OREANDA-NEWS. Fitch Ratings has placed State Street Flexible Asset Allocation Plus Fund's 'Strong' Fund Quality Rating Under Review. The fund is managed by State Street Global Advisors (SSGA).

KEY RATING DRIVERS
The 'Under Review' of the fund's rating follows a disappointing year for the fund in terms of performance relative to its objective and peers, which calls into question the ability of the proprietary MRI (market regime indicator) to navigate volatile market conditions such as those observed in 2015. The fund returned -3.1% in 2015, underperforming its reference index of (Euribor + 400 bps) and peer group category. This was primarily due to difficulties in adjusting risk exposure levels in 1H15 and over the last two weeks of August. This resulted in a one-year drawdown (most negative cumulative return, peak to trough) of -7.5%, which, in Fitch's view, is high for such a medium risk absolute return-oriented strategy. Over the three-year period to end-December 2015, the fund was an average performer in its Lipper category but lagged behind its reference index. It does not have a longer track record under the current investment strategy.

Fitch expects to resolve the 'Under Review' status of the fund after six months. During this period, the agency will closely monitor the fund's performance and potential developments relating to portfolio construction. This is to determine whether the recent underperformance reflects a temporary setback or a more structural deterioration of the investment process' ability to navigate through the cycle and ultimately contain drawdown to deliver on its absolute return objective while improving performance relative to peers.

Structural difficulties in the fund's MRI to identify changes in risk regimes or in the fund's decision-making process to identify and efficiently implement asset allocation may result in a downgrade of the fund's qualitative assessment to 'Good' from 'Strong'. All else being equal, this would result in the agency downgrading the rating to 'Good' from 'Strong'.

FUND PRESENTATION
State Street Flexible Asset Allocation Plus Fund is a sub-fund of SSGA Luxembourg SICAV with EUR82m of assets at end-December 2015. The fund is long-only, and invests globally in all major asset classes. It aims to outperform Euribor 1-month by at least 4% over five years (annualised), with controlled volatility (not exceeding 12%), while minimising drawdowns (maximum drawdown of 10%) in volatile markets. It has been managed under the current investment approach since December 2012. Prior to May 2015, the fund was a France-domiciled SICAV.

INVESTMENT PROCESS
A key input in the portfolio construction is the MRI, a proprietary macro indicator developed in 2001. It systematically identifies prevailing market regimes and trends on the basis of investors' risk aversion across multiple markets and regions. In Fitch's view, the MRI approach fosters efficiency and discipline in the investment process.

Portfolio construction is highly disciplined and the responsibility of the lead portfolio manager. It follows a predefined asset allocation mix corresponding to the prevailing market environment, as defined by the MRI. The assessment of sub-asset classes and geographical regions drives tactical positions, and the final portfolio is implemented through direct holdings, funds, ETFs and listed derivatives, primarily futures.

RESOURCES
The fund is managed by a Paris-based team of four, led by Frederic Dodard, with 19 years of experience and Head of EMEA Investment Solutions Group at SSGA. Gregory Taieb is the fund's lead portfolio manager. The team is supported by a well-staffed research team. SSGA's investment resources are solid, including a global trading desk and an investment risk team of 26.

The fund benefits from SSGA's operational and risk control framework. The IT environment is built around third-party systems, supporting well-controlled, efficient workflows.

FUND MANAGER
SSGA is the asset management arm of State Street Corporation (AA-/Stable/F1+). It is a global asset manager with EUR1.9trn in assets under management at end of September 2015, of which EUR2.2bn were in absolute return/flexible strategies. It employs more than 2,500 staff globally.

RATING SENSITIVITIES
The rating may be sensitive to material changes in the investment or operational processes, or in resources dedicated to the fund. A material adverse deviation from Fitch's guidelines for any key rating drivers could result in a downgrade of the rating. For example, this may be manifested in significant structural deterioration in the funds' performance or an excessive deviation from risk objectives. Key person risk is limited for this fund, but model risk exists.