Fitch Affirms 3 SSGA Fundamental Equity Funds' 'Strong' Fund Quality Ratings
The affirmation of the 'Strong' rating reflects the disciplined investment process, the rigorous fundamental research driving stock selection and the well-resourced investment team, across all three funds. The performance of the three funds was weak in 2014, largely driven by their strong value bias.
KEY RATING DRIVERS
Fund Profiles
The funds are sub-funds of the State Street Global Advisors Luxembourg SICAV. The global fund was launched in December 2012, the Europe fund in May 2013 and the eurozone fund in August 2013. Assets under management (AUM) in each fund were (as of end-February 2015), respectively, EUR26.6m (Europe), EUR22.4m (eurozone) and EUR50m (global).
Investment Process
The investment process involves rigorous screening of the eligible investment universe based on value and quality metrics to identify companies for further research. Portfolio construction is equally rigorous based on an approximate equal weighting and strong sell discipline relative to other stocks recommended by the research team.
The proprietary stock research is of high quality, differentiated by its consistency of approach, notably in its common set of accounting assumptions and adjustments. Research outputs demonstrate a deep understanding of stocks covered and key performance drivers.
Resources
The investment team consists of 24 staff, based in Dublin. The research team of 19 analysts is highly experienced and benefits from a variety of complementary backgrounds. The funds' portfolio managers, Lance Graham (Europe), William Killeen (eurozone) and Brian Routledge (global), are highly experienced and ultimately responsible for the fund's performance.
SSGA's investment resources are extremely strong, including global trade execution teams (11 traders in EMEA), an investment risk team of 16 and a dedicated direct implementation (portfolio compliance monitoring) team based in Dublin.
Track Record
The performance of these funds - along with many other value funds - suffered in 2014, notably in 2H14. In 2014 the funds underperformed peers and their indices, which are broad-market based. In Fitch's view, a more relevant comparison is to value indices, which the funds also underperformed in 2014. Nonetheless, the funds have made a strong start to 2015, with the Europe and eurozone funds outperforming both peers and their indices.
The funds aim to deliver annualised returns of 3-4% above the benchmark over the longer-term. Comparable mandates reviewed by Fitch have not met this target. Accordingly the agency will closely monitor the funds' ability to achieve their long-term objectives.
Fund Manager
SSGA is the investment management arm of State Street Corporation (AA-/Stable/F1+), which had AUM of USD2.8trn as of end-December 2014, including USD5.8bn in fundamental equities. The operational and IT environment is built around standard third-party systems, providing well controlled and efficient workflows.
RATING SENSITIVITIES
The rating may be sensitive to material changes in the investment or operational processes or resources dedicated to the fund. A material adverse deviation from Fitch's guidelines for any key rating driver could result in a downgrade of the rating. For example, this may be manifested in significant structural deterioration in the fund's performance relative to its benchmark - or a representative value benchmark - and peers, an excessive risk deviation or style drift.
Additionally the agency will monitor the funds' ability to achieve their performance objectives over the longer-term. A consistent failure to meet the performance objectives, or material, sustained, underperformance relative to value peers or relevant value indices could cause Fitch to downgrade the ratings.
Fitch's Fund Quality Ratings combine Fitch's experience in qualitative fund analysis with rankings and performance data from Lipper, a Thomson Reuters company. Fitch's Fund Quality Ratings offer an independent, forward-looking assessment of a fund's key performance and risk attributes and consistency of longer-term returns, relative to peer group or benchmarks. The ratings focus on the fund manager's investment process, key fund performance drivers, risk management, and the quality of the fund's operational infrastructure.
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