The Sun Global Zyfin SOE Bond ETF (LON: CURY), the world’s first Indian fixed income exchange-traded fund, has increased the number of bonds within its index from six to ten in an effort to enhance efficiency through greater diversification and a reduced creation basket size.
Launched in November 2015, the fund offers foreign investors the opportunity to invest in the bonds of difficult-to-access AAA-rated Indian companies. The allocations are to key Indian Sovereign Owned Enterprises (SOEs) – corporations of national interest which are 51% owned or more by the Government of India.
When the ETF initially launched, its underlying index – the ZyFin India Sovereign Owned Enterprise Bond Index – consisted of six bonds. The limited number of bonds in the index required the fund’s authorized participant to buy all six bonds when creating a new unit of the ETF in order to avoid shifting the profile of the fund significantly away from its underlying index. Under Indian market rules the minimum fixed income market trading lot/size is 5 crore, or about $750,000, resulting in a basket size of approximately $4.5m per creation unit for the fund.
By increasing the number of bonds within the index to ten, investors benefit from a more diversified exposure, and the authorized participant has greater flexibility to select just one bond when creating a new ETF unit. With similar profiles (each is AAA-rated and issued by an SOE), the bonds generally only differ on duration and maturity. Due to a more diverse index, the authorized participant has a greater range of options available when creating a new unit to select one bond whose addition will still closely align the fund’s effective duration with that of the index. This has allowed the fund to reduce the creation size from approximately $4.5m to $750,000.
By reducing the creation size of the ETF, the fund becomes more accessible to a greater range of investors, broadening the investor base and potentially leading to a future uptick in demand for the fund.
Speaking about the revised ETF structure, Mihir Kapadia, CEO at Sun Global Investments, said: “On the back of the success we have had with the CURY bond so far, we have made the decision to diversify and reduce the basket [creation unit] size – thereby cutting risk for our investors whilst solidifying our position as leading emerging market investment specialists.
By solely tracking bonds from SOEs, the fund provides investors with exposure closely tied to the future development of the Indian economy due to the major role they play in India’s infrastructure development. Examples of such firms include the Rural Electrification Corporation of India, Power Finance Corporation, Indian Railways and PNB. Additionally the fund is invested in Nuclear Power Corp of India, a private company 100% owned by the Indian state, and MTNL and Food Corp, both of which have a sovereign Indian state guarantee attached to their debt.
Making the investment case for India, Sun Global Investments notes that the country’s GDP has doubled since 2007 from $1tn to $2tn and the IMF forecasts GDP growth of 7.9% for the whole of 2016. The firm believes India’s strong economic growth is likely to continue, highlighting current inflation rates of approximately 6.0% (down from 9.1% at the end of 2013), as well as an increase in foreign direct investment from $36bn in 2014 to $55bn as of March 2016. It also sees a strong case for the continued strength of Indian domestic consumption.
“The future looks bright for India’s economy, with its relentless year-on-year growth made more impressive considering the Bear market in which it finds itself,” said Kapadia. “Investors are increasingly interested in India, with Modi’s business friendly government instilling confidence that the country’s rapid growth and provision of investor returns are going nowhere.
“The continued success of this fund reflects our well-placed confidence that India is one of the key investment opportunities of today and tomorrow, with funds like ours benefitting from, and adding to, its success.”
The diversification of the Indian bond market is one of many initiatives being undertaken by the Government of India, in an effort to attract foreign direct investment into the country. The broadening of the investor base to include foreign portfolio investments, such as the Sun Global Zyfin SOE Bond ETF, has been recognised as an important step forward to help develop India’s corporate bond market.
The ETF offers European investors direct access to the Indian bond market without the need for pre-SEBI approval, domestic settlement agreements, prefunded trades tax numbers or quota.
The fund has increased in size by over 150% in the past 3 months and is now over $10m. Additionally there has been increasing take up from UK private wealth asset management firms.
The ETF has an effective duration of 4.7 years and yields 8.2%.
It costs 0.79% per annum and, apart from its US dollar share class, is also available in a British pound share class (Ticker: CRRY).
Since its inception on 17 November 2015 the fund’s index has returned 9.1% in US dollars and 25.9% in British pounds.