OREANDA-NEWS. Fitch Ratings has affirmed ARX Investimentos Ltda.'s (ARX) International Scale Asset Manager Rating at 'Highest Standards'. The Rating Outlook remains Stable.

KEY RATING DRIVERS

ARX's 'Highest Standards' rating reflects Fitch's opinion that the company's investment platform and operating framework are superior relative to the standards applied by institutional investors in international markets.

ARX's rating reflects the strong franchise and corporate governance principles of its controlling owner, The Bank of New York Mellon Corporation (BK; Issuer Default Rating
'AA-'/Outlook Stable). It also factors in the quality of the risk management and compliance framework, in addition to the robust fiduciary administration and custody process. The rating also factors in ARX's well-structured investment process, supported by macroeconomic and fundamental analyses, and ARX's sound technological platform.

The rating applies only to ARX's activities in the domestic market in traditional funds and does not include its overseas asset management activities, the area of third-party funds of funds, or the fiduciary administration services which are provided by another company within the group. These activities have their own processes and policies, segregated from the management of traditional funds.

In Fitch's opinion, ARX's main challenges are reducing its exposure to key person risk in the investment process, and expanding recognition of its multimarket funds to further improve its product mix and help restore stability or growth in assets under management (AUM) levels in order to support continued profitability. Other important challenge includes improving the performance of its main funds in a highly competitive and volatile environment.

The 'Highest Standards' rating is based on the following assessments:

Company: Highest
Controls: Highest
Investments: High
Operations: Highest
Technology: High

Company

ARX has a robust organizational structure and corporate governance framework, with activities which are well-segregated from other group companies. It is a wholly owned subsidiary of BK, a strong global financial conglomerate with expertise in fiduciary administration and funds management, among other areas. ARX maintains sound profitability as one of the parent's main business lines and has been developing its experience in equity funds since 2001.

ARX's AUM materially decreased 34% between December 2013 and June 2015 (industry: +16%). This decrease occurred across all strategies and for all investors due to the worsening local economic scenario and, consequently, less appetite for more sophisticated funds, and reduced exposure by foreign investors, as well as the low performance of the funds in 2015 relative to the benchmark. This scenario is in line with other local asset managers with profiles similar to ARX's.

The share of local equity funds has decreased (to 12% in June 2015 from 17% in December 2013). This decrease has been diluted among other segments. ID-indexed / short-term funds accounted for 32% in June 2015, 25% offshore (basically equity funds), multimarkets 20%, and long & short 11%. The profile of ARX's investor consisted of foreign investors (34%), distributors (24%), investment funds (22%), pension funds (11%) and private banking / other (9%).

Controls

ARX's risk and compliance management benefits from the BK group's strong controls and policies, with their full set of policies and controls, regular committees, and daily reports. Control and governance practices are adequate for the higher complexity and scope of the company's risks and those of the funds under management. Fund limit breaches have not been relevant and have been quickly resolved.

Investments

The investment process is well-structured, supported by committees and solid proprietary analyses. ARX also has ample access to market information. However, ARX has a lean management team relative to the complexity of its investment strategies that involve assets with greater volatility. Despite its highly qualified and experienced investment team, and the well-elaborated process, the key person risk remains, given the autonomy of the portfolio managers in making decisions, as well as the executive turnover. Since 2010, the macro-strategy funds team has experienced a large turnover, most recently at year-end 2013.

Operations

Fiduciary administration is mostly carried out by another company that is part of the group, entirely segregated from ARX. This company is well-recognized in its segment of operation for rendering services to other asset managers, and is one of the largest in the local market. Custody is outsourced to well-recognized external providers, such as Banco Bradesco S.A. The operating activities rely on standardized, integrated and automated processes. The asset manager's middle-office area carries out a thorough reconciliation of the whole process to avoid operating failures.

Technology

ARX has a solid technological platform, including solid proprietary and third-party systems. It recently concluded the implementation of a new front- and middle-office system, EZE Software, which is expected to further improve operating process integration, through real-time positions, pre-trading blocks and alerts, and automatic processing of orders.

Founded in 2001, ARX was acquired by BK in 2008, becoming a wholly-owned subsidiary. It had BRL9.4 billion in assets under active management in June 2015, being one of the main independent asset managers in Brazil, focused on equity, long- & short- and macro multimarket fund strategies. Companies controlled by the BK group in Brazil held BRL13.8 billion of AUM in June 2015, according to the Brazilian Association of Financial and Capital Markets (ANBIMA).

BK has a strong franchise as a global third-party asset manager. It is the world's largest custodian and fiduciary agent of securities and ranks among the 10 largest in several other businesses, such as third-party asset management, with global AUM of USD1.7 trillion in June 2015. In Brazil, the group also has a fiduciary administration company and ranks eighth in the local market, with a total of BRL106 billion of assets under administration.

RATING SENSITIVITIES

ARX's rating could be sensitive to relevant adverse changes to any of its rating drivers, particularly in case of a weakening of its financial profile, high turnover of key staff, or deterioration in processes and policies. An important deviation from Fitch's guidelines for any key driver could also lead to a rating downgrade.

To obtain additional information on Fitch's criteria for rating asset managers, consult the criteria mentioned below, available on Fitch's websites, 'www.fitchratings.com' or 'www.fitchratings.com.br'.