Fitch Ratings said yesterday it has assigned Capital Alliance Investment Grade Fund a National Fund Credit Quality Rating of ‘Af(lka)’ and a National Fund Market Risk Sensitivity Rating of ‘S1(lka)’. The fund is managed by Capital Alliance Investments Ltd.
The ‘Af(lka)’ National Fund Credit Quality Rating is driven by the high underlying credit quality of the fund’s invested portfolio, as measured on the Sri Lankan national scale, also taking into consideration the fund’s investment guidelines.
The ‘S1(lka)’ National Fund Market Risk Sensitivity Rating is driven by the fund’s low sensitivity to interest rate and spread risk.
The ‘Af(lka)’ National Fund Credit Quality Rating considers both the fund’s actual and prospective credit quality. The fund’s weighted-average rating factor (WARF), Fitch’s proprietary measure of fund credit risk, was 0.95 as of end-February 2021. This fell within the ‘AAf(lka) rating range of 0.3-1.0, although the fund’s WARF varied over the six months to end-February between the ‘AAf(lka)’ and ‘Af(lka)’ ranges. The fund’s investment guidelines allow it both to extend duration from current levels and increase exposure to lower-rated, albeit still investment grade issuers. Therefore, Fitch has chosen to assign a rating of ‘Af(lka)’ to reflect the fund’s through-the-cycle credit profile.
A fund’s WARF is a function of the credit ratings of the securities held in a fund’s portfolio and their remaining term to maturity, weighted by market value. Fitch bases the WARF on Fitch ratings where available but can consider other ratings where appropriate.
The National Fund Market Risk Sensitivity rating is driven by the fund’s low sensitivity to interest-rate and spread risk. The fund’s Market Risk Factor (MRF) was 0.93 as of end-February, which was well within the ‘S1(lka)’ rating range of 0.0-2.0. The MRF was consistently within this range for the six months ending February and the fund’s investment guidelines provided effective constraint on the ability of the fund to materially increase interest rate or spread duration.
The fund is an open-end fixed income fund that invests in Government securities and (national scale) investment-grade corporate debt. The fund seeks to obtain a high level of current income, targeting a competitive return consistent with liquidity and preservation of capital. The fund offers daily dealing with T+3 settlement.
The fund was launched in August 2013 and is domiciled in Sri Lanka (CCC). The fund is authorised and regulated by the Sri Lankan Securities and Exchanges Commission. The fund’s assets are segregated with the trustee, Deutsche Bank AG, Colombo Branch, a subsidiary of Deutsche Bank AG (BBB/Positive/F2). The fund’s total assets under management were Rs. 35 billion at end-March.
Fitch views Capital Alliance Investments as a suitably qualified, competent and capable investment manager for the fund. The manager was founded in 2011 and is majority owned by Capital Alliance Ltd. with a minority holding by Sri Lanka Insurance Corporation Ltd. (National Insurer Financial Strength: AA(lka)/Stable). The manager was the second-largest investment manager in Sri Lanka as of end-December 2020, with a market share of about 23%. Capital Alliance Investments had total assets under management of Rs. 73.8 billion as of end-March, of which Rs. 52.5 billion was in unit trust funds.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The National Fund Credit Quality Rating could be upgraded if the fund adjusted its investment guidelines to focus only on higher quality securities. The National Fund Market Risk Sensitivity Rating is already at the highest possible rating level and therefore cannot be upgraded.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The National Fund Credit Quality Rating could be downgraded if the portfolio suffered material negative rating migration or if the fund expanded its investment guidelines to allow it to invest in lower quality securities. The rating could also be sensitive to increased exposure to non-Fitch rated securities where Fitch may have more conservative credit views than other rating agencies. The National Fund Market Risk Sensitivity Rating could be downgraded if the fund’s investment guidelines changed to allow it to assume increased duration risk.