Johannesburg, 22 April 2016 — Global Credit Ratings has today accorded STANLIB Extra Income Fund a national scale fund rating* of AA-(ZA)(f); with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above fund rating to STANLIB Extra Income Fund (“STANLIB EIF”, “the fund”), key features of which are summarised below, based on the following key criteria:
|Fund currency||South African Rand|
|Fund data review date||29 February 2016|
|Assets under management (“AUM”)||R6.3bn|
|Net asset value (“NAV”)||Market value (variable NAV)|
|Fund benchmark||The Alexander Forbes Short Term Fixed Interest (“STeFI”) Composite Index|
Fund profile, objective and investment policy: STANLIB EIF has a fixed income mandate targeting a reasonable level of current income and stability for capital invested. The mandate is executed in favour of the fund’s investors, prioritising capital preservation, low risk and high liquidity. STANLIB EIF complies with regulatory limits, investment policy, and the trust deeds, and features 1 day liquidity and a 2 year weighted average modified duration limit.
Asset manager profile: STANLIB performs fund and investment management in house, outsourcing selected investment administration activities. Based on the manager’s track record, it possesses the competence, capability and capacity to manage the fund. High quality management practices, compliance and risk monitoring, and operational and systems environments aim to meet performance objectives within mandate constraints. Furthermore, the fund’s marketing, risk management, compliance and administration follow market best practice.
Investment performance: The fund’s 12 month rolling returns exceeded benchmark yields over the past 1, 3, 5 and 10 year horizons, and since inception. Volatility over 1, 3 and 5 year time horizons is assessed as low. AUM have been somewhat variable and broadly declining in the past 3 years, partly due to the transfer of the fund’s African Bank Limited (“ABL”) debt to a ‘retention fund’ at the time of it being placed in curatorship. The fund has adequate strategies in place to simultaneously meet investment objectives and manage liquidity. Strategies include investor concentration limits, 1 day liquidity, and maintaining at least 15% of the portfolio in liquid assets (with minimum required long-term ratings of ‘A(ZA)’, or equivalent).
Portfolio quality and market risk: GCR has analysed the portfolio in terms of credit/concentration risk, tenor/duration (relative to limits), and NAV volatility (low) while considering additional sources of market risk. The fund’s weighted average credit rating (“WACR”) – the initial credit risk filter calculation – is ‘AA(ZA)’, declining to ‘AA-(ZA)’ when moderate stresses are applied. GCR considers the fund’s WACR underlying score/stability, tenor and duration limits, fund volatility, concentration and structural risks in determining whether the WACR requires adjustment, when according the overall fund rating.
Key fund risks: Moderately high counterparty credit and high investor concentrations, and the fund’s instrument profile (weighted average maturity of 1.7 years), vs. 1 day liquidity offered, are STANLIB EIF’s key risks. The portfolio modified duration is well inside the 2 year limit, typically 40-50 days. Credit concentration is a systemic issue in South Africa, affecting most or all variable rate, money-market type fixed income funds (due to the high proportion of investments in financial institutions). The fund manages this by adding selected instruments of corporates, state owned entities (“SOEs”) and securitisations to the portfolio, within Regulation 28 limits, while maintaining high credit quality.
An increase in the WACR of the portfolio, accompanied by a sustained reduction in tenor and stability or improvement in concentration risks, could enhance the rating. Mandate breaches, and/or deterioration in credit, liquidity and/or concentration risks, could negatively affect the rating.
* Fund ratings (denoted by a ‘f’ modifier) provide an opinion regarding the fund’s ability to preserve principal value under varying market conditions, with reference to the relevant asset management environment (refer to published rating scales and definitions).
|NATIONAL SCALE RATINGS HISTORY|
|Initial/last rating: First time/new rating|
|Outlook: First time/new rating|
|Primary Analyst||Secondary Analyst|
|Omega Collocott||Jennifer Mwerenga|
|Sector Head: Financial Institution Ratings||Senior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Funds and Asset Managers, updated March 2016
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable fund rating document.
STANLIB Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The fund rating has been disclosed to STANLIB Limited with no contestation of the rating.
The information received from STANLIB Limited and other reliable third parties to accord the fund rating included:
- A breakdown of the fund investment portfolio, including information on the instruments, their terms, conditions and credit quality;
- A breakdown of the fund investor portfolio, including fund flows and withdrawal terms;
- Detail on historical fund returns, fee structures, and expense ratios;
- Details regarding the fund management, investment management and administration activities of the fund;
- Financial statements for Liberty Group Limited (at 31 December 2015) and STANLIB Limited (at 31 December 2014);
- Corporate governance and enterprise risk framework; and
- Industry comparative data and regulatory framework.
The rating above was solicited by, or on behalf of, STANLIB Limited, and therefore, GCR has been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Capital||The sum of money that is invested to generate proceeds.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and/or interest when due.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|Liquid Assets||Assets, generally of a short term, that can be converted into cash.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Long-Term||Not current; ordinarily more than one year.|
|Long-Term Rating||Reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|Net Asset Value||The value of an entity’s assets less its liabilities. It is a reflection of the company’s underlying value and is usually quoted on a per share basis.|
|Portfolio||A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Securitisation||A process of repackaging portfolios of cash-flow producing financial instruments into securities for sale to third parties.|
|Short-Term||Current; ordinarily less than one year.|
|Short-Term Rating||An opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
|Tenor||The time from the value date until the expiry date of a financial instrument.|
For a detailed glossary of terms utilised in this announcement please click here
GCR accords a fund rating* of AA-(ZA)(f) to STANLIB Extra Income Fund; Outlook Stable.