(Repeat for additional subscribers)
April 4 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Southchester (RF) Limited's National Fund Credit Rating at 'AA+(zaf)' and National Fund Volatility Rating at 'V2(zaf)'. The fund is managed by Southchester Investment Managers (Proprietary) Limited (Southchester).
KEY RATING DRIVERS
The affirmation of the National Fund Credit Rating is driven by the fund's high and stable credit quality, as reflected in the fund's weighted average rating factor (WARF) and rating distribution.
The affirmation of the National Fund Volatility Rating is driven by the fund's low exposure to interest rate risk and spread risk, as reflected in the fund's short maturity profile, while recognising the fund's potential exposure to longer dated securities through repurchase agreements.
ASSET CREDIT QUALITY
The fund's weighted average credit quality is high, reflecting its investment policies, which require that the portfolio invest 90% of its assets in securities rated 'A(zaf)' or above. While the fund can have a limited exposure to lower dated securities, this exposure is infrequent and limited in practical terms. The fund's WARF of 0.13 as of February 2014 is consistent with a 'AAA(zaf)' National Fund Credit Rating. However, taking into consideration the concentration risk in the fund and in line with Fitch's rating criteria the agency has notched down the National Fund Credit Rating to 'AA+(zaf)'.
PORTFOLIO SENSITIVITY TO MARKET RISKS
The fund has low exposure to interest rate risk, as reflected in the fund's investment policies, which limit its weighted average maturity (WAM) to interest rate reset date to 90 days. As of February 2014, the fund's WAM was 64 days.
Exposure to spread risk is also low, based on the fund's investment policies, which limit the maximum maturity of individual assets to 1080 days and place limits on the portfolio's weighted average life (WAL, i.e. maturity to final maturity date) at 150 days (WAL of 104 days as of February 2014). The fund's Market Risk Factor is consistent with a 'V1(zaf)' National Fund Volatility Rating. However, the fund may invest in instruments not accessible to money market funds in South Africa and its maturity profile is longer overall.
Therefore the agency believes that a 'V2(zaf)' National Fund Volatility Rating best reflects the fund's overall market risk profile.
The fund has suffered a pattern of heavy month-end redemptions followed by subscriptions at the start of the next month. The fund has serviced all of these redemptions through high natural liquidity (32% overnight) and thanks to its investments in breakable (notice) bank deposits, other liquid money market instruments and its use of reverse repo, which can temporarily help to boost liquidity. The majority of the portfolio is liquid (Fitch estimates that 65% of the portfolio matures in three months as of February 2014), which facilitates secondary security disposals if necessary. The fund continues to diversify its investor base, as evidenced by declining top investor and top-five investor concentrations.
In Fitch's opinion, the fund is concentrated, with a top three issuer exposure consistently in excess of 50% of portfolio holdings. In line with its applicable rating criteria, Fitch typically adjusts the WARF-implied Fund Credit Rating of funds it deems concentrated by one or more notches. Without concentration risk this fund could achieve a 'AAA(zaf)' National Fund Credit Rating.
The fund's concentrated holdings reflects 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 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.
The fund's objective is to obtain as high a level of current income as is consistent with capital preservation and liquidity. It aims to achieve this through investing in a diversified portfolio of short-term debt instruments and from time to time in participatory interests in collective investment schemes (money market funds), which themselves primarily invest in similar debt instruments.
Structurally, the fund is a debenture issuing fixed income portfolio, regulated under the Commercial Paper Exemption Notice 2172 as issued by the Registrar of Banks in 1994 in terms of the Banks Act of 1990. It falls outside the Collective Investment Schemes Control Act of 2012. The debentures have an initial maturity of six years and can be redeemed by debenture holders daily, with a maximum T+2 settlement. The debentures rank pari passu among themselves and a negative pledge exists over the issuer preventing it from engaging in any other activities while any debentures remain outstanding. Economically, Fitch considers Southchester directly comparable with a mutual fund.
The fund had total assets under management (AUM) of ZAR4.0bn as of end-February 2014, although its assets have fluctuated between approximately ZAR1.4bn (in June 2013) and the current amount over the past year.
Southchester is an independent asset manager founded towards the end of 2013. It is licenced by South Africa's Financial Services Board with Financial Service Provider (FSP) number 44868. The fund was previously managed by the same team under Peregrine Fund Platform (Proprietary) Limited's asset management licence.
Southchester continues to insource record keeping, valuation and reporting services from Peregrine under a service level agreement (SLA). It also insources independent compliance monitoring services and credit research from third-party providers, also under SLAs. The fund managers are Andra Greyling and Gregg Bayly, who have 26 years and 18 years treasury and investment management experience, respectively. The fund management team is unchanged between Peregrine and Southchester. Additional oversight is provided by Societe Generale Securities Services (Proprietary) Limited (a division of Societe Generale ; A/Negative/F1) as custodian and trustee.
To maintain bond fund ratings, Southchester and Societe Generale provide Fitch with portfolio information, including details of the portfolio's holdings and credit quality. Fitch closely monitors the credit composition of the portfolio, the credit counterparties used by the manager and the overall market risk profile of the investments.
The ratings assigned to this fund may be sensitive to material changes in the credit quality or market risk profile of the fund. A material adverse deviation from Fitch's guidelines for any key rating driver could cause ratings to be downgraded. Specifically, Fitch would expect to downgrade the National Fund Credit Rating in the event of deteriorating credit quality such that the fund's weighted average rating factor exceeds 0.40, combined with a similar or increased level of potential concentration risk. Fitch would expect to review the fund's National Fund Credit Rating were it to include any securities rated lower than the 'A(zaf)' rating category. Given the relatively short maturity profile of the fund and the conservatism already built in to the National Fund Volatility Rating, the rating is expected to be stable. However, should interest rates or market volatility in South Africa structurally change, or the maturity profile of the fund be materially extended, then Fitch would expect to downgrade the National Fund Volatility Rating.
For additional information about Fitch rating criteria applicable to bond funds, please review the criteria referenced below.