Johannesburg, 19 December 2019 – GCR Ratings (‘GCR’) has affirmed the national scale fund rating* assigned to Sanlam Investment Management Enhanced Yield Fund (‘SIM’, ‘the fund’) at AA-(ZA)(f), key features of which are summarised below.
|Rated Entity||Rating class||Rating scale||Rating||Outlook / Watch|
|Sanlam Investment Management Enhanced Yield Fund||Fund||National||AA-(ZA)(f)||Stable Outlook|
|Fund currency||South African Rand|
|Fund data review date||31 July 2019|
|Assets under management (“AUM”)||R8.2bn|
|Net asset value (“NAV”)||Market value (variable NAV)|
The fund rating on SIM balances a relatively high risk mandate, good asset quality with better diversification, appropriate liquidity for high investor concentrations, good capital preservation, and its position within the wider Sanlam Group.
Portfolio quality: The portfolio’s weighted average credit rating (‘WACR’) of AA(ZA) is considered to be strong, although it is exposed to high asset concentrations however with some diversification to corporates, property funds and securitisations. This concentration is a common feature in most South African cash strategy funds because mandates typically limit the investment universe to top tier banks and government backed instruments, and the structure of South Africa’s banking sector is oligopolistic. Positively, the top tier banks in South Africa are typically of strong quality and well regulated.
Liquidity risk: Liquidity is a neutral ratings factor, balancing high investor concentrations and appropriate liquidity. Investor concentrations are high, with top 20 investors contributing about 80% of total portfolio investments as of 31 July 2019. However, top investors are dominated by SIM’s segregated mandates and the Sanlam Diversified Income Fund of Funds. Liquidity is adequate, supported by significant allocations to senior instruments issued by top tier banks and other highly rated corporates and securitisation vehicles. Top tier banks account for c.70% of portfolio assets, while securities backed by AAA(ZA) sub-sovereigns and securitisation make up another 10%. Furthermore, over 26% of the portfolio is in overnight assets placed both on call and money market funds (‘MMFs’).
Market risk and performance: SIM has a relatively high market risk mandate in comparison to MMFs, given that it allows longer maturity instruments and credits rated below BBB(ZA). Although this adds some diversification, we view this broad mandate negatively. At 31 July 2019, the weighted average maturity was over 200 days, compared to 120 days limit for MMFs. Good capital preservation supported by returns that exceed benchmark within duration constraints is a positive nonetheless.
Manager profile: We view the manager to possess the competence, capability and capacity to manage the fund based on skills and experience of portfolio managers. In addition, adequate compliance and risk management systems aim to meet performance objectives within mandate constraints, leveraging on the systems and capabilities of the Sanlam Group.
* 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).
The Stable Outlook factors no change in mandate and that the fund continues to invest accordingly.
The ratings may benefit from an increase in the WACR, reduction in concentrations, and/or strengthening liquidity buffer. A negative rating action would be taken if there is a decrease in WACR, deterioration in liquidity and/or changes to mandate which we view to be negative.
|Primary analyst||Simbarake Chimutanda||Financial Institutions Analyst|
|Johannesburg, ZA||SimbarakeC@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Sector head: Financial Institution Ratings|
|Johannesburg, ZA||MatthewP@GCRratings.com||+27 11 784 1771|
Related criteria and research
|Global Master Criteria for Rating Funds and Asset Managers, March 2018|
|Rated Entity||Review||Date||Rating class||Rating scale||Rating||Outlook / Watch|
|Sanlam Investment Management Enhanced Yield Fund||Initial||October 2016||Fund||National||AA-(ZA)(f)||Stable Outlook|
|Last||October 2018||Fund||National||AA-(ZA)(f)||Stable Outlook|
|Compound Annual Growth Rate (CAGR)||The year on year percentage growth rate of an investment over a given period of time. It is found by calculating:|
|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.|
|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 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.|
|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.|
|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.|
|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.|
|Rating Outlook||Indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|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.|
|Tenor||The time from the value date until the expiry date of a financial instrument.|
|Trustee||A person or firm that holds or administers property or assets for the benefit of a third party.|
|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; 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.
SIM 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 information received from SIM 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;
- Corporate governance and enterprise risk framework; and
- Industry comparative data and regulatory framework.