Category: Sectors

Categories
Shares Technology Stocks

Revised Tax Expectations Nudge Cooper’s FVE Upward

Young woman trading stock market by touching.

Business Strategy and Outlook

As a cash-pay business with sticky customers and few competitors, the contact lens industry is an attractive market, in our opinion. Four players (Johnson & Johnson, Alcon, Cooper, and Bausch Health) dominate the global market, and industry regulation creates strong barriers to entry, keeping new entrants away. Cooper’s surgical segment has contributed approximately one fourth of total revenue since 2018, following the acquisition of Paragard, a nonhormonal copper intrauterine device.

Though Paragard sales dropped during the COVID-19 pandemic, its believe that the product is well positioned to benefit from secular trends toward increased adoption of IUDs in the U.S. IUD usage rate to mirror the rate in other developed countries, leading to market saturation and a slowdown in segment revenue growth. 

Financial Strength

Cooper is in solid financial strength. While the company took on $1.4 billion in debt in fiscal 2018 to acquire Teva’s Paragard IUD, its vision and surgical segments should generate enough cash to allow the company to pay down debt and continue investing in its businesses. Historically, Cooper had no trouble paying down debt, with debt/EBITDA down from 3.1 in fiscal 2014 to 1.9 times by the end of fiscal 2017. Even with the large acquisition and significant upticks in COVID-19-related costs, the firm ended 2020 with debt about 3 times EBITDA. 

The contact lens market is already very consolidated, especially after the Sauflon acquisition, so future large acquisitions seem unlikely for CooperVision, but the firm may seek additional capital to pursue bolt-on deals in its surgical division. CooperSurgical has acquired about 40 companies since 1990, and we project this trend to continue. Cooper has spent $1.1 billion and $1.9 billion on acquisitions over the past five and 10 years, respectively.

Bulls Say’s 

  • CooperVision will benefit as customers trade up from weekly or monthly contact lenses to more expensive daily lenses. 
  • Paragard is the only nonhormonal IUD approved in the U.S. and does not have any serious competition. 
  • MiSight has first-mover advantage in a fast-growing market with a multibillion-dollar market potential.

Company Profile 

Cooper Companies operates two units: CooperVision and CooperSurgical. Accounting for approximately 75% of total sales, CooperVision is the the second-largest player in the oligopolistic contact lens market. Over 50% of CooperVision’s sales are in international territories. The second unit, CooperSurgical, develops and manufactures diagnostic and surgical products for gynecologists and obstetricians, including the Paragard IUD, which Cooper acquired from Teva in 2017. 

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks Shares

Long-Term Competition a Greater Concern for Five Below Than Near-term Supply Chain, Labor Costs

Business Strategy and Outlook

Five Below’s management team has generated consistent returns by leveraging a differentiated concept and prudent expansion strategy. The firm should be able to expand profitably, as its nimble supply and distribution network are well-suited to meeting the ever-changing demands of its customers (preteens, teenagers, and their money-wielding parents). Five Below offers a variety of items in a tailored store environment while giving parents a measure of cost-certainty, a concept that should remain attractive to shoppers under a range of economic scenarios. 

Still, online retailers’ cost leverage is rising, and as it is estimated that many of Five Below’s target households have access to an Amazon Prime membership, the digitization threat looms. Competitive pressure also comes from physical rivals, including mass merchants dedicating aisles to items priced at a given dollar amount or less. 

Financial Strength

Debt-free with ample cash generation, Five Below’s financial health is strong. Shifting its assortment to include more cleaning and essential products kept the stores open even as infection rates soared in late-2020. Store growth should remain a capital priority (albeit with a continued reliance on leased locations) during our 10-year explicit forecast, with our estimates suggesting Five Below will exceed its 2,500-unit nationwide target toward the end of that time frame. Five Below’s cash generation should lead to share repurchases, escalating as its distribution center build-out is completed. It is estimated that the firm eventually uses roughly 65% of its annual cash flow from operations to buy back equity. Alternatively, it could pursue acquisitions of regional chains to accelerate its growth, though we do not incorporate such purchases into our forecasts because of their uncertain timing and nature.

Bulls Say’s 

  • Five Below’s differentiated concept gives its core customers access to a wide range of items while providing parents cost certainty, a combination enabled by its efficiency and flexible merchandising. 
  • One of the few sizable retailers we cover with significant room for expansion, Five Below should build cost leverage as it grows, helping to protect margins from competitive erosion. 
  • Strategically entering new markets with several stores opened concurrently, Five Below has rapidly gained an ability to spread distribution, supply chain, and advertising costs over a large local sales base.

Company Profile 

Five Below is a value-oriented retailer that operated 1,020 stores in the United States as of the end of fiscal 2020. Catering to teen and preteen consumers, stores feature a wide variety of merchandise, the vast majority of which is priced below $6. The assortment focuses on discretionary items in several categories, particularly leisure (such as sporting goods, toys, and electronics; 47% of fiscal 2020 sales), fashion and home (for example, beauty products and accessories, home goods, and storage solutions; 36% of fiscal 2020 sales), and party and snack (including seasonal goods, candy, and beverages; 17% of fiscal 2020 sales). The chain had stores in 38 states as of the end of fiscal 2020.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
ETFs ETFs

BetaShares Australian Sustainability Leaders ETF: Australian equities exposure with a tangible approach to ESG

ETF - Exchange traded fund financial and trading tool. Business and investment concept.

Approach

FAIR tracks the Nasdaq Future Australian Sustainable Leaders Index, a benchmark Nasdaq co-developed with BetaShares in 2017. As per the guidelines laid out by the Responsible Investment Committee, Sustainability Leaders are defined as companies generating more than 20% revenue from select sustainable business or having a certain grade (B or better) from sanctioned ethical consumer reports or being a certified B corporation. There is a maximum 10 stocks per sector and a limit of 4% exposure at an individual stock level.  

Portfolio

As at 30 November 2021, FAIR has a large-cap-dominated portfolio comprising 86 stocks. Stocks must have a market cap of more than USD 100 million and three-month trading volume of over USD 750,000. The index differs largely from the category index S&P/ASX 200, as there is a significant overweight in healthcare, real estate, technology, and communication services. On the other hand, the portfolio is underweight in financial services and materials with nil exposure to energy stocks.

People

The three-person responsible investment committee may remove index inclusions at any time based solely on qualitative considerations of whether a company still meets ESG considerations. The committee comprises Betashares co-founder David Nathanson and Adam Verwey, a managing director of large investor Future Super.

Performance

In early 2020, the fund dropped significantly owing to the frantic sell-off triggered by the global coronavirus pandemic. Despite this, the fund managed to close on a positive return of 2.23% for the year 2020. The uptrend continued into 2021, and it ended the calendar year with 17.99% returns, closely matching the category.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks Shares

2022 Summer Will Be a Major Test for United’s International Travel Business

Business Strategy and Outlook:

United Airlines is the most internationally focused U.S.-based carrier by operating revenue, with almost 40% of 2019 revenue coming from international activities. Before the COVID-19 pandemic, much of the company’s story focused on realizing cost efficiencies to expand margins. It is anticipated that United’s international routes will not be as pressured, but that international flights will be difficult to fill until a COVID-19 vaccine is developed and distributed. A recovery in business travel is believed to be critical for United to maintain the attractive economics of the frequent flier program. Business travellers will often use miles from a cobranded credit card to upgrade flights when their company is unwilling to pay a premium price. Banks are willing to pay top dollar for these frequent flier miles, which provides a high-margin income stream to United.

The COVID-19 pandemic has presented airlines with the sharpest demand shock in history, and most of our projections are based on our assumptions around how illness and vaccinations affect society. A full recovery in capacity and an 80%-90% recovery in business travel is expected that subsequently grows at GDP levels over the medium term.

Financial Strength:

United has a roughly average debt burden relative to peer U.S. carriers, but an average airline balance sheet is not strong in absolute terms. United carries a large amount of debt, comparatively thin margins, and substantial revenue uncertainty. As the pandemic has wreaked havoc on air travel demand and airlines’ business models, liquidity has become more important than in recent years. The primary risks to airline investors are increased leverage and equity dilution as airlines look to bolster solvency while demand is in the doldrums.

United’s priority after the pandemic will be deleveraging the balance sheet, but it is expected that this will take several years due to the firm’s thin margins. United came into the pandemic with a reasonable amount of debt, with the gross debt/EBITDA ratio sitting at roughly 4.5 times in 2019. United, like all airlines, has materially increased its leverage since February 2020 and has issued debt and received support from the government to survive a previously unfathomable decline in air traffic. As of the fourth quarter of 2021, United has $33.4 billion of debt and $18.3 billion of cash on the balance sheet.

Bulls Say:

  • United has renewed its frequent flier partnership with Chase, potentially creating room for long-term margin expansion. 
  • An increasing focus on capacity restraint across the industry, combined with structurally lower fuel prices, should boost airlines’ financial performance over the medium term. 
  • Leisure travellers have more comfortable with flying during the COVID-19 pandemic.

Company Profile:

United Airlines is a major U.S. network carrier. United’s hubs include San Francisco, Chicago, Houston, Denver, Los Angeles, New York/Newark, and Washington, D.C. United operates a hub-and-spoke system that is more focused on international travel than legacy peers.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks Shares

Discover Ends 2021 With a Decent Quarter as Purchasing Volume Impresses but Loan Growth Remains Slow

Business Strategy and Outlook

Despite initial fears, Discover came through the COVID-19 pandemic with few issues. Its credit card portfolio–its largest source of income–shrank 7% in 2020, a year when most credit card issuers saw declines in the double digits. Perhaps more surprisingly, net charge-offs fell in 2020 and have remained well below normal levels since, both in absolute terms and as a percentage of total loans. We anticipate credit costs will be higher in 2022 but given how low the firm’s delinquency rates are we do not expect a full return to normal credit costs until 2023. We don’t expect this to put any pressure on the bank’s balance sheet as Discover is in a strong financial position to withstand higher credit losses. 

Discover generates most of its revenue through interest income from its credit cards (roughly 70% of its net revenue). While the company has strong positions in the private student debt and personal loan markets in addition to operating its own payment network, its long-term health will be driven by its ability to build and sustain its portfolio of credit card receivables. Discover’s credit card business has been performing very well in recent years, with receivable growth and credit results better than most of its peers. With the majority of its credit cards and student loans charging variable interest rates, the bank will also be a beneficiary of rising interest rates, though this is limited by the firm’s reliance on online deposits. 

In the long run, Discover must continue to deal with the challenges that come with being smaller than many of its competitors in size and scope. Many of the traditional banks that the company competes with can offer their cardholders a broader selection of products and services. Discover’s more traditional competitors often benefit from a lower cost of funding driven by their strong deposit bases. While it is unlikely that Discover will ever fully replicate the product offerings of some its peers, it has made good progress in improving its funding cost through the use of online savings accounts. We are encouraged by its initial forays into checking accounts, as this should help Discover further narrow the cost of funding gap

Financial Strength

Efforts to conserve capital by suspending share buybacks in the initial stages of the pandemic paid off and the company was able to navigate the uncertainty of 2020 and 2021 with ease. Despite increasing shareholder returns in the second half of the year, Discover came out of 2021 in a strong financial position, ending the year with a common equity Tier 1 capital ratio of ratio of 14.8%. We expect the firm to continue its share repurchases in 2022 as Discover works to move back toward its target Tier 1 ratio of 10.5%. In our view, this is an adequate reserve ratio, given that historically the firm has had strong underwriting standards with credit card net charge-off rates below its peers.

 The firm has had success in improving its funding, with more than 70% of total funding now coming from deposits. On the other hand, Discover primarily relies on online savings accounts and brokered deposits. This means it must compete on price for accounts, giving it a higher cost of funding than many of its peers. The company is seeking to mitigate this with an expansion into online checking, but these efforts are still in their early stages.

Bulls Say’s

  • Discover has consistently been able to generate returns on equity that are among the highest of its peers. 
  • Discover’s credit card receivables growth has been above the industry average for some time now. This outperformance continued in 2020 when its receivables balance shrank less than its peers’. 
  • Discover has made good progress in improving its deposit base through online savings accounts and more recently online checking.

Company Profile 

Discover Financial Services is a bank operating in two distinct segments: direct banking and payment services. The company issues credit and debit cards and provides other consumer banking products including deposit accounts, students loans, and other personal loans. It also operates the Discover, Pulse, and Diners Club networks. The Discover network is the fourth-largest payment network in the United States as ranked by overall purchase volume, and Pulse is one of the largest ATM networks in the country.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
ETFs ETFs Research Sectors

BetaShares Australian Sustainability Leaders ETF: Australian equities exposure with a tangible approach to ESG

Approach

FAIR tracks the Nasdaq Future Australian Sustainable Leaders Index, a benchmark Nasdaq co-developed with BetaShares in 2017. As per the guidelines laid out by the Responsible Investment Committee, Sustainability Leaders are defined as companies generating more than 20% revenue from select sustainable business or having a certain grade (B or better) from sanctioned ethical consumer reports or being a certified B corporation. There is a maximum 10 stocks per sector and a limit of 4% exposure at an individual stock level.  

Portfolio

As at 30 November 2021, FAIR has a large-cap-dominated portfolio comprising 86 stocks. Stocks must have a market cap of more than USD 100 million and three-month trading volume of over USD 750,000. The index differs largely from the category index S&P/ASX 200, as there is a significant overweight in healthcare, real estate, technology, and communication services. On the other hand, the portfolio is underweight in financial services and materials with nil exposure to energy stocks.

People

The three-person responsible investment committee may remove index inclusions at any time based solely on qualitative considerations of whether a company still meets ESG considerations. The committee comprises Betashares co-founder David Nathanson and Adam Verwey, a managing director of large investor Future Super.

Performance

In early 2020, the fund dropped significantly owing to the frantic sell-off triggered by the global coronavirus pandemic. Despite this, the fund managed to close on a positive return of 2.23% for the year 2020. The uptrend continued into 2021, and it ended the calendar year with 17.99% returns, closely matching the category.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks

TC Energy Continues to Pursue Promising Low-Carbon Efforts

Business Strategy and Outlook

TC Energy faces many of the same challenges as Canadian pipeline peer Enbridge but also offers important contrasts. The most critical differences between Enbridge and TC Energy arise from their approaches to energy transition.

Canadian carbon emissions taxes are expected to increase to CAD 170 a ton by 2030 from CAD 40 today, meaning it is critical that TC Energy, with its natural gas exposure, follow Enbridge’s approach to rapidly reduce its carbon emission profile and continue to pursue projects like the Alberta Carbon Grid, which will be able to transport more than 20 million tons of carbon dioxide. These taxes potentially increase costs for Canadian pipes compared with U.S. pipes but also make hydrogen a viable alternative to gas-powered electricity generation by 2030 in Canada, presenting an emerging threat. TC Energy recently introduced targets to reduce its Scope 1 and 2 intensity by 30% by 2030 and reach net zero by 2050, which is a start.

In addition, Enbridge’s backlog is more diversified across its businesses already, and it already has a more material renewable business, including hydrogen, renewable natural gas, and wind efforts. Morningstar analysts think the renewable business lacks an economic moat today, and considers it is an important area of investment for TC Energy that it needs to pursue. The renewable investments can compete for capital across the rest of the portfolio, generating reasonable returns on capital, allowing the overall enterprise to adapt to the markets as they evolve. This shift is especially the case as a CAD 170 per ton carbon tax in Canada opens the door for potentially sizable investments to reduce carbon emissions.

Financial Strength 

TC Energy carries significantly higher leverage than the typical U.S. midstream firm, with current debt/EBITDA well over 5 times.The high degree of leverage is supported by the highly protected nature of its earnings stream. As capital spending declines over the next few years TC Energy to currently will reach the 4s in the latter half of the decade.TC Energy is also unusual in that it will continue to rely on the capital markets to meet about 20% of its expected capital expenditures over the next few years.TC Energy has outlined plans to spend about CAD 5 billion annually on a continued basis. About CAD 1.5 billion-2 billion is maintenance spending on its pipelines, and 85% of this is recoverable due to being invested in the rate base. Bruce Power and the U.S. and Canadian natural gas pipelines will consume about CAD 1 billion each annually. ESG-related opportunities such as using renewable power to power its own operations or seeking carbon capture efforts would be on top of this spending. TC’s dividend growth remains prized by its investors, and 3%-5% growth going forward is easily supportable under the firm’s 60/40 framework.

Bulls Say

  • TC Energy has strong growth opportunities in Mexican natural gas as well as liquefied natural gas. 
  • The company offers virtually identical growth prospects and a protected earnings profile to Enbridge but allows investors to bet more heavily on natural gas. 
  • The Canadian regulatory structure allows for greater recovery of costs due to project cancelations or producers failing compared with the U.S.

Company Profile

TC Energy operates natural gas, oil, and power generation assets in Canada and the United States. The firm operates more than 60,000 miles of oil and gas pipelines, more than 650 billion cubic feet of natural gas storage, and about 4,200 megawatts of electric power.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks Shares

Fresenius Position as Top Dialysis Service Provider does remain Symbolic and Unique

Business Strategy and Outlook

Fresenius Medical Care treats end-stage renal disease patients through its dialysis clinic network, medical technology, and care coordination activities. Its strengths in these related areas help Fresenius maintain the leading global position in this market. After pandemic conditions recede, it is likely for the company to benefit from solid demand in developed markets, such as the U.S., and even faster expansion in emerging markets, such as China, in the long run. With global ESRD patient growth expected to remain in the low to mid-single digits in the long run, top-line growth for Fresenius to be toward the top of that range after a very weak 2021 and even higher earnings growth compounded annually during the next five years, as the firm wrings out more efficiencies and repurchases shares. 

The company’s position as the top dialysis service provider and equipment maker in the world remains symbiotic and unique. Fresenius’ experience operating over 4,100 dialysis clinics around the globe (about 1,000 more than the next-largest player, DaVita) gives it insights into caregiver and patient needs to inform service offerings and product innovation. Fresenius uses clinical observations to develop and then manufacture even better technology to treat ESRD patients. It outfits all its clinics with its own brand of equipment and consumables, which has margin implications related to system costs and operating efficiency for staff. However, other dialysis clinics appreciate Fresenius’ technology as well, and Fresenius claims about 35% market share in dialysis equipment/consumables while serving only 9% of ESRD patients through its global clinics. Especially telling, main rival DaVita remains one of Fresenius’ top product customers. 

With growing clinical and payer support for at-home treatments, Fresenius is taking aim at those ESRD therapies with significant investments, too. It recently purchased NxStage Medical for home hemodialysis, which appears differentiated in the industry for its ease of use and physical size. The company also aims to improve on its peritoneal dialysis offering where Baxter has traditionally excelled.

Financial Strength

Fresenius maintains a manageable balance sheet, despite its high lease-related obligations and capital-allocation strategy that includes acquisitions and significant returns to stakeholders. The company receives investment-grade ratings from the three major U.S. rating agencies, which should help it access the debt markets for any necessary refinancing. As of September 2021, Fresenius owed EUR 9 billion in debt and had lease obligations around EUR 5 billion. On a net debt/EBITDA basis, leverage stood at roughly 3 times, which appears manageable and in line with the firm’s previous long-term goal of 2.5-3.0 times, which excluded lease obligations. After generating over EUR 3 billion of free cash flow in 2020 including government aid, free cash flow looks likely to decline to about EUR 1.5 billion before rising to about EUR 2.0 billion by 2026. It is not held the firm will face any significant refinancing risks during the next five years even as it continues to push cash out to stakeholders and pursue acquisitions. While acquisitions remain difficult to predict, the company pays a dividend to shareholders (EUR 0.4 billion in 2020) and makes distributions to noncontrolling interests (EUR 0.4 billion in 2020). It also repurchased EUR 0.4 billion in shares in 2020, and it is alleged more repurchases going forward. With those expected outflows to stakeholders and significant debt maturities coming due in the foreseeable future, it is supposed Fresenius may be an active debt issuer going forward.

 Bulls Say’s

  • Diversified by geography and business mix, Fresenius should be able to benefit from ongoing growth in treating ESRD patients worldwide once the pandemic recedes. 
  • Increasing at-home treatment rates could raise demand for the company’s at-home systems and boost how long patients can continue to work and stay on commercial insurance plans, which can positively affect the company’s profitability. 
  • Through its venture capital arm, Fresenius is investing in new ways to treat ESRD patients, aside from more traditional dialysis tools, which should help keep it at the forefront of this market.

Company Profile 

Fresenius Medical Care is the largest dialysis company in the world, treating about 345,000 patients from over 4,100 clinics across the globe as of September 2021. In addition to providing dialysis services, the firm is a leading supplier of dialysis products, including machines, dialyzers, and concentrates. Fresenius accounts for about 35% of the global dialysis products market and benefits from being the world’s only fully integrated dialysis business. Services account for roughly 80% of firmwide revenue, including care coordination and ancillary operations, while products account for the other roughly 20%. Products typically enjoy a higher margin, making them a strong contributor to the bottom line. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

Adobe Remains Dominant in Creative While Building Its Second Empire in Digital Experience

Business Strategy and Outlook

Adobe has come to dominate in content creation software with its iconic Photoshop and Illustrator solutions, both now part of the broader Creative Cloud, which is now offered via a subscription model. The company has added new products and features to the suite through organic development and bolt-on acquisitions to drive the most comprehensive portfolio of tools used in print, digital, and video content creation The benefits from software as a service are well known in that it offers significantly improved revenue visibility and the elimination of piracy for the company, and a much lower cost hurdle to overcome ($1,000 or more up-front, versus plans as low as $10 per month) and a solution that is regularly updated with new features for users.

Adobe benefits from the natural cross-selling opportunity from Creative Cloud to the business and operational aspects of marketing and advertising. On the heels of the Magento and Marketo acquisitions in the second half of fiscal 2018 and Workfront in 2021, Morningstar analysts believe Adobe to continue to focus its M&A efforts on the digital experience segment and other emerging areas.

Adobe believes it is attacking an addressable market greater than $205 billion. The company is introducing and leveraging features across its various cloud offerings (like Sensei artificial intelligence) to drive a more cohesive experience, win new clients, upsell users to higher price point solutions, and cross sell digital media offerings.

Financial Strength 

Morningstar analysts believe Adobe enjoys a position of excellent financial strength arising from its strong balance sheet, growing revenues, and high and expanding margins. As of November 2021, Adobe has $5.8 billion in cash and equivalents, offset by $4.1 billion in debt, resulting in a net cash position of $1.6 billion. Adobe has historically generated strong operating margins. Free cash flow generation was $6.9 billion in fiscal 2021, representing a free cash flow margin of 43.7%. Morningstar analysts believe that margins should continue to grind higher over time as the digital experience segment scales. In terms of capital deployment, Adobe reinvests for growth, repurchases shares, and makes acquisitions. The company does not pay a dividend. Over the last three years Adobe has spent $2.8 billion on acquisitions, $9.6 billion on buy-backs, while share count has decreased by 15 million shares. It is believed that the company will continue to repurchase shares as its primary means of returning cash to shareholders over the medium term. Morningstar analysts also believe the company will continue to make opportunistic and strategic tuck-in acquisitions.

Bulls Say

  • Adobe is the de facto standard in content creation software and PDF file editing, categories the company created and still dominates. 
  • Shift to subscriptions eliminates piracy and makes revenue recurring, while removing the high up-front price for customers. Growth has accelerated and margins are expanding from the initial conversion inflection. 
  • Adobe is extending its empire in the creative world from content creation to marketing services more broadly through the expansion of its digital experience segment. This segment should drive growth in the coming years.

Company Profile

Adobe provides content creation, document management, and digital marketing and advertising software and services to creative professionals and marketers for creating, managing, delivering, measuring, optimizing and engaging with compelling content across multiple operating systems, devices and media. The company operates with three segments: digital media content creation, digital experience for marketing solutions, and publishing for legacy products (less than 5% of revenue).

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Funds Funds

SBI Corporate Bond Fund Direct Growth: The fund which invest in high quality corporate bond and short duration mandate

Fund Objective

The investment objective of the scheme is to provide the investors an opportunity to predominantly invest in corporate bonds rated AA+ and above to generate additional spread on part of their debt investments from high quality corporate debt securities while maintaining moderate liquidity in the portfolio through investment in money market securities.

Approach

The fund’s strategy is to generate attractive returns through high-quality corporate bonds and short duration mandates. It employs a bottom-up approach combined with a top-down overlay to generate superior risk adjusted returns. The managers use various qualitative and quantitative parameters and put a lot of emphasis on a company’s management, business, and financial health. They also use the analysis of sell-side research and credit rating agencies to form a view on the creditworthiness of companies but to a limited extent. The credit committee then reviews the rated securities, and the approved securities are assigned credit and tenor limits. While constructing the portfolio, the managers have the flexibility to implement the trades with reasonable leeway to express their views. The risk-management team periodically reviews the portfolio to ensure the managers adhere to the guidelines. We believe the flow of ideas/information is effective and fits nicely with the process in place, supporting an Above Average Process rating.

Portfolio

The fund has a higher credit-quality portfolio, making it more liquid and less prone to credit risk. The fund maintains 100% of its assets in AAA rated bonds, despite having the flexibility to take some allocation in lower-rated instruments. The duration of the portfolio is well managed between one and three years. The fund also invests in government securities based on portfolio manager’s view on interest rates, but this does not account for more than 20% of its net assets. But high allocation is made to state development loans, given attractive spreads with regard to central government securities.

The portfolio of the fund is well diversified. The manager also intermittently holds higher cash/money market instruments to take opportunistic trading calls when markets are bumpy.The strategy, however, is not without risk. The fund may underperform its peers if the market favours high-yielding bonds. Also when interest rates are falling, the fund may struggle to outperform its category peers that invest in a portfolio with a little longer duration.

Performance

Under a short tenure of the fund’s existence (February 2019 to December 2021), the fund’s direct share class has posted an excellent annualised return of 8.36% as against the category average (7.14%). The portfolio manager’s research-intensive approach has helped the fund generate superior returns, placing the fund in the first quartile.

In terms of year-on-year returns, the fund’s performance has been inconsistent. The fund outperformed most category peers by a wide margin in 2019 and 2020. However, the 2021 performance got impacted because of the fund’s conservative approach with regard to its peers. On expectation of normalisation of interest rates by the RBI, the manager kept the duration below two years. This resulted in the fund ranking in the fourth quartile as against its category peers. However, the fund has the potential and could bounce back going ahead.

About the fund

The investment objective of the scheme is to provide the investors an opportunity to predominantly invest in corporate bonds rated AA+ and above to generate additional spread on part of their debt investments from high quality corporate debt securities while maintaining moderate liquidity in the portfolio through investment in money market securities.

The fund follows a disciplined and risk-conscious investment process that draws extensively from the in depth expertise of the investment team. The process is bottom-up with a focus on high-quality business models with a top-down overlay. The team’s understanding of the markets and frequent interaction with its equity team and parent company give it an edge in forming views on the business and creditworthiness of the companies. Furthermore, it has built some additional aspects into the approach. They now do an even more detailed analysis of the group and the promoter-linked entities in which they invest.

The execution of the process has been above average with limited credit risk and a short duration strategy. Despite having the flexibility to invest up to 80% of its portfolio in AAA and AA+ rated corporate bonds, the manager constructs the portfolio with a primary focus on liquidity, avoiding exposure to the below AAA rated segment, and keeping the duration between 1 and 3 years

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.