OREANDA-NEWS. Fitch Ratings has assigned the Insight Liquid ABS Fund a Fund Credit Quality Rating of 'AAA' and a Fund Volatility Rating of 'V2'. The fund is due to launch on 21 January 2015, and will be managed by Insight Investment Management Ltd (Insight). The rating of the fund is based on an assessment of its investment guidelines and the model portfolio provided by Insight.

The Fund Credit Quality Rating reflects our expectations of the portfolio's credit quality and rating distribution. The rating also recognises the investment advisor's capabilities and resources in managing asset-backed securities (ABS).

The Fund Volatility Rating reflects the fund's low sensitivity to interest rate risk, but also the potential for higher spread risk given the fund's expected weighted average life (WAL) profile.

KEY RATING DRIVERS

Asset Credit Quality
The fund's expected composition meets Fitch's criteria for a 'AAA' Fund Credit Quality Rating. The weighted average rating factor of the model portfolio is 0.24, well within the range for a 'AAA' Fund Credit Quality Rating.

The fund's model portfolio is concentrated in 'AAA' rated securities (84%). The fund's investment guidelines contain a minimum 'AA-' rating on individual securities, based on Insight's methodology for the fund, which takes the highest rating of the three major international credit rating agencies. The model portfolio is well diversified, across over 100 positions and over 60 issuers.

Portfolio Sensitivity to Market Risks
The fund is expected to have a fairly low exposure to interest rate risk given the investment in ABS securities (which are typically floating with a three-month reset). The model portfolio has an interest rate duration of 49 days. Investment guidelines limit duration to +1.5 years against the fund's benchmark, 3M GBP LIBOR.

The fund's investment guidelines allow for a maximum portfolio WAL of five years, with no limit on the WAL of individual ABS securities. The WAL of the model portfolio is two years. Fitch has calculated a market risk factor, which implies a 'V1' Fund Volatility Rating, based on the model portfolio provided. However, Fitch has decided to assign a 'V2' Fund Volatility Rating to account for the potential for greater spread risk and longer WAL profile compared with that of other 'V1'-rated funds. The possibility of extension risk has also been considered when assigning the 'V2' Fund Volatility Rating.

The fund will hedge underlying investments to GBP via forward contracts, with a +/- 0.25% of net asset value tolerance allowance. The fund will not utilise leverage.

Advisor
Insight was established in 2002, and is one of 13 specialist asset managers owned by Bank of New York Mellon (AA-/Stable/F1+). Insight managed GBP318.5bn of assets as of end-3Q14, and the secured finance/ABS team managed GBP5.8bn as of end-October 2014. Fitch considers Insight to be suitably qualified, competent, and capable of managing the fund.

Fund Profile
The fund will seek to achieve its investment objective through investment in a portfolio of ABS securities, and aims to outperform 3M GBP LIBOR by 0.5% per annum. The fund will invest across several ABS sectors, primarily prime RMBS, but also including autos, credit cards, buy-to-let, CMBS and CLOs. The focus will be on European ABS, primarily the UK and Dutch, although there will be small allocations expected to the US and Australia.

The fund will have daily dealing with a T+4 day settlement period. Potential liquidity risk within the fund relating to ABS is partially compensated by a structural balance to the Insight ILF GBP Liquidity Fund ('AAAmmf'), expected to be between 5% and 10% of fund assets. Furthermore, the prospectus allows redemptions to be halted at the discretion of the board if they exceed 10% on a given day. Nonetheless, fund liquidity will be somewhat reliant on the secondary ABS market, which may become limited during stressed market conditions.

When launched, the fund will be a sub-fund of the existing Ireland domiciled ICVC Insight Global Funds II plc, which currently contains 10 sub-funds, including an ABS-based fund launched in 2007, the Insight Libor Plus Fund. The fund has received regulatory approval from the Central Bank of Ireland and will be UCITS-compliant.

The fund is expected to launch with seed capital of around GBP500m of assets. If this is achieved, Fitch expects the fund to deploy investments within a fairly short time period to achieve a credit and market risk profile broadly consistent with that of the model portfolio provided.

RATING SENSITIVITIES

The ratings may be sensitive to material changes in the credit quality or market risk profiles of the fund. A material adverse deviation from Fitch's guidelines for any key rating driver could cause the ratings to be downgraded by Fitch. For additional information about Fitch's bond fund ratings guidelines, see the criteria referenced below.

Fitch will consider downgrading the Fund Credit Quality Rating if the fund's credit profile is materially lower than that expected over time, and will consider downgrading the Fund Volatility Rating if the fund's WAL profile and exposure to interest rate risk and/or spread risk is materially greater than expected over time.

To maintain the fund ratings, the fund's administrator, Northern Trust International Fund Administration Services, will provide Fitch with monthly information, including details of the portfolio's holdings, credit quality, and WAL profile, among other information. Fitch's rating criteria acknowledge that there will be a period of ramping up the fund, and Fitch will conduct a full review of the fund after six months in addition to its monthly surveillance.