OREANDA-NEWS. Fitch Ratings has placed Under Review the 'Strong' Fund Quality Rating of State Street Emerging Asia Equity Fund (SS EM Asia) and SSGA Emerging Markets Select Equity Fund (SS EM Select).

KEY RATING DRIVERS
The Under Review reflects the underperformance of the funds over the last three and five years compared with the benchmark and peers.

SS EM Asia returned 1.1% and 10.3% over the three and five years respectively to end-April 2016 (net of fees, P share class), underperforming its benchmark by 10.6pp and 8.5pp respectively. The fund returned -6.2%, which is 1.7pp below the benchmark, so far in 2016.

SS EM Select returned -10.6% and -3.5% over the three and five years respectively to end-April 2016 (net of fees, I share class), falling short of its benchmark by 10.6pp and 5.8pp respectively. The fund returned 0.3% to the end of April this year, which is 0.5pp below the benchmark.

Fitch expects to resolve the "Under Review" status of the funds in six months. During this period, the agency will closely monitor the funds' performance and potential developments relating to portfolio construction. This is to determine whether the recent underperformance reflects a temporary setback or a more structural deterioration of the investment processes' ability to navigate through the cycle and ultimately deliver on their return objectives relative to their benchmarks over the longer term.

Fund Presentation
SS EM Asia is a Luxembourg SICAV with EUR92m of assets at end-March 2016. It invests in equity stocks from the eight countries making up the MSCI Emerging Markets Asia Index.

SS EM Select is a Luxembourg SICAV with EUR73m of assets at end-March 2016. It invests in global emerging markets equities with a bias towards smaller, less liquid markets relative to market cap-weighted indices.

Both funds follow an active long-only approach, combining quantitative and fundamental inputs. Country allocation and bottom-up stock selection drive their investment strategies.

Investment Process
SSGA's quantitative models allow a consistent, systematic assessment of countries and a large number of companies to identify those that are attractively valued and with growth prospects. SS EM Select's investment strategy has historically resulted in a large underweight of larger countries like China and Korea compared with the benchmark. SSGA recently modified the country model applied in SS EM Select to reflect the scale of the Chinese market and increase the fund's exposure to China. SSGA increased the number of country clusters to six from four and classified China as a cluster of its own. China remains underweight in SS EM Select, but the gap has shrunk. SSGA's strong quantitative governance practices and resources support model developments and enhancements.

Resources
The lead portfolio managers of the two funds are experienced and benefit from long tenure at SSGA. They are supported by the broader active emerging markets equity team. The team recently merged with the developed active quantitative equity team to form a global active quantitative equity group. The head of the emerging market equity team left following the merger, but this did not materially affect the management of the two funds because of the team-oriented investment approach.

The funds benefit from SSGA's operational and risk control framework. The IT environment supports well-controlled, efficient workflows.

Track Record
SS EM Select has been underperforming the benchmark and peers over the last three years and returned -20.6% over the one year to end-April 2016, underperforming the benchmark by 0.9pp. The fund's investment strategy leads to large deviations in terms of country allocation relative to the index as it is overweight smaller, less liquid countries and underweight larger countries. Fitch recognises this strategy may, at times, lead to performance deviation relative to the index even though the fund maintains a beta close to one.

SS EM Asia was started in 1993. The fund has been underperforming the benchmark and peers over the last three years and returned -22.6% (net of fee, P share) over the one year to end-April 2016, while the index returned -21.1%.

Asset Manager
SSGA is the asset management arm of State Street Corporation (AA-/Stable/F1+). It is a global asset manager with USD2.3trn in assets under management at end-1Q16. Actively managed equity assets were USD32bn, of which USD5bn was in emerging markets.

RATING SENSITIVITIES
The ratings may be sensitive to material changes in the investment or operational processes, or in resources dedicated to the fund. A material adverse deviation from Fitch's guidelines for any key rating drivers could result in a downgrade of the ratings. For example, this may be manifested in significant structural deterioration in the funds' performance, an excessive risk deviation from objectives, or substantial turnover in the investment team. Key person risk is limited for these funds, but model risk exists.