OREANDA-NEWS. Fitch Ratings has affirmed STANLIB Extra Income Fund's 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 STANLIB Asset Management Ltd.

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 floating-rate securities with longer final maturity dates.

ASSET CREDIT QUALITY
The fund's weighted average credit quality is high as indicated by its WARF, which Fitch has calculated in the middle of the 'AA(zaf)' NFCQR category range. 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 one year. 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 moderately concentrated, due to its largest issuer exposure in excess of 15% and top five issuer exposure in excess of 50%. The fund was "diversified" as per Fitch's criteria in March 2014, but has increased the top issuer exposure to 21.4% at end-February 2015 from 12.8% at end-February 2014. As the increased exposure has been to the largest, highly-rated South African banks, the fund's credit quality has increased as a result. Fitch has applied a one-notch penalty from the WARF-implied rating of 'AA(zaf)', to reach a NFCQR of 'AA-(zaf)', recognising the impact of increased concentration but improved credit quality.

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 two years, 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 longer final maturity.

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 with 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 STANLIB suitably qualified, competent and capable of managing the funds. The fund is managed by Mary Hartigan, who has deep experience and tenure with STANLIB. She is part of STANLIB's fixed income investment team consisting of 14 investment professionals with average experience of 17 years.

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 the fund 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, STANLIB provides Fitch with monthly portfolio information, including details of the portfolio's holdings and credit quality.