OREANDA-NEWS. Fitch Ratings has downgraded the International Scale Asset Manager Rating of Fator Administracao de Recursos Ltda. (FAR) to 'Good Standards' from 'High Standards'. The Rating Outlook is Stable.

KEY RATING DRIVERS

In Fitch's opinion, the combination of continuing turnover in FAR's investment personnel, including at the senior level, with further modifications to the long term strategic plan of the company are inconsistent with a 'High Standards' Asset Manager Rating. The turnover in investment staff is reflected in a change of the Investments pillar score to 'Good' from 'High'. Accordingly, Fitch has downgraded FAR to 'Good Standards' from 'High Standards'.

Notwithstanding these developments affecting the Investment pillar of Fitch's rating criteria, FAR remains a capable provider of investment funds relying in a strong risk controls and compliance framework, segregated structures for fiduciary administration and custody and well-established operations procedures. This is reflected in the 'High Standards' scores FAR maintains in the Controls and Operations pillars. The rating also benefits from the corporate structure of Banco Fator SA. (Fator, long-term National Rating 'BBB-(bra)'/Outlook Negative).

The 'Good Standards' rating assigned to FAR reflects Fitch's opinion that the investment platform and operational framework of the asset manager are good relative to the standards applied by institutional investors in international markets.

The asset manager's rating applies to its activities in the local market and does not contemplate private banking, fiduciary administration and custody operations. All these activities have their own processes and policies, which are segregated from the traditional fund management.

Fitch believes that FAR's main challenges are: to consolidate its new investments team, to regain consistent performance in its main products, to maintain the level of service after the relevant staff downsize and to regain profitability.

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

Company: Good
Controls: High
Investments: Good, from High
Operations: High
Technology: Good

Company
FAR is an asset manager with significant experience in the local market. It is a wholly owned subsidiary of Fator, with a long track record in equity markets, mainly in mid- and small-cap companies listed on BM&F Bovespa. The company has recently started to expand its product offering to include new strategies such as credit funds. Its organizational structure is segregated from the other activities of Fator, with good corporate governance and compliance policies. Its structure is lean, with well-established processes and an adequate investments team.

Fator and FAR have undergone a significant restructuring process since 2011, with many changes to its executives, including the group's CEO, FAR's CEO and CIO. The changes were implemented as part of an effort aimed at balancing revenues between the business areas on a more consistent and profitable basis. The group reported losses in the last three periods disclosed, as did FAR. The latest developments of these efforts resulted in a severe downsizing impacting almost all business units of the group. However, the majority shareholder still has demonstrated commitment to the group with recent capital support, which partially mitigates short term concerns related to the negative financial performance of the AM.

FAR maintained assets under management (AUM) of BRL3.7 billion in December 2015, an 8% increase in comparison with December 2014. However, this growth is mainly explained by the transfer of funds formerly managed by Fator's asset management unit to FAR. The investor profile was comprised of pension funds (56%), corporate/institutional (11%), insurance companies (5%), private banking (17%) and others (11%) as of December 2015.

AUM profile still presents a relevant concentration on strategies in which the asset manager had acknowledged expertise, with 11% allocated in equity funds, 12% in fixed income funds, 55% in multimarket funds, 5% in real estate funds and 17% in others.

Controls
FAR relies on independent and well-organized corporate risk and compliance structures, following well-defined methodologies and guidelines. The asset manager has strong operational risk controls, with low operating losses, well-formalized and documented compliance policies and procedures, as well as solid systems and policies for market risk and liquidity control. Limit mismatches have been low and promptly solved. Although the risk management and compliance team also had a reduction in personnel, the remaining staff is sufficiently senior to maintain a solid level of support to the AM.

Investments
The asset manager presents a solid investment process, based on committees supported by macroeconomic, bottom-up and quantitative analyses. The process is well-formalized, being carried out by qualified professionals. Although managers enjoy certain autonomy in their decisions, all committee guidelines must be complied with.

In October/2015, the CEO of the group, Marco Bologna, implemented in the asset manager a restructuring plan primarily focused on cost reduction. He assumed the role of FAR's CEO and assigned Antonio Conceicao, Director of Portfolio Management of Fator, to CIO of FAR. Additionally, Bologna layed off a relevant number of FAR's employees and merged the investment teams of Fator and the AM. Even though most of the professionals currently working at FAR were already part of the group, they are now working under a different organizational structure and a new business scope.

Senior management is also carrying out an extensive review of FAR's product offering, with the aim to rationalize the number of funds, merge the ones with low AUM and increase the number of strategies it offers to investors. As an example of its initial efforts, FAR launched a new credit fund focused on tax-exempt infrastructure bonds.

The high turnover in the investments team coupled with a complete revamp of its product offering is reflected in the Investments pillar score of 'Good.' According to the agency's rating criteria, the result is that the Investments score no longer meets Fitch's definition of 'High Standards'. The assessment to this category is now rated as 'Good Standards'.

Operations
Fiduciary administration activities are carried out by another business unit of the group, in similar fashion to other asset managers linked to banks in Brazil. Controllership and asset custody are carried out by renowned companies of the sector, such as Itau Unibanco group. The processes comply with the regulations and are supported by adequate technological platforms, with a good level of automation. Furthermore, the middle office area, which is segregated from the asset manager, performs daily reconciliation of the whole operational process, including the trading activity, NAV calculation and fund's cash flow.

The AM is finishing the implementation of the system that integrates the processes between the front office trading, back office and main custodian. This solution also automates the reconciliation procedure and NAV validation providing online cash flow management to the PMs. This initiative is expected to be concluded by July 2016.

Technology
FAR maintains adequate portfolio management, risk control and automated back office systems, in addition to benefiting from the good structure and technological platform of Fator. The asset manager has made investments in technology to improve the efficiency and agility of the processes. Besides its risk control and post-trading compliance systems, it has almost fully implemented an internally developed platform with pre-trading and performance attribution resources.

Company Profile
FAR is an asset manager created in 1997, with AUM of BRL 3.7 billion in AUM as of December 2015. The company is responsible for the third-party asset management activities of Fator.

RATING SENSITIVITIES
The rating of FAR is sensitive to relevant adverse changes to any of its above mentioned major fundamentals, mainly in the case of further weakness of its financial profile, additional turnover in its senior management and investments team or deterioration in its processes and policies. A relevant deviation from Fitch's guidelines for any key-factor could also result in a rating downgrade.