The firm's head of fixed-income investment, Arsa Indaravijaya, said AYF would avoid launching closed-ended long-term fixed-income funds while there was volatility in the global economy because it raised concerns about defaults on debentures.

The lesson was learned when AYF's Bt1.3-billion Capital Preservation Fund 3-4-5, launched by a former management team in June 2005, was forced recently to unload debentures issued by Primus Leasing. The debentures, which were originally rated A+ and guaranteed by Ford Motor Credit, accounted for about 28 per cent of the fund.

However, when Standard & Poor's cut Ford Motor's short- and long-term corporate credit ratings to junk status (BB+/B-1), Primus' debentures were downgraded to BB+.

Securities regulations prohibit any fund from investing more than 5 per cent of its total net asset value in debentures with a rating lower than BBB.

AYF, whose current management team took over in January 2006, sought to solve the problem by selling the debentures. It was not until recently, however, that it was able to sell them to a foreign bank.

"It's the best solution we can find for our customers," Arsa explained. "It's more difficult because it's a closed-ended fund, and it's hard to get rid of debentures when their ratings are down."

The three-year-maturity Capital Preservation Fund 3-4-5 had promised returns of 3, 4 and 5 per cent.

However, selling the Primus' debentures has meant that the best return holders can expect is 2 per cent, Arsa said. This is because the debentures were sold at a discount after the downgrade.

"We were not sure whether Primus would be able to repay when the debentures mature," Arsa said. "If it [was unable to] repay, the unit holders may not have received even 2 per cent. They may have lost some of their investment capital too."

The move, however, has not gone over well with many of those who invested in the fund.

"I know there's risk in investment. It's good that the firm tried to solve the problem, but it would have been better if it had not happened," said one Capital Preservation Fund investor. "If it happens often, it will affect my decision on whether to continue investing in the firm's funds."

AYF was renamed from Ayudhya JF Asset Management last year after Bank of Ayudhya (BAY) spent Bt10 million to acquire shares held by JP Morgan and doubled its stake from 38.33 to 76.67 per cent. Later last year, BAY bought the remaining shares from other shareholders to become the sole owner of AYF.

Arsa, who joined AYF in April last year, said the bank and the asset management firm had worked closely to solve inherited problems. Previously, the fund had been "hooked up with several negative moves" and, in late 2005, its deputy chief investment officer Tongjai Thanachanan, its chief investment officer Suchart Techaposai, and finally its managing director Reungvit Nandhabiwat, resigned.

In 2003, the firm was the country's third-largest mutual-fund player, with Bt58.18 billion under management. AYF has seen its assets under management rise from Bt27.83 billion last July to Bt40.66 billion.

Piyarat Setthasiriphaiboon

The Nation