Johannesburg, 12 December 2018 — Global Credit Ratings has affirmed Sanlam Investment Management Enhanced Yield Fund’s national scale fund rating* of AA-(ZA)(f); with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has affirmed the above fund rating to Sanlam Investment Management Enhanced Yield Fund (“SIM EYF”, “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 2018|
|Assets under management (“AUM”)||R5.6bn|
|Net asset value (“NAV”)||Market value (variable NAV)|
Fund rating factors: GCR qualitatively assessed the fund’s underlying asset quality, and performed an evaluation of management, the portfolio’s historical performance in terms of price/return volatility, and market and liquidity risks.
Fund profile: The fixed income mandate of SIM EYF aims to deliver total returns exceeding those offered by money market (“MM”) funds. The mandate prioritises capital preservation, attracting retail, corporate and institutional investors. The fund complies with regulatory limits, investment policy, and the trust deeds, and features three day liquidity and a two year weighted average duration (“WAD”) limit.
Portfolio quality and market risks: SIM EYF’s stress-tested weighted average credit rating (“WACR”) was ‘AA(ZA)’ at 31 July 2018. The fund’s relatively flexible mandate together with the inclusion of long dated assets in the portfolio have yielded a moderate market risk assessment. SIM EYF’s long maturity profile (weighted average maturity (“WAM”) of 4.3 years) raises spread risk. Portfolio credit concentration is assessed as high. GCR notes, credit concentration is a systemic issue in South Africa. The fund manages this by adding selected instruments of corporates, government and securitisations to the portfolio, within Regulation 28 limits, while maintaining high credit quality (although not mandated). The mandated duration limit matches the fund’s investment horizon, while actual WAD was within the mandated upper limit.
Investment performance: SIM EYF has largely met its performance objectives over the past 3 years and since inception. Volatility over 1, 3 and 5 year time horizons is assessed as moderate. AUM growth has been strong over the past 3 years, highlighting the appropriateness of the fund’s mandate and execution in meeting investor requirements. At 31 July 2018, the fund’s compound annual growth rate for AUM over the past 3 years was 33.3%, albeit the trend has been somewhat volatile. The fund’s investor base may be highly concentrated and somewhat volatile. However, SIM EYF fund has adequate strategies in place to simultaneously meet investment objectives and the fund’s liquidity needs.
Manager profile: SIM, within the Sanlam Investment cluster is mandated to perform investment management functions, while SCI is the fund manager. GCR assesses SIM EYF as being managed within a very strong fund management and control environment. 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.
Key fund risks: Counterparty/investor concentrations, and tenor-based exposure are SIM EYF’s key risks. The fund’s high investor concentration is a function of its top 10 investors/holdings being other SIM managed funds which utilise the fund as a strategic holding of MM assets.
An increase in the WACR of the portfolio, accompanied by a sustained reduction in WAM and a sustained track record of low volatility could enhance the rating. Furthermore, the rating may be positively impacted by a tighter mandated or improvement in concentration risks. A deterioration in the WACR of the portfolio, mandate breaches, and/or significant increase in the volatility of the fund 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 (November 2017)|
|Fund rating: AA-(ZA)(f)|
|Primary Analyst||Committee Chairperson|
|Vimbai Muhwati||Matthew Pirnie|
|Credit Analyst||Sector Head: Financial Institutions Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Funds and Asset Managers, updated March 2017
SIM EYF report 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.
Sanlam Investment Management (Proprietary) Limited participated in the rating process via face-to-face management meetings 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 Investment Management (Proprietary) Limited.
The information received from Sanlam Investment 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;
- 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;
- Financial statements for Sanlam Investment Management Enhanced Yield Fund, Sanlam Investment Management (Proprietary) Limited 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 Investment Management (Proprietary) Limited, and therefore, GCR has been compensated for the provision of the rating.
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.|
|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.|
|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.|
|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 please click here
GCR affirms Sanlam Investment Management Enhanced Yield Fund’s fund rating* of AA-(ZA)(f); Outlook Stable.