Johannesburg, 13 February 2019 — Global Credit Ratings has accorded Old Mutual Institutional Short Term Interest Fund an initial 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 Old Mutual Institutional Short Term Interest Fund (“OMST01”, “the fund”), key features of which are summarised below:
|Fund currency||South African Rand|
|Fund data review date||12 November 2018|
|Assets under management (“AUM”)||R197m|
|Net asset value (“NAV”)||Market value (variable NAV)|
|Fund benchmark||Short Term Fixed Interest Composite Index (“STeFI”)|
The fund rating of the Old Mutual Institutional Short Term Fund is supported by portfolio weighted average credit quality, and a good fund manager track record. The outlook is Stable, reflecting our opinion that the investment manager will ensure the credit quality and liquidity remains at robust levels.
Fund profile: The fixed income mandate of the fund aims to deliver total returns in excess of cash, maximising the level of income achieved within restrictions set out in the investment policy with primacy given to capital stability. The fund aims to service only institutional investors. Regulatory, mandate, and investment policy compliance are evident. OMST01 features one day liquidity and a weighted average modified duration limit of 180 days.
Asset manager profile: Futuregrowth Asset Management (Pty) Limited (“FAM”; “the IM”) performs the investment management functions in house, outsourcing selected administration activities. Based on track record, the manager possesses the competence, capability and capacity to manage the fund. High quality management practices, compliance and risk monitoring, as well as operational and systems environments aim to meet performance objectives within mandate constraints. Furthermore, the fund’s marketing, risk management, compliance, administration and performance reporting follows best practice.
Investment performance: The fund was established on the 31st of August 2018, since then, AUM grew to R197m at 12 November 2018. The current AUM is attributable to a single client, but management believe they have sufficient mechanisms to grow AUM and project a R10bn book in 6 months. The growth in the book size will be complimented by a running cash reserve of c.10% to meet client needs.
Portfolio quality and market risk: GCR’s portfolio analysis considered credit/ concentration risk, tenor/duration (and limits), and additional sources of market risk, in addition to OMST01’s stress-tested weighted average credit rating (“WACR”) of ‘AA+(ZA)’, in determining the fund rating. The fund’s short track record and long portfolio tenor result in an initial ‘moderately low’ market risk assessment. The fund’s liquidity on valuation date was very low bearing in mind the low liquidity needs at this point. Management highlighted that measures are in place to support liquidity as AUM grow for example, among others, at least 25% of the fund invested in instruments with a maturity of three months or less.
Key fund risks: Very high investor and counterparty concentration, and tenor based exposure, are OMST01’s key risks. The fund’s very high investor concentration is a function of its short history and small size, while very high issuer concentration is due to the IM’s decision to primarily invest in instruments issued by South Africa’s top tier banks and the South African government. OMST01’s long maturity profile (weighted average maturity of 1.2 years and modified duration of 112.1) raises spread risk.
An increase in the WACR of the portfolio, accompanied by a reduction in tenor and improvement in concentration risks and a track record of performance could positively impact the rating. Mandate change/breach, increase in the volatility of the fund, and/or deterioration in the fund’s WACR could lower the rating.
* Fund ratings (denoted by an ‘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 GCR’s published rating scales and definitions.
NATIONAL SCALE RATINGS HISTORY
|Initial/last rating (February 2019)|
|Fund rating: AA+(ZA)(f)|
|Primary Analyst||Secondary Analyst|
|Vimbai Muhwati||Kudzanai Samanga|
|Credit Analyst||Junior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Financial Institutions Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Funds and Asset Managers, updated March 2017
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; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Futuregrowth Asset Management Proprietary 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 Futuregrowth Asset Management Proprietary Limited and was amended following an appeal.
The information received from Futuregrowth Asset Management Proprietary 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;
- Amended investment mandate signed 7 February 2019;
- Detail on historical fee structures, and expense ratios;
- Details regarding the fund management, investment management and administration activities of the fund;
- Corporate governance and enterprise risk framework; and
- Industry regulatory framework.
The rating above was solicited by, or on behalf of, Futuregrowth Asset Management Proprietary 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.|
|Corporate Governance||Refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.|
|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 Rating Agency||An entity that provides credit rating services.|
|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.|
|Financial Statements||Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.|
|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.|
|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.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|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.|
|National Scale Rating||Provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|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.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|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.|
|Securities||Various instruments used in the capital market to raise funds.|
|Security||An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default.|
|Short-Term||Current; ordinarily less than one year.|
|Tenor||The time from the value date until the expiry date of a financial instrument.|
For a detailed glossary of terms please click here
GCR accords a fund rating* of AA+(ZA)(f) to Old Mutual Institutional Short Term Interest Fund; Outlook Stable