OREANDA-NEWS. Fitch Ratings has assigned the RECM Money Market Fund a 'AA+(zaf)' National Fund Credit Quality Rating and a 'V1(zaf)' National Fund Volatility Rating. The fund is managed by RECM Collective Investments (Pty) Ltd and the fund's investment advisor is Regarding Capital Management (Pty) Ltd (RECM).

The 'AA+(zaf)' rating is driven by the fund's high credit quality, as reflected by its weighted average rating factor (WARF) of 0.18 at end-February 2015. Consistent with Fitch's rating criteria, the rating factors in a one-notch downward adjustment to take account of concentration risk.

The 'V1(zaf)' rating is driven by the fund's low exposure to interest rate and spread risk, as reflected in its short maturity profile.

KEY RATING DRIVERS

Asset Credit Quality
The weighted average credit quality of the fund is high as indicated by the fund's WARF, which factors in the short maturities of the fund's assets. Fitch has reviewed historical portfolios, which indicate that the fund's WARF has broadly been between 0.15 and 0.20 over the past 12 months. The fund primarily invests in issuers rated in the 'F1+(zaf)'/'AA(zaf)' rating category, and current eligible investments are restricted to the major five South African banks and the South African government. The fund had no exposure to African Bank when it was placed into curatorship. Fitch's review of historical portfolios shows that the fund last had exposure to African Bank in January 2014.

Concentration
In Fitch's opinion, the fund is concentrated with its large top three issuer exposure exceeding the guidelines for concentration as outlined in Fitch's rating criteria. In line with its applicable rating criteria, Fitch may reduce the WARF-implied National Fund Credit Quality Rating of funds it deems concentrated by one or more notches. In this case, Fitch views a single-notch adjustment as appropriate to reflect the high concentration risk posed by the fund. This is consistent with the approach Fitch has taken with other rated South African money market funds.

The concentrated holdings of the fund reflects its eligible investments and the structural characteristics of the South African market, with a limited supply of treasury bills, and the five largest banks having a combined market share (based on total assets) of around 90%, according to Fitch's estimates.

Without a structural evolution of the South African market which results in a more diverse, high quality and liquid issuance market, it is highly unlikely that Fitch would rate any money market fund in South Africa higher than 'AA+(zaf)'.

Portfolio Sensitivity to Market Risk
The fund has low exposure to interest rate risk and spread risk, as reflected by its short maturity profile, with the result that the fund's market risk factor (i.e. a risk-adjusted duration measure) is also low, consistent with its 'V1(zaf)' rating. As per regulation, the fund's weighted average duration (i.e. to next interest rate reset date) is capped at 90 days, its weighted average life (i.e. to final maturity date) at 120 days, and no individual investment may have a maturity of greater than 13 months.

Fund Profile
The fund is regulated by South Africa's Financial Services Board under the Collective Investment Schemes Control Act of 2002 (specifically Notice 90 of 2014). As of end-February 2014, the fund's total assets under management were approximately ZAR1.9bn.

The Advisor
Fitch considers RECM suitably qualified, competent and capable of managing the fund's investments. RECM is a privately owned, independent asset manager, with a historical focus on value equity investing. RECM had around ZAR17bn of assets under management at end-February 2015.

The fund is co-managed by Piet Viljoen (RECM's co-founder and Chairman) and Sean Neethling, with input from RECM's CIO, Jan van Niekerk. They have 28 years, 11 years and 17 years of investment experience respectively. They form part of RECM's investment team of 15 staff. The fund has appropriate credit selection and monitoring and benefits from a suitable control environment.

RATING SENSITIVITIES

The ratings of the fund may be sensitive to material changes in the fund's credit quality or market risk profile. A material adverse deviation from Fitch criteria for any key rating driver could cause ratings to be downgraded by Fitch. Specifically, Fitch would expect to downgrade the National Fund Credit Quality Rating in the event of a sustained deterioration in the fund's credit quality.

Given the maturity profile of the fund, the National Fund Volatility Rating is expected to be stable. However, should interest rates or market volatility in South Africa structurally change then Fitch would expect to downgrade the rating.

RATING CRITERIA

Fitch rates money market funds (MMFs) in South Africa under its global bond fund rating criteria. This reflects the differences the agency perceives between South African MMFs and other Fitch-rated MMFs under its international and national MMF rating criteria. Specifically, the high level of concentration in these funds, a structural characteristic of the South African market, is inconsistent with Fitch's view of the risk profile of a MMF. The agency also notes regulatory differences between the US and European MMFs (subject to Rule 2a-7 in the US and ESMA guidelines for MMFs in Europe) and the regulatory regime in South Africa.

Funds in the 'AA(zaf)' category are considered to have high underlying credit quality relative to other entities in the South African market. The fund's assets are expected to maintain a weighted-average portfolio rating of 'AA(zaf)'.

Funds rated 'V1(zaf)' are considered to have low sensitivity to market risk. On a relative basis, total returns of funds rated 'V1(zaf)' are expected to exhibit high stability, performing consistently across a broad range of market scenarios. The rating does not address the sensitivity of a bond fund to extreme risks that may result from reduced liquidity in secondary markets during certain periods of time.

Comparisons between different national fund rating scales or between an individual national and international scale are inappropriate.