Johannesburg, 10 April 2020 – GCR Ratings has affirmed the national scale fund rating of AA-(ZA)(f) on Stanlib Extra Income Fund; with the outlook accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Stanlib Extra Income Fund||Fund Rating||National||AA-(ZA)(f)||Stable Outlook|
|Fund inception date||28 November 1978 (mandate change, 2012)|
|Fund currency||South African Rand|
|Fund data review date||28 February 2020|
|Assets under management (“AUM”)||R12.8bn|
|Net asset value (“NAV”)||Market value (variable NAV)|
|Fund benchmark||STeFI Composite Index|
GCR Ratings (“GCR”) has affirmed the above fund rating on Stanlib Extra Income Fund (“Stanlib EIF”, “the fund”), key features of which are summarised below. We have changed the outlook from positive to stable due to a lower weighted average credit rating score at the time of review and the heightened risk in the operating environment emanating from the COVID-19 pandemic.
In determining a fund rating, GCR qualitatively assesses the fund’s underlying asset quality, and performs an evaluation of management quality, 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 provide investors an opportunity to earn higher income than money market investments, while enjoying the stability associated with money market funds. Investments include a flexible mix of money market instruments, bonds, fixed deposits, listed debentures and other high yielding securities, subject to restrictions imposed by CISCA and Regulation 28 of the Pension Funds Act. The fund features 1-day liquidity (with exception of special circumstances) and a 2-year weighted average modified duration limit.
Asset manager profile: STANLIB performs fund and investment management in house. In our view, STANLIB EIF is managed within a strong fund management and control environment, as supported by the manager’s track record. The fund has consistently achieved its performance objectives within the constraints of its mandate while adhering to quality management practices. Overall, we believe that the fund’s marketing, risk management, compliance and administration’s assessment is supportive of the rating.
Investment performance: By and large, the fund has exceeded the benchmark over the 10 year review period, with little return volatility. Over the same period, Stanlib EIB’s assets under management have progressively increased. GCR believes the consistent growth in assets speaks to confidence in the fund and its management by the investors.
Portfolio quality and market risk: GCR’s portfolio analysis considered credit/ concentration risk, tenor/duration (and limits), NAV volatility (low), and additional sources of market risk, in addition to STANLIB EIF’s stress-tested weighted average credit rating of AA(ZA), in determining the fund rating. However, the fund’s comparatively flexible mandate together with the inclusion of long dated assets in the portfolio have yielded a moderate market risk assessment of AA-(ZA).
Key fund risks: Counterparty/investor concentrations, and tenor-based exposure are STANLIB EIF’s key risks. Over the portfolio modified duration has kept well inside the 2-year limit, typically 40-50 days. Credit concentration is a systemic issue in South Africa, affecting most or all variable rate, money-market type fixed income funds. The fund’s tenor is on the high end (FY20: 2.1years), introducing relatively higher spread risk. Positively, the fund has better than industry average credit diversification which it manages by adding selected instruments of corporates, state owned entities (“SOEs”) and securitisations to the portfolio, within Regulation 28 limits, while maintaining high credit quality.
In light of the ongoing global COVID-19 pandemic, GCR expect a more volatile operating for rated funds in South Africa. In particular, we expect unusually high fund flows (more appropriately large drawdowns) which could pose liquidity challenges on the funds and the market generally. Positively, we expect the funds to hold higher than usual liquidity. However, there could also be rapid negative migration in credit quality and the liquidity of invested assets. These factors could bring down the ratings of all rated peers, should the domestic stress increase.
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. Failure to hold adequate levels of liquidity, mandate changes or breaches, increase in the volatility of the fund, and/or deterioration in the fund’s WACR could lower the rating.
|Primary analyst||Kudzanai Samanga||Analyst Financial Institutions|
|Johannesburg, ZA||KudzanaiS@GCRratings.com||+27 11 784 1771|
|Secondary analyst||Thandolwenkosi Mkwanazi||Analyst Financial Institutions|
|Johannesburg, ZA||ThandolwenkosiM@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of 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|
|Stanlib Extra Income Fund rating report, 2019.|
Stanlib Extra Income Fund
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Fund rating||Initial rating||National||AA-(ZA)(f)||Stable||April 2016|
|Last rating||National||AA-(ZA)(f)||Positive||April 2019|
|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.
Stanlib 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 Stanlib Limited.
The information received from Stanlib 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, Stanlib Limited, and therefore, GCR has been compensated for the provision of 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). ↑