Johannesburg, 31 October 2017 — Global Credit Ratings has affirmed the national scale fund rating* accorded to Sanlam Alternative Income Fund 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’s (“SAIF”, “the fund”), key features of which are summarised below.
|Fund currency||South African Rand|
|Fund data review date||31 July 2017|
|Assets under management (“AUM”)||R8.02bn|
|Net asset value (“NAV”)||Targeted constant price of R1.00|
|Fund benchmark||Average after tax yield (individual tax) on the SIM Money Market Fund (“SMMF”)|
In determining a fund rating, GCR qualitatively assesses the fund’s management, and performs an evaluation of the fund portfolio’s historical performance in terms of price/return volatility, underlying asset quality, and market and liquidity risks. This fund rating was based on the following key criteria:
Fund profile: SAIF has a conservative fixed income mandate, executed in favour of its corporate and high net worth retail clients. The objective of the fund is to offer a liquid, dividend yielding investment which will substantially track the local short-term interest rate cycle.
Asset manager profile: Sanlam Structured Solutions (“SSS”), a division of Sanlam Investment Management (Pty) Ltd (“SIM”) within the Sanlam Investment cluster, together with Ora Fund Managers (Pty) Ltd (“Ora”) are 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. Very strong management practices, compliance and risk monitoring facilitate 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 return has exceeded its benchmark since inception. That being said, SAIF’s outperformance of its benchmark has reduced in more recent periods due to changes in tax laws (dividend withholding tax (“DWT”) replacing secondary tax on customers and subsequent increase in DWT rate) affecting the taxable nature of preference share distributions (which has affected after tax returns). Average AUM is on an upward trajectory, while being constrained by availability of investments. Investor flows are 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’s portfolio analysis considered credit/ concentration risk, tenor/duration (and limits), and other sources of market risk, in addition to SAIF’s stress-tested weighted average credit rating (“WACR”) of ‘AA-(ZA)’, in determining the 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 rating (December 2015)||Last rating (October 2016)|
|Fund rating: AA-(ZA)(f)||Fund rating: AA-(ZA)(f)|
|Rating outlook: Stable||Rating outlook: Stable|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Funds and Asset Managers, updated March 2017
SAIF rating reports (2015-16)
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 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 SAIF, SIM, and Sanlam Limited at 31 December 2016;
- Corporate governance and enterprise risk framework; and
- Industry comparative data and regulatory framework.
The rating above was 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.|
|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.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.|
|Institutional Investors||Financial institutions such as pension funds, asset managers and insurance companies, which invest large amounts in financial markets on behalf of their clients.|
|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.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|Interest Rate Risk||Interest rate risk in the banking book is the risk that earnings or economic value will decline as a result of changes in interest rates. The sources of interest rate risk in the banking book are repricing/mismatch, basis and yield curve risk.|
|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.|
|Overnight Rate||The interest rate at which money due to be returned the next day is lent by one bank to another.|
|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.|
|Repurchase Agreement||In a REPO, one party sells assets or securities to another and agrees to repurchase them later at a set price on a specified date.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Securities||Various instruments used in the capital market to raise funds.|
|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 glossary of terms please click here
GCR affirms Sanlam Alternative Income Fund’s rating of AA-(ZA)(f); Outlook Stable.