Unifi High Yield Fund

Preface

Investor Predicament

Conventional Equity

•High / above averagereturn potential

•Accompanied by extremevolatility

Conventional Debt

•Low / below averagevolatility

•Hardly any real returnspost tax and inflation

Cyclicality of asset values combined with misconstructed risk-return expectations push investors to either

• settle for sub-par returns (or)

• bear volatility beyond one’s temperament leading to capital loss

Unifi HYF Proposition

High Yield Fund

•Endeavour to generate netpost tax returns of 3% p.aover the rate of inflation(Core-CPI)

•Minimal / below averagevolatility

`

Risk adjusted arbitrage andfixed income opportunitiesarising from

• corporate events

• macro-economic cycles

• emerging credit

Overview

Investment Objective

Unifi High Yield Fund (HYF) is a discretionary fund focusing on fixed income and event arbitrageinvestment opportunities in capital markets with an endeavor to generate net post tax returns of 3% p.aover the rate of core inflation (CPI). The objective is to consistently generate superior compoundedannual returns than conventional fixed income instruments with uncompromising emphasis on capitalpreservation.

Unifi Capital Pvt. Ltd.Fund Manager

Min Investment INR 1 crore

Performance Reporting

Monthly NAV & Quarterly Review

Independent Custodian & Accountant

HDFC Bank

Lock in periodExit load of 2% if redeemedwithin 6 months.

TenureOpen ended; Monthly subscription andredemption

Fees1% per annum fixed and 20% performanceover hurdle rate (Monthly Chargeable)

Valuation S&P CRISIL

Launch Date 04-Apr-2013.

AUM (INR Crs) INR 463 crores

Hurdle RateNon cumulative pre tax return of 10% perannum

Setup Fees None

Overview

Strategies InstrumentsIndicative Allocation

Avg Allocation FY 2020

Avg Allocation FY 2019

Avg Allocation FY 2018

Avg Allocation FY 2017

Event Arbitrage

Arbitrage opportunities in Listed Equities arising from open offers, delisting, mergers & de-mergers, IPOs, Cash-Futures

0 – 100% 8% 11% 21% 26.%

Nominal Bonds Conventional AAA & AA bonds of various Indian Companies –Typically HTM

0 – 50% 16% 22% 26% 23%

Structured & High yield Debt

Structured Secured Corporate Debt, Commercial Papers, short term bonds and tax efficient Preference Shares of NBFCs focusing on Housing, SME , CV, Agri and Micro Finance.

0 – 75% 72% 65% 46% 46%

Directional CallsEquity, G-Secs and AAA debt(duration calls)

0 – 10% 1% 2% 1% 2%

Cash / LiquidFor liquidity purposes / temporary parking of funds.

3% -0.3% 6% 3%

Overview

Performance Comparison with MF’s

Despite the tough environment, we are pleased to submit that our HYF has generated a pre-taxreturn of 13.18% p.a in FY2020. The CAGR returns since inception of the fund is about 14.27%p.a (pre-tax) with a volatility (standard deviation) of less than 2%. We are also quite satisfiedthat our HYF returns have been significantly better than comparable debt mutual funds – bothcredit funds and duration driven dynamic bond funds not only in this year but also in all ourearlier years as well.

HYF vs. Debt MF returns FY2020 FY2019 FY2018 FY2017 FY2016 FY2015 FY2014

Unifi HYF – Pre Tax 13.18% 10.75% 14.47% 13.70% 14.67% 16.82% 14.40%

Debt MFs - Dynamic Bond Category Average

8.49% 6.49% 4.69% 12.13% 6.55% 10.54% 5.86%

Debt MFs-Dynamic Bond Category Topper 13.83% 8.83% 7.98% 14.40% 8.07% 15.13% 10.36%

Debt MFs - Credit Funds Category Average

-0.60% 6.06% 7.70% 10.65% 8.99% 9.28% 8.41%

Debt MFs - Credit Funds Category Topper 9.43% 8.51% 9.43% 11.50% 10.02% 11.87% 11.12%

Performance Comparison

The graph hereunder shows the returns earned by Unifi HYF compared with a line that representsour target i.e. Inflation (Core CPI*) + real returns of 3% post tax.

*Core CPI reflects the actual inflation trend in an economy as it adjusts the excessive price volatility seen in few food and energyproducts from time to time.

-1.00

-0.50

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HYF Monthly Post Tax Returns (In %) HYF Post Tax Returns Core CPI + 3% Core CPI

188.65

146.18

181.84

Investment Strategy

• The focus is on opportunities in the AAA to Investment Grade segment to optimizeafter tax yields while balancing risks.

• Typically, all debt investments are made with Hold to Maturity (HTM) mind set butsome of it could be traded opportunistically to maximize capital appreciation orminimize risk. .

Fixed Income opportunities – Nominal & High Yield Debt

• Emerge from corporate events like mergers, acquisition, buybacks, regulation triggered/ voluntary open offers made to the public by controlling shareholders, companydelisting, declaration of special dividends etc. .

• The risk- return pay-off in most of such deals is deal-specific and has limitedcorrelation to market cycles.

Event Arbitrage opportunities

Debt Investments – Approach and Strategy

Investment Strategy - The focus would be on opportunities in the AAA to Investment Grade

segment to optimize after tax yields while balancing risks. Typically, all debt investments are

made with Hold to Maturity (HTM) mindset but some of it could be traded opportunistically to

maximize capital appreciation or minimize risk. Arbitrage opportunities emerging from the

following possibilities will be actively pursued to enhance the overall portfolio yields.

Wholesale to Retail – Bulk Buying from Bank

Treasuries / Primary Issuances at finer rates and

selling in smaller lots with a mark-up to HNIs /

Private Provident Fund Treasuries.

Aggregator of Retail Lots – Provide the much

needed liquidity channel for retail bond

holders at market yields plus spread.

Subsidiary – Holding Company – Focus on 100%

Subsidiaries whose papers are rated lower than their

highly rated Parent companies but offer an higher

yield.

Tactical Calls - Consider macro-economy

driven opportunities like softening of Yield

Curve (duration play) due to fall in Interest

Rates and conducive Rating Upgrades cycle

resulting in capital gains.

Debt Investments – Approach and Strategy

Structured Papers from Emerging Financial Sectors- Consider high yield opportunities arising from

well-capitalized and professionally managed Alternative NBFCs focusing on

The following criteria is firmly applied for selection of investment opportunities in this segment -

➢ Fundamentally sound and profitable business model

➢ Management with proven track record

➢ Robust process for credit evaluation, security creation, operations control and collections

➢ Presence of seasoned Private Equity investors in the board

➢ Recent round of promoter / private equity infusion strengthening the capital adequacy

➢ Short Term Maturity and being in the top quadrant of the Company’s Liability

Repayment profile thereby placing our exposure in a positive Asset Liability bucket.

Affordable HousingSME Financing

backed by MortgagesCommercial Vehicles

FinancingMicro Financing

Debt Investments – Approach and Strategy

Case Study – (SME Finance) – Aye Finance

We invested in 13.86% 2 year Non-convertible debentures (quarterly amortisation) of Delhi based Aye FinanceLimited. Aye is an NBFC focused on cluster-based approach of lending to micro-enterprises in rural and semi-urban areas. Its net-worth at that point was about Rs.250 crs , AUM - Rs.675+ crs and had the followingattributes -

➢ Good Robustness of In-house credit-underwriting systems demonstrated by low PAR90➢ 82% of the company owned by credible PE and Foreign Institutions – LGT Capital, SAIF, Capital-G & Accion.➢ Diversified lender base – with 15+ domestic & foreign institutions.➢ Well capitalized NBFC & Comfortable Asset Liability Profile with huge surplus

The NCDs were issued to the company to enable it to expand its AUM and leverage its balance sheet. We hadincluded an additional covenant that cumulative Asset-Liability mismatch should always be positive to the extentof 10% or more in all the buckets up to 3 years . Subsequent to the NCD issue in Nov 2018, the management wasable to expand its AUM and attracted further equity of Rs 230 Crs in Feb 2019.

Rs. in Crore Favourable Asset Liability Profile at the time of Investment – Sep 2018

<30

days

31 - 60

days

61-90

days

91 - 365

days1 -3 years

3-5

years

> 5

yearsTotal

Total Assets (a) 104.92 44.72 43.93 384.02 366.65 22.07 0.89 967.20

Total Liabilities (b) 28.32 12.93 11.15 102.03 246.35 206.33 360.10 967.20

Mismatch (a-b) 76.60 31.80 32.79 281.98 120.30 (184.27) (359.21)

Cumulative Mismatch 76.60 108.40 141.19 423.17 543.47 359.21 (0.00)

Event Arbitrage

In a typical open offer, theprice movement during theperiod between publicannouncement and the offerclosure is largely insulatedfrom market volatility anddelivers a debt like absolutereturn.

Particulars FY20 FY19 FY18 FY17 FY16 FY15 FY14

Total no. of offers

19 26 45 51 73 60 60

No. of offers participated

3 2 1 2 7 9 12

Average offer size (in crs)

740 1071 70 186 161 287 3941

Largest Offer invested (in crs)

2262 923 0.91 415 1621 11449 29200

Smallest Offer invested (in crs)

448 329 0.91 115 26 251 30

175

185

195

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225

0

10000

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14/07/2015 14/08/2015 14/09/2015 14/10/2015 14/11/2015 14/12/2015

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e P

rice

Vo

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n 0

0's)

IIFL Open Offer

Volumes (in 00's) Share Price

Similar to Debt Returns

PA Date: 14 Jul 2015Purchase Date: 25 Aug 2015Purchase Date: 185Offer Price: 195

Payment Date: 8th Dec 2015Acceptance: 100%Return: 5.40%Annualized Returns: 18.79%

0

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Historical No of Open Offers

Merger Arbitrage

Case Study – (HCL – Geometric Merger)

HCL-Geometric merger was announced in Apr 2016 wherein for every 43 shares of Geometric, itsshareholder would get 10 shares of HCL Tech and 43 preference shares of 3DL PLM (7% redeemable)with a face value of Rs.68 each. We started tracking the spreads and entered into the trade in April 2016where we reckoned that we could make 14% per annum. We bought shares of Geometric and sold HCLTech in the futures market. HCL Tech being a highly liquid F&O scrip enabled us to hedge ourGeometric exposure completely and lock-in the desired spreads. All the deal related approvals wereobtained by Jan 2017 and the spreads had also narrowed to 8% p.a by then. As we had realized theintended holding period return of 14% p.a, we exited the trade during February month just before therecord date for share swap and moved into another opportunity with better yield. . Below is the timelineof approvals and respective spreads.

Event DateAnnualized

return

Merger Announcement date 1-Apr-16 25.22%

Unifi Entered the trade 4-Apr-16 14.97%

NOC approval from exchange 8-Jun-16 13.61%

CCI Approval 21-Aug-16 14.10%

Shareholders approval 4-Oct-16 16.50%

High Court Approval 14-Dec-16 11.55%

Copy of High court approval submitted to exchange 18-Jan-17 12.05%Unifi Exit prior to record date of 15-03-17 28-Feb-17 7.83%

80.00

90.00

100.00

110.00

120.00

130.00

140.00HCL - Geometric Price Movement

HCL Tech Geometric

Ratings Migration

Name of the CompanyUpgrade /

DowngradeFrom To Financial Year

Aye Finance Private Limited Upgrade BBB BBB+ FY 2020

Cholamandalam Finance Upgrade AA AA+ FY 2018

Equitas Small Finance Bank Upgrade A A+ FY 2017

ESAF Small Finance Bank Upgrade A- A FY 2019

Esskay Fincorp Upgrade A A+ FY 2019

Five Star Business Finance Upgrade BBB- A FY16 & FY19

Grama Vidiyal (Merger with IDFC Bank) Upgrade BBB AAA FY 2017

IFMR Capital Upgrade A- A+ FY 2015

IKF Finance Upgrade A- A FY 2016

Satin Credit Care Upgrade BBB BBB+ FY 2015

Spandana Sphoorty Financial Limited Upgrade BBB+ A- FY 2019

Suryoday Small Finance Bank Limited Upgrade A- A FY 2019

Utkarsh Micro Finance Upgrade BBB BBB+ FY 2016

IDBI Downgrade AA- BBB FY 2017

Western India Transport Finance Downgrade BBB- D FY 2021

• Three of the investee companies have been awarded Small Finance Bank Licences (Suryoday micro finance, Equitas Holdings, Utkarsh Micro finance)

Latest Holdings – Key Attributes

Average Exposure

Fixed Income (Debt) 71.3%

Event Arbitrage 25.0%

Directional Calls 2.0%

Cash / (Leverage) 1.7%

Debt Quants

Weighted Average Maturity 1.78 Yrs

Carry Yield 11.80%

Latest Ratings Exposure

AAA & AA 24%

A 24%

BBB 20%

Total 68%

Liquidity Profile of the Portfolio

Less than 1 week 30%

Between 1 week & 1 month 33%

Between 1 month & 3 months 7%

Greater than 3 months 30%

Total 100%

Key Attributes of the portfolio

Latest Holdings – Key Attributes

Latest Holdings – Key Attributes

Portfolio as of 31st August 2020

High Yield Fund Portfolio

High Yield Fund Portfolio % of

PortfolioConstituents

Listed AAA hybrid & Equity Arbitrage

36%India grid Invit, WABCO, JB Chemicals, , Majesco & Liquid MFs.

Highly Liquid & Well Rated Debt

28%Cholamandalam, Indusind, Muthoot Finance, TVS Credit Services, Avanse & Tata Steel.

High Yield Debt 36%

Investments in Emerging NBFCs – monthly and quarterly amortising structure. [70% of this portfolio is getting redeemed within 12 months]

Total Portfolio value 100%

AIF Performance

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300A

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Monthly Returns UNIFI AIF

Birla Sh. Term Opp. Fund Fran Temp Corp. Bond

BSL Dynamic Bond Fund(G) Reliance Dynamic Bond(G)

UNIFI AIF vs Debt Fund’s

Monthly Performance in (%)

Year Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Annual

FY14 0.92% 1.56% -0.70% 1.60% 1.02% 0.87% 1.18% 1.07% 2.84% 0.79% 2.20% 0.95% 14.40%

FY15 1.15% 1.43% 1.22% 1.44% 1.13% 1.20% 1.14% 1.36% 1.48% 1.28% 1.38% 1.83% 16.82%

FY16 0.92% 1.14% 0.75% 1.58% 1.26% 0.87% 1.24% 0.82% 1.31% 1.12% 0.59% 2.51% 14.67%

FY17 1.00% 1.14% 0.83% 1.24% 1.10% 1.38% 0.79% 1.28% 0.77% 0.90% 0.80% 1.97% 13.70%

FY18 1.60% 0.32% 1.00% 1.15% 1.42% 2.25% 0.90% 1.40% 0..80% 0.63% 0.81% 1.60% 14.47%

FY19 0.65% 0.31% 0.41% 0.84% 0.92% 0.22% 0.64% 0.71% 1.02% 0.84% 0.85% 3.01% 10.75%

FY20 0.49% 1.15% 0.66% 0.93% 0.89% 0.72% 0.94% 1.35% 1.03% 1.23% 1.22% 1.87% 13.18%

FY21 0.38% 0.61% 0.92% 1.43% 1.52% 4.92%

Returns

UNIFI AIFBirla Sh. Opp.

Fund(G)Fran. Corp.

Bond fund(G)

BSL Dynamic Bond

Fund(G)

Reliance Dynamic Bond(G)

Average Monthly Return 1.12% 0.75% 0.58% 0.62% 0.71%

CAGR 14.27% 9.35% 7.14% 7.60% 8.73%

Cumulative Returns 168.09% 94.07% 66.75% 72.20% 86.05%

Largest Monthly Gain 3.01% 2.34% 3.06% 4.85% 4.28%

Largest Monthly Loss -0.70% -1.17% -3.76% -3.83% -3.81%

% of positive Months 98.88% 91.01% 84.27% 73.03% 74.16%

Standard Deviation (Annualised) 1.88% 2.15% 3.58% 4.78% 4.49%

AIF Performance

Latest Holdings – Key AttributesAverage Allocation & Return Attribution

16%11%

16%26%

21%11% 8%

71% 84% 75%

69%72%

87%88%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

Liquid Funds / (Leverage)

Directional Calls

Fixed Income

Event Arbitrage

Average Allocation Return Attribution

5%

2% 3%4%

5%

1%

3%

9%14%

11% 9% 7%

10%

10%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

Liquid Funds / (Leverage)

Directional Calls

Fixed Income

Event Arbitrage

Investment Process

Idea Origination

Opportunity validation, review and evaluation of risk / return scenarios

Investment Committee Review

Initiation of Investment

Unifi Capital (P) Ltd –Fund Manager to the Trust

Post Investment Monitoring and Risk Management

CIO, Head-Research and Head-Relationship

AIF Trustees

Internal Review

Statutory Auditors

Portfolio Parameters

Pre-trade

Ongoing Surveillance

Post-tradeFirm Infrastructure

In-depth bottom-up review of all investment

opportunities by documented and well

seasoned evaluation process

Sensible Exposure Limits:

- Theme Specific

- Company Specific (not more than 10%)

‘Marketable Liquidity’ Assessment

Rigorous due-diligence on structure and

security w.r.t debt investment opportunities

Maximum Leverage limit including

derivative exposures capped at 1.5 times the

fund corpus

Daily Mark-to-Market assessment including

detailed review of extreme movements

Real-time monitoring of economic developments,

corporate communications to stock exchanges and

methodical tracking of economy and company

specific developments

Periodical meeting / calls with management of all

the investment companies to measure progress,

review results and revalidate assumptions

Opportunistic hedging/tactical trading to respond

to short-term, counter-theme market moves

Best-in-class IT infrastructure with

back-up

Documented Process Flow

Reputed Trustees, Custodian, Valuer

etc

Research Access to premium

databases capturing economic, sector

and company specific trends

Periodical Internal Review and

Statutory Audit

Risk Management Framework

• Avoid becoming too large too soon

We periodically close the fund to new subscriptions so that we have adequate time to“cherry-pick” our investments and maintain a healthy funnel of investible ideas. Thisstrategic calibration allows us to complete proper homework and offers the flexibility to say“no” to investments that we find sub-optimal. Since our commercial interest is aligned togenerate higher return on capital, we don't unduly prioritise growing the fund itself.

• Avoid long duration

We invest in shorter maturity bonds of fundamentally strong corporates at an attractiveabsolute yield. This protects us from having to forecast interest rates; a challenge that trips-up most professional investors most of the time. Equally important is the fact that short tenoralso offers the enormous benefit of not having to predict the prospects of a business far intothe future. Since uncertainties rise exponentially with time, we logically prefer to settle for aslightly lower yield than expose our capital to the risk of permanent loss due to potentialdisruptions over the longer term. We bear in mind that our upside is in any case capped bythe bond's contracted yield, unlike the case of an equity investor who accepts long durationin the hope of earning an out-sized upside.

Key tenets

Four key tenets of our investment and risk mitigation framework :

• Avoid placing too much value on credit ratings

Credit events from the last year validate the fact that securities of highly rated and largerfirms are not necessarily safer than those issued by smaller companies. The fund welcomesopportunities from relatively new issuers by leveraging our in-house capability to analysebusinesses from a fundamental bottom-up perspective. These emerging firms require smallersums and it takes us considerable time and resources for a thorough due-diligence. Preciselyfor this reason the big institutions are not equipped to operate in this space, allowing us toearn superior yields.

• Embrace Illiquidity

The bond market is dominated by large mutual funds that are managed by small teams. In theinterest of efficiency they tend to prefer investing in large and well established firms whosebonds are perfect for quick large scale deployment and offer liquidity at short notice. On thecontrary, the issue with emerging company bonds is that they tend to be less liquid and we asinvestors should be clear in our mind about holding them till they mature in 18 to 30months. In this aspect we are particularly well placed. Despite being an open-ended fund(monthly window), we are uniquely positioned to buy illiquid bonds in exchange for higheryield due to the stability of our diversified corpus from our clients.

Key tenets (Contd.)

Four key tenets of our investment and risk mitigation framework (Contd.)

Why Unifi High Yield Fund ?

• Successful and consistent track record of achieving superior returns than the benchmark credit and dynamic bond mutual funds in all the 7 years since inception.

• Open-ended fund with no entry load. No exit load post 6 months of investment.

• Historical volatility has been less than 2%. Portfolio construction with uncompromising emphasis on capital preservation.

• Core high yield debt portfolio with flexibility to participate in event arbitrage opportunities with high returns potential.

• Complete bottom-up in-house research of all deals and rigorous monitoring mechanism post investment. No outsourcing of research or undue reliance on credit ratings.

• Calibrated raising of fresh capital according to deployment potential. Not looking to scale beyond INR 1000 crores so as to remain nimble and deliver performance across market and economic cycles.

P . S . - The Power of Compounding

The power of compounding is the eight wonder of the world – Einstein.

A portfolio with consistent above average compounded returns over years createsmore wealth than a one offering high returns at a higher volatility. See theexample below –

Even one bad year in a 5 yr time period could significantly bring down the returnsand dilute the power of compounding.

Year 1 Year 2 Year 3 Year 4 Year 5

Portfolio A 100 18% 16% 17% 19% 15%

219

Portfolio B 100 40% 27% -38% 24% 22%

167

For further information visit:

www.unificap.com

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