OREANDA-NEWS. Fitch Ratings has affirmed Nedgroup Investments Core Income Fund's (CIF) National Fund Credit Quality Rating (NFCQR) and National Fund Volatility Rating (NFVR) at 'AA-(zaf)'/'V2 (zaf)'. The fund is South-Africa domiciled and managed by Taquanta Asset Managers on behalf of Nedgroup Collective Investments.

KEY RATING DRIVERS
The affirmation of the 'AA-(zaf)' NFCQR is driven by the fund's stable credit quality, as reflected in the weighted average rating factor (WARF) and ratings distributions while also factoring in the portfolio's concentration risk.

The affirmation of the 'V2(zaf)' NFVR is driven by the combination of low exposure to interest rate risk and the fund's sensitivity to spread risk, which is low, but greater than its sensitivity to interest rate risk, resulting from its exposure to longer dated floating-rate securities.

ASSET CREDIT QUALITY
CIF's weighted average credit quality is high as indicated by the fund's WARF, which Fitch has calculated in the upper (i.e. higher credit quality) range of the 'AA(zaf)' NFCQR category. The maturity dimension of the WARF calculation is primarily driven by Fitch's longer-term rating factors as outlined in its rating criteria, which are applied to securities with a residual final maturity in excess of 13 months. The fund's internal investment guidelines prevent it from investing in any security rated below 'A-(zaf)'.

CONCENTRATION
In Fitch's opinion, the fund is concentrated, with a top three issuer exposure consistently in excess of 50% of portfolio holdings. In line with its applicable rating criteria, Fitch typically adjusts the WARF-implied NFCQR of funds it deems concentrated by one or more notches.

The fund's concentrated holdings reflects its investment mandate 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 of around 90%, according to Fitch's estimates.

PORTFOLIO SENSITIVITY TO MARKET RISK
The fund has low exposure to interest rate risk due to a majority of holdings in floating rate instruments, which typically reset quarterly. It is managed to a maximum portfolio duration of 180 days, although in practice its portfolio duration is typically less than 90 days. The fund incurs moderate spread risk due to its ability to invest in securities with a maximum final maturity of up to five years.

The fund's Market Risk Factor, which incorporates both the fund's low sensitivity to interest rate risk and its relatively greater sensitivity to spread risk falls within the range consistent with a 'V1(zaf)' NFVR. However, given the fund's spread risk due to its exposure to longer dated securities and its market risk profile in comparison to other funds rated by Fitch, the agency considers a NFVR of 'V2(zaf)' appropriate.

FUND PROFILE
The fund is regulated by South Africa's Financial Services Board under the Collective Investment Schemes Control Act of 2002 (CISCA, specifically Notice 90 of 2014). The fund is compliant with Regulation 28 of the Pension Funds Act, making it an eligible investment for South African pension schemes. Regulation 28 caps maximum issuer exposure at 25% whereas the maximum issuer exposure permitted under CISCA is 30%.

THE ADVISOR
Fitch considers Taquanta Asset Managers suitably qualified, competent and capable of managing the fund. Nedgroup Investments operates an outsourced operating model under which it selects asset managers to run the different portfolios it offers to investors under its trademarked "Best of Breed" approach. Taquanta Asset Managers is its selected money market manager.

RATING SENSITIVITIES
The fund's ratings may be sensitive to material changes in its credit quality or market risk profile. A material adverse deviation from Fitch's criteria for any key rating driver could cause ratings to be downgraded. Specifically, Fitch would expect to downgrade the NFCQR in the event of sustained deterioration in credit quality and/or changes to the fund's investment guidelines to allow a larger portion of lower rated assets. Conversely, given Fitch's view on concentration risk, it would expect to upgrade CIF in the event that it increased the portfolio's diversification if credit quality remained unchanged.

Given the fund's maturity profile the NFVR is expected to be stable. However, should interest rates or market volatility in South Africa structurally change, or the fund significantly increases the interest rate risk taken, then Fitch would expect to downgrade the NFVR.

For additional information about Fitch rating criteria applicable to bond funds, please review the criteria below.

To maintain the fund's ratings, Taquanta provides Fitch with monthly portfolio information, including details of the portfolio's holdings and credit quality.