Announcements Fund Rating Alerts

GCR affirms Old Mutual Institutional Short Term Interest Fund’s rating of AA+(ZA)(f); Outlook Stable.

Rating Action

Johannesburg, 12 February 2020 – GCR Ratings has affirmed the national scale fund rating[1] of AA+(ZA)(f) on Old Mutual Institutional Short Term Interest Fund; with the outlook accorded as Stable.

Rated Entity / Issue

Rating class

Rating scale

Rating

Outlook / Watch

Old Mutual Institutional Short Term Interest Fund

Fund Rating

National

AA+(ZA)(f)

Stable Outlook

Fund summary

       

Fund inception date

30 August 2018

Fund currency

South African Rand

Fund data review date

31 December 2019

Assets under management (“AUM”)

R1.9bn

Net asset value (“NAV”)

Market value (variable NAV)

Fund benchmark

Short Term Fixed Interest Composite Index (“STeFI”)

Rating Rationale

GCR Ratings (“GCR”) has affirmed the above fund rating on Old Mutual Institutional Short Term Interest Fund (“OMST01”, “the fund”), key features of which are summarised below.

In determining a fund rating, GCR qualitatively assesses the fund’s underlying asset quality, and performs an evaluation of management, the fund’s historical performance in terms of price/return volatility, and market and liquidity risks. The fund rating was based on the following key criteria:

Fund profile: The fund aims to deliver regular income in excess of returns from money market yields and corporate bank deposits, while prioritising capital preservation and maintaining a high level of liquidity. The portfolio aims to outperform money market yields while adhering to a weighted average modified duration limit of 180 days, and a maturity limit of three years on individual securities. These limits are longer dated than Money Market Fund regulatory limits of 90 days and 13 months on the weighted average modified duration and individual security maturity respectively, as well as a 120 day weighted average maturity limit for Money Market Funds. The fund’s mandate limits exposure to non-equity instruments issued by the top five South African banks, the South Africa Government, and/ or South African Government Guaranteed non-equity securities. The fund services institutional and corporate investors and features a one day liquidity offering, which results in liquidity risk. GCR notes this but is satisfied that the risk is adequately mitigated by the fund’s cash holding, the liquid nature of the securities, close relationships with investors resulting in a good understanding of their cashflow needs, as well as the proportion of securities with very short dated maturities.

Asset manager profile: Futuregrowth Asset Management (Pty) Limited 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 has a relatively short track record having being established in August 2018. The AUM has grown to R1.9bn from R197m in 12 November 2018, which represents significant growth but fell short of the fund’s target as a result of a very competitive operating environment. The fund’s returns have outperformed the benchmark since inception.

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. At the review date, the fund’s maturity profile and interest rate sensitivity as measured by the weighted average maturity and weighted average duration were 1 year and 100 days respectively, which GCR views to be in line with the fund’s profile and objective to outperform money market yields.

Key fund risks: Very high investor and counterparty concentration, and tenor based exposure, are the fund’s key risks. The fund’s investor concentration remains very high as a function of its short history and small size, while very high issuer concentration is a result of the systemic constraints in the South African market, further to the decision to invest only in instruments issued by South Africa’s top tier banks and the South African government, which is considered as conservative and is a positive from a credit perspective. The fund’s long maturity profile (weighted average maturity of 1 year and modified duration of 100 days) raises spread risk.

Rating Triggers

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.

Analytical Contacts

Primary analyst

Thandolwenkosi Mkwanazi

Financial Institutions Analyst

Johannesburg, ZA

ThandolwenkosiM@GCRratings.com

+27 11 784 1771

     

Secondary analyst

Kudzanai Samanga

Financial Institutions Associate

Johannesburg, ZA

KudzanaiS@GCRratings.com

+27 11 784 1771

     

Committee chair

Matthew Pirnie

Sector Head: Financial Institutions Ratings

Johannesburg, ZA

MatthewP@GCRratings.com

+27 11 784 1771

Related Criteria and Research

Global Master Criteria for Rating Funds and Asset Managers, updated March 2017

Old Mutual Institutional Short Term Interest Fund rating report, 2019.

Ratings History

Old Mutual Institutional Short Term Fund

Rating class

Review

Rating scale

Rating class

Outlook

Date

Fund rating

Initial/ Last

National

AA+(ZA)(f)

Stable

February 2019

Glossary

Asset

A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.

Asset Quality

Refers primarily to the credit quality of a bank’s earning assets, the bulk of which comprises its loan portfolio, but will also include its investment portfolio as well as off balance sheet items. Quality in this context means the degree to which the loans that the bank has extended are performing (ie, being paid back in accordance with their terms) and the likelihood that they will continue to perform.

Capital

The sum of money that is invested to generate proceeds.

Cash

Funds that can be readily spent or used to meet current obligations.

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.

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.

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.

Risk

The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.

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.

Yield

Percentage return on an investment or security, usually calculated at an annual rate.

Salient Points 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 a video call management meeting 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.

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;
  • Fund investment mandate;
  • Detail on historical fee structures, and expense ratios;
  • Detail on historical fund returns, fee structures, and expense ratios (where available);
  • Details regarding the fund management, investment management and administration activities of the fund;
  • Corporate governance and enterprise risk framework; and
  • Regulatory framework and data.

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.



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