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Concepts & Tutorials

Guest Post: Raghu Vohra on the Global Fixed Income Funds Structure Process

This is a guest post by Raghu Vohra, founder at Blackstone Valley Group and an investor in Capital Mind. Raghu works closely with the fixed income investment industry.

Hello Folks, this is a follow up to the conversation, Deepak and I had a conversation a couple of weeks ago, link here (https://www.youtube.com/watch?v=N5F-JxHkjTo) regarding the workings of Global Fixed Income Funds. We had a great number of folks watch the chat and a few came back to me asking if I could do write more about how are these funds structured. The below is my attempt to showcase that.

Please note these are generic ideas and presented in a simplistic way – every Fixed Income Asset Manager has their own individual processes to reflect complexity involved these structures/decisions.

  1. Institutional /Retail: The first decision is whether the fund being launched is for Institutional Investors (Institutions having +$50MM of Investable Assets) or for the Retail Investors (common folks like us).  For the purpose of this article – we will focus on the Retail side & on a Country Specific fund
  2. Fund Objective : – Capital Preservation, Growth, Income, Arbitrage, Other.
  3. Time Horizon :- Short Term (1-5yrs), Medium (5-10yrs), Long Term(10+yrs)
  4. Target Objective :- Local, Domestic, Latam, Europe, EMEA, Asia – Pacific, Emerging Markets, Frontier Markets, Special Situations, Country Specific
  5. Complexity of Fund Strategy : – Simple, Complex, Intermediate
  6. Degree of Use of Other Instruments (Derivatives, Options, Swaptions, Preferred Secs, etc):- Low, Medium, High
  7. Liquidity of Underlying securities : – Low, Medium, High
  8. Inherent Fund Risks (Legal, tax, counterparty, structural) :- Low, Medium, High
  9. Complexity (Fees, Schedules, Offering) :- Simple, Medium, Complex
  10. Expected Fund Volatility to the Benchmark :- Low, Medium, High
  11. Investment Suitability (where does this fund fall as a holding option): – Core Holding, Satellite, Major, Minor etc
  12. Fund Manager Mandate: Restricted, Intermediate, Broad
  13. Fund Size: Small, Medium, Large

An Example:

Here is an example derived on the selections made from the Options above:-

  • 1. Retail Fund for US based domestic investors.
  • 2. Objective: Growth
  • 3. Time Horizon: 10yrs
  • 4. Target: India
  • 5. Fund Complexity: Complex
  • 6. Degree of use of other instruments: Medium
  • 7. Liquidity of underlying: Medium
  • 8. Fund risks: Low
  • 9. Fees/Schedule complexity: Simple
  • 10. Volatility: High
  • 11. Suitability: Satellite, Minor
  • 12. Mandate: Broad
  • 13. Fund Size: Medium: +USD500MM

Now since this is a country specific fund – the fund managers have to explain and account for Country Risks to the Fund Trustees.

  • 1) Country:- Sovereign Credit Ratings (S&P, Moodys, Fitch, Firm’s own proprietary rating model)
    • Geo-Political: – Nuclear Arms, Civil Unrest, Separatist movements
    • Political: – Structure, Governance, Track Record
    • Economical: – GDP, Inflation, Tax Policy
    • Central Bank:- Steady, Intervene as needed
    • Market Regulator:- Steady, More Transparency Needed
    • Legal: Judicial Involvement
  • 2) Currency:- Capital Controls, Convertibility, Pegs (Ranges), Volatility
  • 3) Target Industry (Using 1 for example): Growth (Historical vs Projected), Size
  • 4) Target Securities:- Market Cap, Volatility, Forecast EPS, Earnings Growth, Management Team, Term (To rate their bond offerings)
  • 5) Liquidity:- Medium

Country Specific Risks For Our Example Fund

Since it will be an India based fund –

  • 1. BBB-, Baa3, BBB-, and (B-) These are reflective of a Stable Grade across the agencies.
    • Nuclear: Yes, Civil Unrest: No, Separatist: Limited (Govt. in Control)
    • Political Structure: Multi-Party Democracy, Governance: Low, Track Record: Mixed
    • GDP Growth: 7.0% -8.5%, Inflation: 8.5-11%, Tax: Complex & some instances of Retrograde taxation
    • RBI:- Fighting Inflation & Managing Growth. Complex
    • SEBI: Difficult Task, Unable to stop stock manipulations by Promoter, Broker cartels.
    • Supreme Court: Rare Activism, Can act on Suo – Moto (own cognizance)
  • 2. Rupee. Not Fully Convertible. Steady Depreciation against EUR/USD, USD.
  • 3. Automobiles: Growth, 21+ Million vehicles in ’13-14, 22% of GDP. Production & Export base to Asia/Africa. Biggest Auto Market by 2035. (HT:IBEF)
  • 4. Target: TataMotors, Mahindra, Bajaj, Maruti ,TVS, GM, Fiat, Honda, Volvo (Note :for their Corporate Bond Offerings only)
  • 5. Liquidity: Medium

So as you can see launching a Global Fixed Income on a simplistic basis still involves a lot of work and effort and processes for the managers before it reaches the investors.

Hope this sheds more light. Please let Deepak and me know how you liked this article.

I can be reached at rvohra@blackstonevalleygroup.com and my twitter handle is @BlackstoneVG.