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Fitch Affirms Two STANLIB Funds
March 28, 2014 / 4:47 PM / 4 years ago

Fitch Affirms Two STANLIB Funds

(The following statement was released by the rating agency) LONDON, March 28 (Fitch) Fitch Ratings has affirmed the National Fund Credit Ratings (NFCR) and National Fund Volatility Ratings (NFVR) of the following two funds managed by STANLIB Asset Management: STANLIB Corporate Money Market Fund (CMMF): 'AA+(zaf)'/ 'V1(zaf)' STANLIB Extra Income Fund (EIF): 'AA-(zaf)'/'V2(zaf)' KEY RATING DRIVERS CMMF's NFCR is driven by its high and stable credit quality, as reflected by its weighted average rating factor (WARF) and rating distribution. The NFCR factors in a one-notch downward adjustment to reflect concentration risk in-line with Fitch rating criteria. Concentration risk is a structural feature of the South African market. EIF's NFCR is driven the fund's high credit quality and rating distribution. Unlike other similar funds rated by Fitch in South Africa to date, Fitch considers EIF diversified under its rating criteria definitions for concentration risk. The affirmation of the NFVRs is driven by the funds' stable market risk profiles. Both funds have very low exposure to interest rate risk, due to the short overall maturity profile of CMMF and the exposure to floating-rate instruments only in EIF. EIF has a longer maturity profile than CMMF thus incurring moderate spread risk, which results in its 'V2(zaf)' NFVR. Asset Credit Quality The weighted average credit quality of CMMF is high, taking into consideration the short maturities of the invested assets, and has remained fairly stable over time. The fund primarily invests in issuers rated 'F1+(zaf)'. No securities in the fund's portfolio were on Rating Watch Negative or had a Negative Outlook as of the February 2014 portfolio holdings. EIF's weighted average credit quality is high as indicated by its WARF, which Fitch has calculated in the lower end of the 'AA(zaf)' NFCR category range. The maturity dimension of the WARF calculation is primarily driven by Fitch's longer-term rating factors, as outlined in its rating criteria, which are applied to securities with a residual final maturity in excess of one year. The fund can invest in securities with an unlimited final maturity; in practice 80% of the February 2014 portfolio had a legal final maturity of five years or less. The fund concentrates its holdings in securities rated in the 'AA(zaf)' and 'A(zaf)' rating categories. Concentration In Fitch's opinion, CMMF 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 downwards the WARF-implied NFCR of funds it deems concentrated by one or more notches. Without concentration risk, CMMF would have achieved a 'AAA(zaf)' NFCR. The concentrated holdings reflect the fund's investment mandate, which limits it to banking issuers, 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. As EIF does not breach any of the tests for concentration risk set out in Fitch's rating criteria the agency therefore considers it diversified. Portfolio Sensitivity to Market Risk As CMMF is a constant net asset value (NAV) fund the NFVR is therefore driven by the market risk exposure of the underlying portfolio, which may not necessarily be reflected in the fund's NAV. The fund has low exposure to interest rate risk and spread risk, as reflected by a short maturity profile, with the result that the market risk factor (i.e. a risk-adjusted duration measure) for the fund 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 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 396 days. EIF has low exposure to interest rate risk due to its majority holding in floating-rate instruments, which typically reset quarterly. It is managed to a maximum weighted average duration (WAD, i.e. maturity based on next interest rate reset date) of two years, although in practice its WAD is typically around 90 days, reflecting the fact that it only invests in floating-rate instruments which typically reset at 90 days. On the other hand, it incurs moderate spread risk due to its ability to invest in securities with an unlimited final maturity. Fitch's calculation of the fund's Market Risk Factor (as outlined in its rating criteria), which incorporates both the fund's low sensitivity to interest rate risk and its moderate sensitivity to spread risk falls within the range consistent with a 'V2(zaf)' NFVR. Fund Profiles Both funds are regulated by South Africa's Financial Services Board under the Collective Investment Schemes Control Act of 2002 (specifically Notice 80 of 2012). EIF is also Regulation 28-compliant, making it an eligible investment for South African pension schemes. Regulation 28 caps maximum issuer exposure at 25% whereas the maximum issuer exposure permitted under CISCA is 30%. CMMF invests in fixed- and floating-rate money market instruments, including negotiable certificates of deposit, promissory notes and fixed deposits issued by major South African banks. The size of the fund (combined with other money market funds managed by STANLIB) allows the fund to negotiate preferential rates and structures with issuers. EIF invests in floating-rate instruments only. It also holds some asset-backed commercial paper and credit-linked notes (CLNs), including basket CLNs. It has limited exposure to corporate issuers. As of end-February 2014, the funds had ZAR29.5bn (CMMF) and ZAR6.2bn (EIF) in assets under management (AUM). The Advisor Fitch considers STANLIB suitably qualified, competent and capable of managing these funds. STANLIB is owned by Liberty, which was around 54% owned by the Standard Bank Group (BBB/Stable/F3) as of end-December 2013. STANLIB's AUM were ZAR542bn as of end-December 2013, including ZAR182bn in fixed interest. The funds are managed by Ansie van Rensburg (CMMF) and Mary Hartigan (EIF), both of whom have deep experience and tenure with STANLIB. The portfolio managers are part of STANLIB's fixed income investment team consisting of 14 investment professionals with average experience of 15 years. Fitch views positively the depth of analysis and frequency of review in STANLIB's credit process. RATING SENSITIVITY Funds in the 'AA(zaf)' NFCR category are considered to have very high underlying credit quality. The assets of the fund 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. Funds rated 'V2(zaf)' are considered to have low sensitivity to market risk. On a relative basis, total returns of funds rated 'V2(zaf)' are expected to exhibit relative 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 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 criteria for any key rating driver could cause ratings to be downgraded by Fitch. Specifically, Fitch would expect to downgrade the NFCRs in the event of sustained deterioration in credit quality. Given the funds' market risk profiles, the NFVRs are expected to be stable. However, should interest rates or market volatility in South Africa structurally change then Fitch would expect to downgrade the NFVRs. 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. 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 (subject to Rule 2a-7 in the US and ESMA guidelines for MMFs in Europe) and the regulatory regime in South Africa. 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 9 1 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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