S&P: LGIM Liquidity Funds plc – LGIM Liquidity Plus Fund Assigned 'AAAf/S1' Fund Credit Quality And Volatility Ratings
The 'AAAf' rating reflects the extremely strong protection that the fund's portfolio provides against losses from credit defaults, and is based on our analysis of the credit quality of the portfolio's eligible investments, the counterparties, and overall management by the portfolio's investment managers. The fund credit quality rating is designed to capture a fund’s overall exposure to default risk. Fund credit quality ratings are different from the traditional credit ratings (e. g., issuer credit ratings) that we assign to bonds or debt issued by a corporation. The fund credit quality rating does notaddress a fund’s ability to meet payment obligations.
LGIM Liquidity Funds plc is an open-ended umbrella investment company with variable capital and segregated liability between funds incorporated with limited liability in Ireland. Additional subfunds in this structure include the LGIM Sterling Liquidity Fund ('AAAm'; rated in 2008) and the LGIM US Dollar Liquidity Fund ('AAAm'; rated in 2011).
In our view, credit risk of the fund will be limited by focusing on high-credit-quality names, and the portfolio will be managed so as to maintaina credit profile consistent with the 'AAAf' rating.
The investment objective of the newly rated fund is to preserve capital and generate income. The base currency of the fund will be British pound sterling. To achieve its objective, the fund will invest in a diversified portfolio of high-quality money market instruments (particularly certificates of deposit and commercial paper) and longer-dated fixed-income securities (including floating-rate notes, covered bonds, and structured finance instruments). In our understanding, the structured finance investments will be focused on assets that have relatively short-term tenors to minimize potential extension risk of securities such as auto loans, consumer loans, and credit card receivables.
The fund'sweighted-average maturity will be restricted to one year, which willaid in controlling interest rate risk. While the prospectus allows for investments in securities that are not denominated in the fund's base currency, we understand this will be kept below 30% of the overall portfolio and be fully hedged. For the purposes of hedging such risks, the fund has the ability to use derivative instruments.
The experienced LGIM investment professionals based in London are responsible for the day-to-day management of the newly launched fund, as well as for managing money market assets of approximately ?28 billion. Interest rate and maturity strategies are determined during regular investment policy committees, and the portfolio's management team draws upon the expertise of a competent and seasoned credit research team, which maintains a global list of approved credits specifically used for money market and short-duration funds.
Our fund volatility ratings are designed to rank fixed-income funds according to the degree to which they are exposed to the factors that ultimately lead toshare price and return volatility. The 'S1' volatility rating signifies that we expect the fund will demonstrate a low sensitivity to changing market conditions, and a level of risk that is less than, or equal to, that of a portfolio comprised of the highest-quality fixed-income instruments with an average maturity of one year or less denominated in the fund's base currency. As part of our volatility analysis, we focus on assessing quantifiable portfolio risk factors, including interest-rate risk, yield curve risk, creditrisk, liquidity risk, and concentration risk.
The fund's custodian is Dublin-based Northern Trust Fiduciary Services (Ireland) Ltd. and its administrator is Northern Trust International Fund Administration Services (Ireland) Ltd. Both entities are subsidiaries of The Northern Trust Co.
We review on a monthly basis pertinent fund information and portfolio reports provided to us by independent parties as part of our surveillance process.
Our fund credit quality ratings, identified by the 'f' subscript, are forward-looking opinions about the overall credit quality of a fixed-income fund's portfolio. Fund credit quality ratings range from 'AAAf' (extremely strong protection against losses from credit default) to 'CCCf' (extremely vulnerable to losses from credit defaults). Our fund volatility ratings, identified by the 'S' subscript, are forward-looking opinions about a fixed-income fund's sensitivity to changing market conditions. Our volatility ratings range from 'S1+' (lowest sensitivity) to 'S6' (highest sensitivity).