OREANDA-NEWS. Fitch Ratings has affirmed the following two sub-funds of the UK-domiciled OEIC, Royal London Bond Funds ICVC, both managed by Royal London Asset Management Ltd (RLAM):

Royal London Cash Plus Fund: 'AAAf' / 'S1'

Royal London Enhanced Cash Plus Fund: 'AAf' /'S2'

The affirmation of the Fund Credit Quality Ratings is driven by the high and stable credit quality of the funds as measured by their weighted average rating factors (WARF), which are consistent with the ratings.

The affirmation of the Fund Market Risk Sensitivity Ratings is driven by the funds' low sensitivity to interest rate and spread risks, as reflected in the funds' maturity profiles.

KEY RATING DRIVERS

Weighted Average Credit Quality

The cash plus fund's weighted average credit quality is very high, as indicated by the fund's WARF, which was 0.14 at end-August 2016. The fund's investment guidelines allow a minimum credit quality of 'F1' or equivalent for cash instruments, UK government securities and supranational issuers with a minimum 'AA' rating, and corporate bonds with a minimum 'AA-' rating. The fund also invests in covered bonds, typically of at least 'AA' credit quality.

The enhanced cash plus fund's weighted average credit quality is high, as indicated by the fund's WARF, which was 0.3 at end-August 2016. This WARF indicates a borderline 'AAAf' Fund Credit Quality Rating; however, Fitch has chosen to affirm the fund at 'AAf' based on the results of its WARF stress testing, which indicate that any downgrades or extension of credit risk in the portfolio could push the WARF into the 'AAf' range. The fund only invests in investment-grade securities and may invest up to 20% of its assets in ABS, MBS, and covered bonds.

Portfolio Sensitivities to Market Risks

The cash plus fund has a very low exposure to interest rate and spread risks. The weighted-average maturity (WAM) to reset date (WAM, which measures interest rate sensitivity) of the fund was 112 days and its weighted average life (WAL) to final maturity date (which measures sensitivity to spread risk) was 312 days, resulting in a market risk factor well within the 'S1' Fund Market Risk Sensitivity Rating range as of end-August 2016. Interest rate risk is managed with a duration limited to three years, although duration has been stable at around 0.4 years over the past 12 months.

The enhanced cash plus fund has a low exposure to market risk factors such as interest rate and spread risks. The fund manages interest rate risk to a target duration band of one-to-two years with a limit of three years. Its WAM to reset date (a proxy for duration) was 200 days as of end-August 2016. The fund may be exposed to spread risk as there is no limit on weighted-average final maturity and given a maximum legal final maturity limit of 10 years for all securities, save for ABS and MBS. The fund had a WAL (a proxy for spread duration) of 424 days as of end-August 2016.

Potential exposure to longer-dated securities leads Fitch to assign a conservative 'S2' Fund Market Risk Sensitivity Rating, whereas the fund's market risk factor would indicate a 'S1' rating based on the end-August 2016 portfolio composition. Neither fund uses leverage or takes foreign currency exposures.

Fund Profiles

The sub-funds are domiciled in the UK, are regulated by the UK's Financial Conduct Authority and are UCITS-compliant. The cash plus fund's performance objective is to achieve +0.5% to +0.75% per annum gross of fees above seven-day LIBID over a rolling 12-month period. The enhanced cash plus fund's investment objective is to minimise risk to capital while providing income and capital growth in excess of money market rates. It has a similar investment approach to the cash plus fund but with the potential for higher yield and a corresponding increase in risk.

The cash plus fund's total assets stood at approximately GBP2bn and the enhanced cash plus fund's at GBP330m.

The Advisor

RLAM was established in 1988 and is part of the Royal London Group, a mutual society. Royal London is the UK's largest mutual life and pension company. RLAM managed a total of around GBP88bn in assets, of which around half were in fixed income as of end-March 2016.

RATING SENSITIVITIES

The ratings may be sensitive to material changes in the funds' credit quality or market risk profile. A material adverse deviation from Fitch's guidelines for any key rating driver could cause Fitch to downgrade the ratings. For example, if credit deterioration occurs such that the WARF increases beyond criteria levels for the ratings assigned, the ratings may be downgraded. Fitch's WARF stress testing shows that the ratings of both funds are robust at the current levels. The stress tests for the enhanced cash plus fund also show that despite the fund's base WARF indicating a 'AAAf' rating, the fund's credit quality profile is nonetheless more consistent with a fund in the 'AAf' rating range.

Potential downgrades to the Fund Market Risk Sensitivity Rating are limited in scope, given the funds' low sensitivity to interest rate and spread risks, and the funds' investment guidelines.