Johannesburg, 23 September 2020 – GCR Ratings has assigned an initial national scale fund rating of AA-(ZA)(f) on Investec Specialist Investments BCI Enhanced Income Fund, with the outlook accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Investec Specialist Investments BCI Enhanced Income Fund||Fund Rating||National||AA-(ZA)(f)||Stable Outlook|
|Fund inception date||15 November 2018|
|Fund currency||South African Rand|
|Fund data review date||31 August 2020|
|Assets under management (“AUM”)||R1.3bn|
|Net asset value (“NAV”)||Variable NAV|
|Fund benchmark||55% of SteFI Call Deposit Index|
GCR Ratings (“GCR”) has accorded the above initial national scale fund rating on Investec Specialist Investments BCI Enhanced Income Fund (“IBEIFA”, “the fund”), key features of which are summarised below.
Fund profile: The Investec Specialist Investments BCI Enhanced Income Fund is a conservative risk profile portfolio with the objective to earn income largely in the form of dividends, due to domestic tax advantages, whilst preserving capital and maintaining liquidity. The fund is suitable for short to medium term investment horizons, typically 6 to 18 months or longer. IBEIFA features T+2 liquidity period.
In determining a fund rating, GCR qualitatively and quantitatively assesses the fund’s credit risk, weighted average maturity and interest rate risk, management quality assessment and liquidity risk. The fund rating was based on the following key criteria:
Credit Quality Assessment: IBEIFA’s unadjusted risk score taken from a weighted credit average of the portfolio was 15.50. Investec Specialist Investments BCI Enhanced Income Fund is unlike a typical income fund that seeks return from interest bearing fixed income instruments, rather it invests mainly in cumulative redeemable preference shares and protected equity. Effectively, the fund hedges interest rate risks, and market risk of the equity positions with equity REPOs, leaving exposure dividend risk and performance risk of the hedge counterparty (mainly Investec Bank Limited; IBL). However, the hedging mechanisms are also fairly standardized and can therefore be traded with other counterparties should the need arise. All assets are supported by collateral arrangements and monitored daily such that the relevant credit risk is actual mark-to-market daily and therefore the anticipated downside impact is small.
Despite 19% of total invested assets having some counterparty risk with IBL, we did not make a negative adjustment for counterparty concentration risk as we believe it is mitigated by the related party and reputational linkage between the fund and the main counterparty, the good diversification and quality of the underlying securities, the collateral cover and the mark-to-market feature on these instruments.
Weighted Average Maturity (“WAM”) and Interest Risk: The fund’s maturity profile was a slight negative to the fund rating. Importantly, despite the fund’s investment strategy which includes investment in equity, the fund does not hold perpetual instruments. The calculation of weighted average maturity was based on the maturity date of the preference shares and the repo contracts on equity. The calculated WAM for the fund was c.3.5 years which warranted a -1 adjustment to the initial risk score. However, the -1 adjustment was balanced by the fact that the fund does not onboard duration risk (+0.5 adjustment).
Whilst coupon/dividend risk could be a significant risk to the fund due to the discretionary nature of dividends. This risk is managed by largely by limiting exposure to the top counters on the Johannesburg Stock Exchange, the tradability of the underlying security, the use of equity REPOs to limit capital losses, and the cumulative feature in preference shares. The resultant adjustment to the initial unadjusted risk score of the fund was -0.5.
Management Assessment: In March 2020, Investec Asset Management (“IAM”) was unbundled from Investec Group to be separately listed as Ninety One Limited (“Ninety One”) on Johannesburg Stock Exchange and Ninety One Plc on London Stock Exchange. Shareholders and management considered the move as strategic to unlock value from the group and enhancing focus to each company’s core business. In the unbundling, Ninety One became a fully dedicated asset management firm and the remaining Investec entity became mostly the core banking enterprise. This particular fund however sits on the banking side. There is very little overlap on this fund’s mandate or administrative function with the asset management spin off. IBEIFA is managed by Investec Specialist Investments Fund Managers (Pty) Limited and its administrative functions are handled by Boutique Collective Investments (Pty) Ltd. Collectively from the two above mentioned entities and the Trustee (Standard Bank South Africa Limited), GCR believes there is sufficient staff and resources to manage the fund with requisite competence, capability and capacity which is supportive of the rating. The fund is fairly new with less than 2-year vintage. However, over the same period performance has been good, with returns in excess of the benchmark with very little volatility. Typically, GCR allows new funds a grace period of 3 years to demonstrate growth in Assets under Management (“AUM”) as in most cases performance track record is key for AUM growth. As at 31 August 2020, the fund had R1.3bn in AUM, albeit with c.40% being seed capital. We are confident of the fund’s prospects provided there remains consistency in performance and mandate.
Liquidity Assessment: Liquidity is neutral to the fund rating. High investor concentrations are reflective of the South African market and the fund’s vintage. Management highlighted their role in actively managing the investors liquidity needs in order to avoid fund flows that could possibly be disruptive to the fund’s mandate. The fund’s concentrated investor base leaves it susceptible to large and volatile fund (out)flows. Nevertheless, adequate liquidity management strategies are in place to manage liquidity including investor concentration monitoring, T+2 liquidity period, holding adequate levels of liquid assets (about 87% of the fund at date of review) and relationship management with the investors that gives anticipation of major cashflow events. The fund’s liquidity also benefits from its proximity to the bank by way of reputational linkage and operational integration.
In light of the ongoing global COVID-19 pandemic, GCR appreciates the volatile environment which may adversely affect funds, in reference to performance pressures and unusually high fund flows (more appropriately large drawdowns) which can pose liquidity challenges on the funds and the market generally. GCR will continue validate the above assessments with developments within the fund and the broader market.
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. Mandate change/breach, and/or deterioration in the fund’s WACR, liquidity and/or concentration risks could lower the rating.
|Primary analyst||Kudzanai Samanga||Financial Institutions Analyst|
|Johannesburg, ZA||KudzanaiS@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
|Criteria for Fund Ratings, July 2020|
|Criteria for the GCR Ratings Framework, May 2019|
Investec Specialist Investments BCI Enhanced Income Fund
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Fund rating||Initial/last rating||National||AA-(ZA)(f)||Stable||September 2020|
RISK SCORE SUMMARY
|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.
Investec Specialist Investments Fund Managers (Pty) 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 Investec Specialist Investments Fund Managers (Pty) Limited
The information received from Investec Specialist Investments Fund Managers (Pty) 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;
- 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, Investec Specialist Investments Fund Managers (Pty) Limited, and therefore, GCR has been compensated for the provision of the ratings.