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Feb 11 - Fitch Ratings has assigned Absa Money Market Fund a 'AA+(zaf)' National Fund CreditRating and a 'V1(zaf)' National Fund Volatility Rating. The fund is managed by Absa Investments.
KEY RATING DRIVERS:
The 'AA+(zaf)' Fund Credit Rating is driven by the fund's high credit quality, as reflected by its weighted average rating factor (WARF) and rating distribution. Consistent with the agency's rating criteria the Fund Credit Rating factors in a one notch downward adjustment to take account of the fund's concentrated counterparty risk. The adjustment reflects the structural characteristics of the South African market, the high credit quality of the issuers represented in the portfolio and the short asset maturities.
The 'V1(zaf)' Fund Volatility Ratings is driven by the fund's low exposure to interest rate risk and spread risk, as reflected in its short maturity profile.
ASSET CREDIT QUALITY:
The fund's weighted average credit quality is high as indicated by the fund's low WARF, which also reflects the short maturities of the fund's assets. Fitch's review of historic portfolio holdings indicates that the fund has been stable over time, maintaining high credit quality. The fund primarily invests in issuers rated in the 'F1+(zaf)'/'AA(zaf)' rating category.
CONCENTRATION:
In Fitch's opinion, the fund is concentrated, like other South African money market funds rated by the agency, with the top three issuer exposures in excess of 50% of portfolio holdings. In line with its applicable rating criteria, Fitch typically adjusts down the WARF-implied Fund Credit Rating of funds it deems concentrated by one or more notches. Absent concentration risk, this fund could achieve a 'AAA(zaf)' Fund Credit Rating.
The fund's concentrated holdings reflects its investment mandate 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.
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:
The fund has low exposure to interest rate risk and spread risk, as reflected by its short maturity profile, with the result that the fund's market risk factor (i.e. a risk-adjusted duration measure) is also low, consistent with 'V1(zaf)' ratings. As per regulation, the fund's weighted average duration (i.e. factoring in next interest rate reset date) is capped at 90 days and its weighted average life (i.e. based on portfolio securities' final maturity dates) at 120 days and no investment may have a maturity of greater than 397 days.
FUND PROFILE:
The fund is regulated by South Africa's Financial Services Board under the Collective Investment Schemes Control Act of 2002 (specifically Notice 80 of 2012).
The fund invests 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-December 2012 the fund's total assets under management were approximately ZAR57.8bn. It was launched in May 1997 and as a result has one of the longest-track records of any money market fund in South Africa.
THE ADVISOR:
Fitch considers Absa Investments suitably qualified, competent and capable of managing the fund. Absa Investments is a subsidiary of Absa Group Limited ('A'/Stable/'F1', National 'AAA(zaf)'/Stable/'F1+(zaf)') which is majority owned by Barclays Bank PLC ('A'/Stable/'F1'). Absa Group Limited is the highest rated banking group in South Africa. The fund is co-managed by Juan Bekker and Rehana Rungasamy, who have, respectively 24 and nine years' experience and have been with Absa Investments since 2008. Fitch views positively the control environment at Absa Investments, which comprises a well-resourced operations team of 13 and industry using a suite of systems (Charles River, Barra Aegis, Statpro and HiPortfolio) which Fitch views as in-line consistent with international best practices.
As of end-December 2012 Absa Investments' total assets under management (AUM) were ZAR192bn, with the Absa Money Market fund representing 30% of the total. Absa Investments employed 315 staff as of December 2012.
RATING SENSITIVITY:
Funds in the 'AA(zaf)' rating category are considered to have very high underlying credit quality relative to other entities in the South African market. 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 fund's short maturity profile the Fund Volatility Rating is 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 Rating.
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 international money market funds (subject to Rule 2a-7 in the US and ESMA guidelines for MMFs in Europe) and the regulatory regime in South Africa, in spite of proposed changes to applicable regulation in South Africa. Specifically Fitch notes differences in required mark-to-market frequency and escalation procedures between South African and European and US money market funds, which are required to value more frequently and to pursue formalised processes in the event that a funds mark-to-market net asset value deviates from its book NAV.
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.
Link to Fitch Ratings' Report: Absa Money Market Fund
