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Fitch Ratings said yesterday it has maintained Capital Alliance Investment Grade Fund’s National Fund Credit Quality Rating of ‘Af(lka)’ and National Fund Market Risk Sensitivity Rating of ‘S1(lka)’ on Rating Watch Negative (RWN).
It said the RWN reflects continued deterioration in the credit profile of the fund’s investible universe. Fitch recently recalibrated the Sri Lankan national rating scale and downgraded 10 domestic banks and five domestic finance and leasing companies. Fitch aims to resolve the RWN in the next six months, depending on how the credit quality of the banks and non-bank financial institutions evolves.
The National Fund Credit Quality Rating considers 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 1.4 at end-February 2023. This was within the ‘Af(lka)’ rating range of 0.9-2.1. A fund’s WARF is a function of the credit ratings of the securities held in a fund’s portfolio and the remaining term to maturity, weighted by market value.
Fitch said it bases the WARF on Fitch ratings where available. Fitch assumes exposure that is not publicly rated by any globally recognised rating agency as rated at ‘CCC(lka)’ for the purpose of the WARF calculation. An estimated minimum rating provided by the relevant analytical team at Fitch is used if available.
The investment manager has adjusted the investment guidelines amid the challenging credit environment and has undertaken more conservative investment decisions to maintain the WARF within the current rating category.
Fitch said The National Fund Market Risk Sensitivity Rating reflects the fund’s low sensitivity to interest rate and spread risk. The fund’s weighted-average maturity and weighted-average life remain short, at around five months and 18 months, respectively. About 35% of the assets carry floating interest rates. The fund’s investment guidelines constrain the fund’s ability to significantly increase interest rate or spread duration. The market risk factor, Fitch’s proprietary measure of fund market risk, is within the ‘S1(lka)’ rating range of 0.0-2.0.
The fund is an open-end fixed-income fund that mainly invests in Sri Lankan banks and non-bank financial institutions. It seeks a high level of current income, targeting a competitive return that is consistent with liquidity and capital preservation. The fund offers daily dealing with T+3 settlement according to the fund’s memorandum, but in practice the fund endeavours to settle at T+1.
The fund was launched in 2013 and is domiciled in Sri Lanka. It 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 size was around Rs. 15 billion at end-February 2023.
Fitch regards Capital Alliance Investments Limited 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, (National Insurer Financial Strength: A(lka)/RWN).
The manager was the country’s second-largest investment manager, with a market share of about 28%, and total assets under management of Rs. 45 billion in unit trust funds as of end-February 2023.