Johannesburg, 10 October 2016 — Global Credit Ratings has affirmed Sanlam Alternative Income Fund’s 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 Sanlam Alternative Income Fund (“SAIF”, “the fund”), key features of which are summarised below, based on the following key criteria:
|Fund currency||South African Rand|
|Fund data review date||31 July 2016|
|Assets under management (“AUM”)||R8.60bn|
|Net asset value (“NAV”)||Targeted constant price of R1.00|
|Fund benchmark||Average after tax yield (individual tax) on the SIM# Money Market Fund|
# Sanlam Investment Management (Pty) Ltd.
Fund profile: SAIF has a conservative fixed income mandate, executed in favour of its corporate and high net worth retail clients. The fund complies with regulatory limits, investment policy, and the trust deeds.
Asset manager profile: Ora Fund Managers (Pty) Ltd and Sanlam Structured Solutions, a division of SIM within the Sanlam Investment cluster are jointly mandated to perform investment management functions, while Sanlam Collective Investments (RF) (Pty) Ltd is the fund manager. Based on the managers’ track records, they possess the competence, capability and capacity to manage the fund. High quality of management practices, compliance and risk monitoring aim to meet performance objectives within mandate constraints and targeted constant NAV requirement. Furthermore, the fund’s marketing, risk management, compliance and administration follow market best practice.
Investment performance: The fund’s yield has exceeded its benchmark since inception. That being said, SAIF’s outperformance of its benchmark has declined in more recent periods due to changes in tax laws affecting the taxable nature of preference share distributions (which has affected after tax returns). Average AUM have risen, while being constrained by availability of investments. Investor flows may be volatile (due to a concentrated investor base) but the fund has adequate strategies in place to simultaneously meet investment objectives and manage liquidity. Strategies include active investor engagement, conservative liquidity management, and generous liquid asset buffers (with minimum long-term ratings of at least ‘A-(ZA)’ or equivalent).
Portfolio quality and market risk: GCR has analysed credit/concentration risk in SAIF’s portfolio, and its maturity profile, while considering whether additional sources of market risk impact the fund. SAIF invests in instruments of rated entities (or guaranteed by such entities), and its weighted average credit rating (“WACR”) remained stable at ‘AA-(ZA)’. GCR considers the fund’s WACR stability and underlying score, tenor and duration limits, concentration, and structural risks, in determining whether the WACR requires adjustment when according the overall fund rating.
Key fund risks: High counterparty credit and investor concentrations, and asset/ liability duration mismatches are the fund’s biggest risks. 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). SAIF manages this by investing in the highest quality counterparties available, within mandate limits. Investor concentration and duration mismatch risks are mitigated by the fund’s conservative liquidity management process.
An increase in the WACR of the portfolio, accompanied by stability or improvement in concentration risks, could enhance the rating. Mandate breaches, and/or deterioration in credit, liquidity or concentration risks, could negatively affect the rating.
* Fund ratings 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 (December 2015): AA-(ZA)(f)|
|Primary Analyst||Committee Chairperson|
|Kuzivakwashe Murigo||Omega Collocott|
|Credit Analyst||Sector Head: Financial Institution Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Funds and Asset Managers, updated March 2016
SAIF rating report (2015)
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.
Sanlam Structured Solutions (a division of Sanlam Investment Management (Pty) Ltd), and Ora Fund Managers (Pty) Ltd 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 Sanlam Structured Solutions and Ora Fund Managers (Pty) Ltd with no contestation of the rating.
The information received from Sanlam Structured Solutions, Ora Fund Managers (Pty) Ltd and other reliable third parties to accord the fund rating included:
- A breakdown of the fund investment portfolio, including information on investments (terms, conditions, 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 SAIF, SIM, and Sanlam Limited at 31 December 2015;
- Corporate governance and enterprise risk framework; and
- Industry comparative data and regulatory framework.
The ratings above were solicited by, or on behalf of, Sanlam Collective Investments (RF) (Pty) Ltd, 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.|
|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.|
|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.|
|Guarantee||An undertaking in writing by one person (the guarantor) given to another, usually a bank (the creditor) to be answerable for the debt of a third person (the debtor) to the creditor, upon default of the debtor.|
|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.|
|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.|
|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.|
|Preference Share||Preference or preferred shares entitle a holder to a first claim on any dividend paid by the company before payment is made on ordinary shares. Such dividends are normally linked to an interest rate and not determined by company profits. Preference shares are normally repayable at par value in the event of liquidation. They do not usually carry voting or pre-emptive rights. Preference shares can be redeemable or perpetual.|
|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.|
|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.|
|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.|
For a detailed glossary of terms utilised in this announcement please click here
GCR affirms Sanlam Alternative Income Fund’s fund rating* of AA-(ZA)(f); Outlook Stable