Johannesburg, 15 July 2021 – GCR Ratings (“GCR”) has affirmed the national scale fund rating* of AA+(ZA)(f) on the Prescient Corporate Money Market Fund (‘PCMMF’, ‘the fund’); with the outlook accorded as Stable.
|Rated Entity||Rating class||Rating scale||Rating*||Outlook / Watch|
|Prescient Corporate Money Market Fund||Fund rating||National||AA+(ZA)(f)||Stable|
|*||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).|
|Fund inception date||26 November 2019|
|Fund currency||South African Rand|
|Assets under management (“AUM”)||R1.2bn|
|Fund benchmark||STeFI Call Deposit Index (“STeFI Call”)|
|Net asset value (“NAV”)||Targeted constant price of R1.00|
|Association for Savings and Investment South Africa (“ASISA”) classification||South Africa – Interest Bearing – Money Market|
Fund profile: PCMMF aims to provide regular stable income for investors while preserving capital. The fund invests in short term money market instruments issued by the four largest banks in South Africa, thus providing daily liquidity to investors. Nonetheless, the fund has flexibility to invest in other financial instruments such as treasury bills in changing economic or market conditions. PCMMF complies with CISCA BN90 limits and constraints. The fund’s allowed limit on individual instrument maturity is 13 months.
Weighted Average Credit Quality (‘WACQ’): The fund has tilted to higher quality assets in the first half of 2021, with increased allocation to South African treasury bills. As of 31 March 2021, treasury bills increased to over 50% of the fund, up from less than 15% one year prior. As a result, the weighted average credit quality increased to 17 from 16.5 at mid-year 2021. We expect this to continue but only if the yields on treasury bills continue to outperform that on bank NCDs and other placements. Therefore, despite the positive tilt we have maintained the WACQ at 16.5 as we believe this will be the longer-term breakdown of the portfolio. The fund’s credit concentration is high, albeit a neutral rating factor because credit concentration is a systematic issue affecting most short-term income funds in South Africa.
Maturity & Duration The fund’s mandate caps Weighted Average Duration (‘WAD’) and Weighted Average Maturity (‘WAM’) at 90 days and 120 days respectively and limits final maturity of any individual portfolio assets to 13 months. The fund did tilt to longer-term and higher duration assets in 2021, albeit with mandate limits. That said, maturity and duration remained firmly within limits and to levels still supportive of the rating. WAD averaged 66 days over the past 12 months whilst the fund’s WAM remained stable at around 106 days at the fund review date.
Management & Governance: PCMMF was launched on the 26th of November 2019 following its approval by the Financial Sector Conduct Authority (‘FSCA’). The fund had accumulated AUM of R1.2bn as at 31 March 2021 and its performance has outperformed the STEFI index since inception. Prescient Management Company (‘PMC’), PCMMF’s Manco, ensures that regulatory and operational conditions necessary for the fund to achieve its investment objectives are met. In this regard, PMC appointed Prescient Investment Management (‘PIM’) as the investment manager responsible for the full discretionary management of the fund’s investment portfolio, ongoing risk management and compliance of the fund. PIM has a 23-year track and its AUM sat at R100bn at June 2021. PMC outsources all administration services to Prescient Fund Services. Overall, we expect the fund to be managed under the currently strong management and control environment of PIM.
Liquidity: Liquidity of the portfolio is viewed to be sound, supported by investments in treasury bills and short-term money market instruments. Some investor concentrations remain, but they have moderated materially over the past year. Redemption risk is well managed by close contact with the investors and strong understanding of the seasonality and behaviour of cash flows.
The Stable outlook balances our expectation that the fund will ultimately revert to a WACQ dominated by the top tier banks and not concentrated in the sovereign. We expect AUM growth to continue, performance to be strong and liquidity to remain robust.
If the WACQ remains at higher levels and the mandate demonstrates more conservativism, we could raise the ratings. Conversely, a significant moderation in the quality of assets or reduction in the liquidity could bring down the ratings, however this is unexpected over the ratings horizon.
|Primary analyst||Simbarake Chimutanda||Financial Institutions Analyst|
|Johannesburg, ZA||SimbarakeC@GCRratings.com||+27 11 784 1771|
|Committee chair||Vinay Nagar||Senior Financial Institutions Analyst|
|Johannesburg, ZA||Vinay@GCRratings.com||+27 11 784 1771|
Related criteria and research
|Criteria for the GCR Ratings Framework, May 2019|
|GCR Rating Scales, Symbols & Definitions, May 2019|
|Criteria for Fund Ratings, July 2020|
|Rated Entity||Review||Rating class||Rating scale||Rating||Outlook/Watch||Date|
|Prescient Corporate Money Market Fund||Initial*||Fund rating||National||AA(ZA)(f)||Stable Outlook||December 2019|
|Last||Fund rating||National||AA+(ZA)(f)||Stable Outlook||October 2020|
*The fund was assigned an indicative rating of AA(ZA)(f)(IR) in September 2019.
Risk score summary
|Cash||Funds that can be readily spent or used to meet current obligations.|
|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.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Downgrade||The assignment of a lower credit rating to a company or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|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.|
|Fixed Deposit||Where funds are deposited in a savings account for a pre-determined period of time.|
|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. 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 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.|
|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.|
|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.|
|Tenor||The time from the value date until the expiry date of a financial instrument.|
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; 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.
The fund rating has been disclosed to Prescient Investment Management (Pty) Ltd. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
Prescient Investment Management (Pty) Ltd 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 information received from Prescient Investment Management (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;
- Details regarding the fund management, investment management and administration activities of the fund;
- Main, amendments and supplemental deeds;
- Financial Sector Conduct Authority approval letter; and
- Industry comparative data and regulatory framework.