender base – 9 Banks & NBFCs – successful raising of long term debt Well capitalized NBFC tapping the SME market with innovative products like Cash advances against POSbills, Taxi loans , etc., Comfortable Asset Liability Profile with huge surplusThe NCDs were issued to the company to enable it to expand its AUM and leverage its balance sheet. We had puta covenant to limit the leverage at 3x of equity. Subsequent to the NCD issue in Dec 2016, the management wasable to expand its AUM and attracted further equity of Rs 293 Cr in Aug 2017.

Rs. in Crore Favourable Asset Liability Profile at the time of Investment - Dec 2016

<30

days

31 - 60

days

61-90

days

91 - 365

days1 -2 years

2-3

years

> 3

yearsTotal

Total Assets (a)119.84 21.55 13.88 103.26 58.05 23.58 4.99 345.15

Total Liabilities (b)37.70 5.44 7.47 47.87 30.96 0.00 215.71 345.15

Mismatch (a-b)82.14 16.11 6.41 55.39 27.09 23.58 (210.72) -

Cumulative Mismatch82.14 98.25 104.66 160.05 187.14 210.72 0

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

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 FY19 FY18 FY17 FY16 FY15 FY14 FY13

Total no. of offers

26 45 51 73 60 60 74

No. of offers participated

2 1 2 7 9 12 16

Average offer size (in crs)

1071 70 186 161 287 3941 523

Largest Offer invested (in crs)

923 0.91 415 1621 11449 29200 5222

Smallest Offer invested (in crs)

329 0.91 115 26 251 30 40

175

185

195

205

215

225

0

10000

20000

30000

40000

14/07/2015 14/08/2015 14/09/2015 14/10/2015 14/11/2015 14/12/2015

Shar

e P

rice

Vo

lum

e (i

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%

0

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120

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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%

80.00

90.00

100.00

110.00

120.00

130.00

140.00HCL - Geometric Price Movement

HCL Tech Geometric

Ratings Migration

Financial Year Name of the CompanyUpgrade /

DowngradeFrom To

FY 2019 Spandana Sphoorty Financial Limited Upgrade BBB+ A-

FY 2019 Esskay Fincorp Upgrade A A+

FY 2019 Five Star Business Finance Upgrade A- A

FY 2019 Suryoday Small Finance Bank Limited Upgrade A- A

FY 2018 Cholamandalam Finance Upgrade AA AA+

FY 2017 Zee Entertainment Preference Shares Upgrade AA+ AAA

FY 2017 IDBI Downgrade AA- BBB

FY 2017 Aspire Home Finance Upgrade A+ AA-

FY 2017 Equitas Small Finance Bank Upgrade A A+

FY 2017 Grama Vidiyal (due to Merger with IDFC Bank) Upgrade BBB AAA

FY 2016 IKF Finance Upgrade A- A

FY 2016 Five Star Business Fin Ltd Upgrade BBB- BBB

FY 2016 Utkarsh Micro Finance Upgrade BBB BBB+

FY 2015 Satin Credit Care Upgrade BBB BBB+

FY 2015 IFMR Capital Upgrade A- A+

FY 2015 Vistaar Financial Services Upgrade A3 A2

• Total Upgrades – 15, Total Downgrades – 1 , Defaults – 0• Since inception of the fund, there has been only one rating downgrade - IDBI perpetual bonds from AA- to BBB• Three of the investee companies have been awarded Small Finance Bank Licences (Suryoday micro finance, Equitas Holdings, Ujjivan Micro finance)

Latest Holdings – Key Attributes

Average Exposure

Fixed Income (Debt) 89.5%

Event Arbitrage 3.5%

Directional Calls 1.5%

Cash / (Leverage) 5.5%

Debt Quants as on May 2019

Weighted Average Maturity 1.76 Yrs

Carry Yield 12.42%

Ratings Exposure

AAA & AA 12%

A 43%

BBB 29%

Structured & Unrated 5.5%

Total 89.5%

Liquidity Profile of the Portfolio

Less than 1 week 13.36 %

Between 1 week & 1 month 7.07 %

Between 1 month & 3 months 5.78 %

Greater than 3 months 73.79 %

Total 100.00 %

Key Attributes as of May 2019

AIF Performance

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-3%

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-1%

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250A

pr/

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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

AIF Performance

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% 1.64%

Returns

UNIFI AIFBirla Sh. Opp.

Fund(G)Fran. Corp.

Bond fund(G)

BSL Dynamic Bond

Fund(G)

Reliance Dynamic Bond(G)

Average Monthly Return 1.13% 0.75% 0.78% 0.69% 0.70%

CAGR 14.25% 9.34% 9.78% 8.51% 8.58%

Cumulative Returns 129.33% 73.45% 77.78% 65.51% 66.15%

Largest Monthly Gain 3.01% 2.34% 3.06% 4.85% 4.28%

Largest Monthly Loss -0.70% -1.17% -2.10% -3.63% -3.81%

% of positive Months 98.65% 93.24% 90.54% 75.68% 72.97%

Risk

Standard Deviation (Annualised) 1.95% 2.05% 2.24% 4.47% 4.71%

Investment Allocation & Returns Attribution

Returns AttributionInvestment Allocation

9%

14%

11%

9%

6%

10%

5.2%

2.2%

2.5%

3.6%

5.0%

0.6%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

FY 14 FY 15 FY 16 FY 17 FY 18 FY 19

Fixed Income Event Arbitrage Directional Calls Liquid Funds / (Leverage)

71%

84%75%

69% 72%

87%

16%

11%

16% 26% 21%

11%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

FY 14 FY 15 FY 16 FY 17 FY 18 FY 19

Fixed Income Event Arbitrage Directional Calls Liquid Funds / (Leverage)

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 195+ clients.

Key tenets (Contd.)

Four key tenets of our investment and risk mitigation framework (Contd.)

Our quick access to institutional borrowings against the bond portfolio and a well-definedliquidity management policy further strengthen us. The following table provides you aglimpse of our diversity:

We respect and appreciate the faith you have reposed in Unifi. We will continue to beinnovative and disciplined as we work on sustaining the higher returns that this fund hasgenerated.

Key tenets (Contd.)

Four key tenets of our investment and risk mitigation framework (Contd.)

Particulars Corpus % Particulars Corpus %

Top 3 clients 12% Direct Clients 63%

Top 5 clients 17% Top 2 distributors 19%

Top 10 clients 26% Top 5 distributors 31%

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 6 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

For further information visit:

www.unificap.com

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