Fitch Affirms Absa Money Market Fund at 'AA+(zaf)' / 'V1 (zaf)'

Fri Mar 28, 2014 12:48pm EDT

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(The following statement was released by the rating agency) LONDON/PARIS, March 28 (Fitch) Fitch Ratings has affirmed Absa Money Market Fund's 'AA+(zaf)' National Fund Credit Rating (NFCR) and 'V1(zaf)' National Fund Volatility Rating (NFVR). The fund is managed by Absa Asset Management. KEY RATING DRIVERS The 'AA+(zaf)' NFCR is driven by the fund's high credit quality, as reflected in its stable weighted average rating factor (WARF) and rating distribution. The NFCR factors in a one-notch downward adjustment to reflect concentration risk, a structural feature of the South African market. The 'V1(zaf)' NFVR is driven by the fund's low exposure to interest rate risk and spread risk, as reflected in its short maturity profile. Asset Credit Quality The fund's weighted average credit quality is high as indicated by the fund's low and stable WARF, which also reflects the short maturities of the fund's assets. The fund primarily invests in issuers rated 'F1+(zaf)'. Concentration In Fitch's opinion, the fund is concentrated, like other South African money market funds rated by the agency, with the top three issuer exposure consistently in excess of 50% of portfolio holdings. In line with its rating criteria, Fitch typically adjusts down the WARF-implied NFCR of funds it deems concentrated by one or more notches. Without concentration risk this fund would have achieved a 'AAA(zaf)' NFCR. The fund's concentrated holdings reflect its investment mandate and the structural characteristics of the South African market, with a limited supply of treasury bills, and the five largest banks having a combined market share of around 90%, according to Fitch's estimates. Without a structural evolution of the South African market that results in a more diverse, high quality and liquid issuance market, it is highly unlikely that Fitch could rate any money market fund higher than 'AA+(zaf)' in South Africa. Portfolio Sensitivity to Market Risk The fund has low exposure to interest rate risk and spread risk, as reflected by its short maturity profile, with the result that the fund's market risk factor (i.e. a risk-adjusted duration measure) is also low, consistent with a 'V1(zaf)' NFVR. As per regulation, the fund's weighted average duration (i.e. factoring in next interest rate reset date) is capped at 90 days and its weighted average life (i.e. based on portfolio securities' final maturity dates) at 120 days and no investment may have a maturity of greater than 397 days. Fund Profile The fund is regulated by South Africa's Financial Services Board under the Collective Investment Schemes Control Act of 2002 (specifically Notice 80 of 2012). The fund invests in fixed- and floating-rate money market instruments, including negotiable certificates of deposit, promissory notes and fixed deposits issued primarily by major South African and foreign banks with local operations. As of end-February 2014 the fund's total assets under management (AUM) were approximately ZAR52.5bn, making it the largest single money market fund in South Africa. It was launched in May 1997 and as a result has one of the longest-track records of any money market funds in South Africa. The Advisor Fitch considers Absa Asset Management suitably qualified, competent and capable of managing the fund. Absa Asset Management is a subsidiary of Absa Group Limited (A/Stable/F1) which is majority owned by Barclays Bank PLC (A/Stable/F1). Absa Group Limited is the highest rated banking group in South Africa. The fund is co-managed by Juan Bekker and Rehana Rungasamy, who have, respectively 25 and 10 years of experience and have both been with Absa Asset Management since 2008. Fitch views positively the control environment at Absa Asset Management, which comprises a well-resourced operations team of 13 using a suite of systems (Charles River, Barra Aegis, Statpro and HiPortfolio) which Fitch views as in-line with international best practices. As of end-December 2013 Absa Asset Management's total AUM were approximately ZAR115bn, with the Absa Money Market fund representing 50% of the total. Absa Asset Management employed 31 staff as of end-December 2013. RATING SENSITIVITY Funds in the 'AA(zaf)' rating category are considered to have very high underlying credit quality relative to other entities in the South African market. The fund's assets are expected to maintain a weighted-average portfolio rating of 'AA(zaf)'. Funds rated 'V1(zaf)' are considered to have low sensitivity to market risk. On a relative basis, total returns of funds rated 'V1(zaf)' are expected to exhibit high stability, performing consistently across a broad range of market scenarios. The NFVR does not address the sensitivity of a bond fund to extreme risks that may result from reduced liquidity in secondary markets during certain periods of time. Comparisons between different national fund rating scales or between an individual national and international scale are inappropriate. The ratings assigned to the funds may be sensitive to material changes in the credit quality or market risk profile of the funds. A material adverse deviation from Fitch criteria for any key rating drivers could cause ratings to be downgraded by Fitch. Specifically, Fitch would expect to downgrade the NFCR in the event of sustained deterioration in credit quality. Given the fund's short maturity profile the NFVR is expected to be stable. However, should interest rates or market volatility in South Africa structurally change then Fitch would expect to downgrade the NFVR. RATING CRITERIA Fitch rates MMFs in South Africa under its global bond fund rating criteria. This reflects the differences the agency perceives between South African MMFs and other Fitch-rated MMFs under its international and national MMF rating criteria (see below). Specifically, the high level of concentration in these funds, a structural characteristic of the South African market, is inconsistent with Fitch's view of the risk profile of a MMF. The agency also notes regulatory differences between the US and European MMFs international money market funds (subject to Rule 2a-7 in the US and ESMA guidelines for MMFs in Europe) and the regulatory regime in South Africa, in spite of proposed changes to applicable regulation in South Africa. Specifically, Fitch notes differences in required mark-to-market frequency and escalation procedures between South African and European and US money market funds, which are required to value more frequently and to pursue formalised processes in the event that a funds mark-to-market net asset value deviates from its book NAV. For additional information about Fitch rating criteria applicable to bond funds, please review the criteria referenced below, which can be found on Fitch's web site at www.fitchratings.com. Contacts: Primary Analyst Alastair Sewell Senior Director +44 20 3530 1147 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Richard Woodrow, CFA Associate Director +44 20 3530 1388 Committee Chairperson Manuel Arrive, CFA Senior Director +33 1 44 29 91 77 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, Global Bond Fund Rating Criteria, 13 August 2013, are available on www.fitchratings.com. Applicable Criteria and Related Research: Global Bond Fund Rating Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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