April 4 - Fitch Ratings has affirmed the National Fund Credit Ratings and
National Fund Volatility Ratings of the following South African money market
funds (MMFs) managed by Investec Asset Management (IAM):
Investec Corporate Money Market Fund (ICMMF)
Fund Credit Rating affirmed at 'AA+(zaf)'; Fund Volatility Rating affirmed at
'V1(zaf)';
Investec Money Market Fund (IMMF)
Fund Credit Rating affirmed at 'AA+(zaf)'; Fund Volatility Rating affirmed at
'V1(zaf)';
KEY RATING DRIVERS:
The affirmations of the Fund Credit Ratings are driven by the funds' high and
stable credit quality, as reflected by the funds' weighted average rating
factors (WARFs) and rating distributions.
The affirmations of the Fund Volatility Ratings are driven by the funds' low
exposure to interest rate risk and spread risk, as reflected in their short
maturity profiles.
ASSET CREDIT QUALITY:
The weighted average credit quality of these funds is high, taking into
consideration the short maturities of invested assets and has remained
relatively stable over time. The funds primarily invest in issuers rated in the
'F1+(zaf)'/'AA(zaf)' rating category. Approximately 60% of the ICMMF and 70% of
IMMF were subject to a Negative Outlook as of March 2012, reflecting the
revision of the Outlook on South Africa's long-term foreign and local currency
Issuer Default Ratings to Negative in January 2012 and the resulting impact on
South African banks' rating outlooks.
CONCENTRATION:
In Fitch's opinion, these funds incur substantial concentration risk, with the
top three issuer exposures consistently in excess of 50% of portfolio holdings.
In line with its applicable rating criteria, Fitch typically adjusts the
WARF-implied Fund Credit Rating of funds it deems concentrated by one or more
notches. Without concentration risk these funds could achieve 'AAA(zaf)' Fund
Credit Ratings.
The concentrated holdings reflect the funds' investment mandates and the
structural characteristics of the South African market, with a limited supply of
treasury bills, and the five largest banks having a combined market share of
around 90%, according to Fitch's estimates. The IMMF may also invest in asset
backed commercial paper conduits. However, these conduits are generally fully
supported by the major South African banks and, as a result, provide limited
diversification.
Without a structural evolution of the South African market which results in a
more diverse, high quality and liquid issuance market, it is highly unlikely
that Fitch could rate any money market fund higher than 'AA+(zaf)' in South
Africa
PORTFOLIO SENSITIVITY TO MARKET RISK:
Both funds have low exposure to interest rate risk and spread risk, as reflected
by short maturity profiles, with the result that the market risk factors (i.e. a
risk-adjusted duration measure) for these funds are low, consistent with
'V1(zaf)' ratings. As per regulation, the funds' weighted average maturities are
capped at 90 days and no investment may have a maturity of greater than 365
days.
FUND PROFILES:
Both funds are regulated by South Africa's Financial Services Board under the
Collective Investment Schemes Control Act of 2002 (specifically Notice 1503 of
2005). Fitch notes that amendments to this legislation have been proposed and
are expected to be implemented in 2012. Fitch believes that the funds are well
positioned to comply with the proposed new regulatory framework.
The IMMF is also Regulation 28 compliant, making it an eligible investment for
South African pension schemes.
Both funds invest in fixed- and floating-rate money market instruments including
negotiable certificates of deposit, promissory notes and fixed deposits issued
primarily by the major South African and foreign banks with local operations.
As of end February 2012 the IMMF had ZAR21.7bn in assets under management (AUM)
and the ICMMF ZAR2.5bn.
THE ADVISOR:
Fitch considers IAM suitably qualified, competent and capable of managing these
funds. IAM is a part of the Investec Group (NR), which also includes Investec
Ltd ('BBB-'/Negative/'F3'). As of December 2011 IAM had ZAR711.6bn in AUM,
including ZAR224bn in fixed income (around 30% of AUM). The funds are co-managed
by Lisa MacLeod and Vivienne Taberer both of whom have deep experience and
tenure with IAM. The portfolio managers are part of IAM's global fixed income
investment team consisting of 37 investment professionals with average
experience of 14 years. Fitch views positively the rigour of IAM's credit
analysis and its structured investment process, notably the use of its
proprietary money market model.
RATING SENSITIVITY:
Funds in the 'AA(zaf)' rating category are considered to have very high
underlying credit quality. The fund's assets are expected to maintain a
weighted-average portfolio rating of 'AA(zaf)'.
Funds rated 'V1(zaf)' are considered to have low sensitivity to market risk. On
a relative basis, total returns of funds rated 'V1(zaf)' are expected to exhibit
high stability, performing consistently across a broad range of market
scenarios. The Fund Volatility Rating does not address the sensitivity of a bond
fund to extreme risks that may result from reduced liquidity in secondary
markets during certain periods of time.
Comparisons between different national fund rating scales or between an
individual national and international scale are inappropriate.
The ratings assigned to the funds may be sensitive to material changes in the
credit quality or market risk profile of the funds. A material adverse deviation
from Fitch criteria for any key rating driver could cause ratings to be
downgraded by Fitch. Specifically, Fitch would expect to downgrade the Fund
Credit Ratings in the event of sustained deterioration in credit quality,
largely tied to its credit opinion on the South African banking industry. Given
the short maturity profiles of these funds the Fund Volatility Ratings are
expected to be stable. However, should interest rates or market volatility in
South Africa structurally change then Fitch would expect to downgrade the Fund
Volatility Ratings.
RATING CRITERIA:
Fitch rates MMFs in South Africa under its global bond fund rating criteria.
This reflects the differences the agency perceives between South African MMFs
and other Fitch-rated MMFs under its international and national MMF rating
criteria (see below). Specifically, the high level of concentration in these
funds, a structural characteristic of the South African market, is inconsistent
with Fitch's view of the risk profile of a MMF. The agency also notes regulatory
differences between the US and European MMFs (subject to Rule 2a-7 in the US and
the ESMA guidelines for MMFs in Europe) and the regulatory regime in South
Africa, in spite of proposed changes to applicable regulation in South Africa.
For additional information about Fitch rating criteria applicable to bond funds,
please review the criteria referenced below, which can be found on Fitch's web
site at www.fitchratings.com.
Additional information is available at www.fitchratings.com.
The ratings above were solicited by, or on behalf of, the issuer, and therefore,
Fitch has been compensated for the provision of the ratings.
The sources of information used to assess this rating were the public domain and
IAM.
Applicable criteria and related research: 'Global Bond Fund Rating Criteria',
dated 16 August 2011,
'South African Money Market Funds - Analysis under Updated Criteria - Amended',
dated 17 August 2011, 'South Africa', dated 1 February 2012, 'Money Market Fund
Reform in South Africa', dated 29 February 2012, 'Global Money Market Fund
Rating Criteria', dated 29 March 2012, 'National Scale Money Market Fund Rating
Criteria', dated 15 March 2010 are available at www.fitchratings.com.
Note to Editors: Fitch's National ratings provide a relative measure of
creditworthiness for rated entities in countries with relatively low
international sovereign ratings and where there is demand for such ratings. The
best risk within a country is rated 'AAA' and other credits are rated only
relative to this risk. National ratings are designed for use mainly by local
investors in local markets and are signified by the addition of an identifier
for the country concerned, such as 'AAA(zaf)' for National ratings in South
Africa. Specific letter grades are not therefore internationally comparable.
National Fund Volatility ratings are an opinion of the relative sensitivity of
the total return, including market price, on a fund's shares to a broad array of
assumed interest rates, rate of mortgage prepayment, liquidity of the portfolio,
spreads, currency exchange rates, and other market conditions. Additional
information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
Global Bond Fund Rating Criteria
South African Money Market Funds - Analysis under Updated Criteria - Amended
Money Market Fund Reform in South Africa
Global Money Market Fund Rating Criteria
National Scale Money Market Fund Rating Criteria
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