FranklinCorporateBondOpportunity:Buy

RadhikaMerwin

Thefundinvestsinlowerratedbonds,butlimitsconcentrationrisk

Interestrateshavecomedownsharplyinthelastoneyearwiththeyieldonthe10yeargovernmentbondfallingfrom
8.2percentlastyearto7.6percentnow.
Butinvestorsneednotlooktogiltfundsalonetoridetheresultingbondrally.Debtfundsthatinvestincorporate
bondscanalsoofferhigherreturns,butthroughadifferentroute.Thesefundsearnhigherreturnsbyinvestingnon
AAAbonds.Asidefromadownwardratecycle,suchfundscanalsogainfromapossiblerevivalintheeconomythatcan
leadtoratingupgrades.FranklinCorporateBondOpportunityisonesuchfundthatinvestsinbonds,takingoncredit
risktoearnhigherinterest.Thefundhasoutperformeditscategoryaverageoveroneandthreeyearperiods.
Higherrisk
Itistruethatcorporatebondfundsunlikegiltfundsthatinvestonlyingovernmentsecuritiescarrytheriskofloss
ofcapital.Thisisbecausecorporatebonds(borrowers)candefaultontheirpaymentobligations.Theycanalsobe
downgradedbyratingagenciesonseveralgrounds,whichcanerodethebondsvalue.
Recently,twoJPMorgandebtfundsthathadinvestedinAmtekAutosbonds,sufferedhugelossesowingtorating
downgrades.ButwhatledtosteeperosioninthefundsNAV,wastheirlargeexposurestotheAmtekAutobonds.
Henceasinvestors,itisessentialthatyoupickfundsthathaveadiversifiedportfolioandlowconcentrationrisk.
FranklinCorporateBondOpportunitycurrentlyinvestsabout64percentinAratedbonds,27percentinAAratedand
anegligibleportioninAAAratedbonds.Whilethispegsthefundsriskhigher,itsdiversifiedportfolioofferscomfort.
AsofOctober2015,thefundhasinvestedinbondsofcloseto50corporates,withhighestexposureat6.9percentto
JSWSteelsAAratedbonds.Comparedtosomeofthesimilarfundsinitscategory,FranklinCorporateBondsportfolio
carrieslowerconcentrationrisk.BirlaSunLifeMediumTermPlan,forinstance,hasinvestmentsinabout20
corporates,with9percentinAAAbonds,about31percentofitsassetsinAandbelowratedbonds,andanother30
percentinAAratedsecurities.
Consistentperformer
FranklinCorporateOpportunityFundhasdelivered10.6percentannualisedreturnsinceitsinceptioninDecember
2011.Inthe2014rally,thefundclocked12percentreturn.
Overathreeyearperiod,thefunds10percentreturnplacesitinthetopquartileofitscategory.Ithasdelivered9.6
percentreturninthelastoneyear,muchhigherthanthecategoryaverageof9.2percent.Theyieldtomaturity(YTM)
forthefundhasbeeninthe10.7to12percentrange.ThecurrentYTMof10.8percentisamongthehighestwithinits
category.Thestrategyofthefundistokeeptheaveragematuritybelowthreeyears,at2.52.7years.Thismitigatesthe
riskofinterestratemovements.
(ThisarticlewaspublishedonNovember22,2015)
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