HDFC Credit Risk Debt Fund Direct Option Normal Reinvestment Inc Dist cum Cap Wdrl Opt INF179KA1I53

We have qualitatively reviewed this strategy and reaffirmed its Process and People ratings. The following text is from Aug. 16, 2023.

With a blend of high-quality and high-yield bonds, HDFC Credit Risk Debt has delivered outstanding long-term returns. We continue to have confidence in the portfolio manager and time-tested investment process, meriting an Above Average rating for both the People and Process pillars.

Shobhit Mehrotra is a competent and experienced manager. He was the head of credit research function but following CIO Prashant Jain’s exit he also started heading the fixed-income function. Mehrotra has led this strategy since March 2014 and is competent on the credit management side. He plies a long-term approach by focusing mainly on generating consistent returns with low risk. The fund is backed by a deep and talented team of tenured investment professionals with successful long-standing track records in the Indian fixed-income market. Although we value the long tenure of the investment team, we are concerned about its size.

The investment process is underpinned by diligent research, combined with qualitative and quantitative aspects. The focus on lower credit quality is crucial in this strategy. The fund typically maintains 60%-65% of its net assets in AA and below rated bonds.

While evaluating credit the focus is mainly on the company’s ability to repay loans, a strong promoter background, collateral pledged to secure debt, and covenants. This strategy enabled the fund to weather the 2018-19 credit crises with greater comfort than some of its competitors. The fund did witness a downgrade in a few investments, but eventually the manager exited at a better price than they had been marked down. The fund also suffered large outflows in April-May 2020 owing to panic redemption, but the execution remained efficient. All this points toward a robust investment process.

Execution of the process has been good, and Mehrotra avoids taking high-duration bets in the portfolio. He maintains a shorter duration profile and typically varies between 2.5 and 3.0 years based on his view on interest rates. The fund is well-diversified, and Mehrotra does not compromise by taking outsize exposure or by exposing the fund too much to interest-rate risk. To counterbalance the liquidity risk in the portfolio, he holds strong AAA rated instruments, which are extremely tradable.

Mehrotra is mindful of the risk in his portfolio and invests only in companies with strong promoter backing and where the team has high conviction, such as Tata, Godrej, Mahindra Reliance, and L&T. He also invests in PSU bonds to maintain liquidity in the portfolio.

The research-intensive approach has generated impressive long-term returns. We think the manager’s core strength lies in managing credit strategies more efficiently. However, investors should note that the portfolio's illiquid nature could lead to an adverse impact under severe redemption pressure.