Fitch Affirms Lyxor EuroGovies Risk Balanced at 'AAf'/'S2'
The affirmation of the Fund Credit Quality Rating is driven by the high credit quality of the fund's portfolio of assets as measured by the fund's weighted average rating factor (WARF). The rating also reflects the distribution of asset ratings and investment guidelines limiting the minimum rating to 'AA-' (or equivalent) and large portfolio exposures to the French sovereign (AA/Stable), as allowed by the fund's prospectus.
The affirmation of the 'S2' Fund Market Risk Sensitivity Rating is driven by the fund's low exposure to interest rate risk with duration maintained around three to four months. The rating also factors in potentially long asset maturities but contained spread risk resulting from the fund's focus on high-quality sovereign, supranational and government agencies.
KEY RATING DRIVERS
Weighted Average Credit Quality
The fund's weighted average credit quality is high. The WARF was 0.86 at end-August 2016, which is consistent with a Fund Credit Quality Rating in the 'AAf' category. The fund invests in a diversified portfolio of high quality assets rated at least 'AA-' or equivalent. These must be issued or guaranteed by central authorities, central banks or government agencies of an EU member state, and supranationals such as the bank for International Settlements, the International Monetary Fund, the EU Commission, the European Financial Stability Facility or the European Stability Mechanism.
Portfolio diversification guidelines frame portfolio concentration risk, limiting exposures to supranationals, agencies and high quality European countries other than France and Germany. The fund may be exposed up to 100% to France and Germany provided there is minimum diversification across at least six securities and no more than 30% in a single security.
Portfolio Sensitivities to Market Risks
The fund has low exposure to interest rate risk, with the fund's duration managed around three to four months. This is achieved through interest rate hedging of fixed-rate securities exposures with interest-rate swaps and investments in floating-rate securities.
The fund's investment guidelines do not constrain the maturity of assets (typically below 15 years) or the portfolio's weighted average life (WAL). At end-August, no assets had residual maturities longer than 10 years and the portfolio's WAL was six years. The high quality of portfolio assets means the fund's sensitivity to spread risk is contained, despite the long maturity of securities, and is in line with a 'S2' Fund Market Risk Sensitivity Rating.
Lyxor EuroGovies Risk Balanced is a Luxembourg-domiciled bond fund pursuant to the UCITS regulation. As of end-August 2016, the fund's total assets stood at EUR658m. Its investor base comprises European financial institutions.
Lyxor, the fund manager, was established in 1998 and is the wholly owned asset manager of Societe Generale (A/Stable/F1). It employs 600 staff worldwide and had USD127bn of assets under management and advisory at end-June 2016. Lyxor provides investment management products and customised solutions in ETFs and indexing, alternatives and multi-management, and absolute return and solutions.
The rating may be sensitive to material changes in the fund's credit quality or market risk profile. A material adverse deviation from Fitch's guidelines for any key rating driver could cause Fitch to downgrade the rating. For example, if credit deterioration occurs such that the WARF increases beyond criteria levels for a 'AAf' Fund Credit Quality Rating, the rating may be downgraded. Fitch's WARF stress testing shows that the rating is robust at the current rating level.
Potential downgrades to the Fund Market Risk Sensitivity Rating are limited in scope, given the fund's low sensitivity to interest rate and spread risks, and the fund's investment guidelines.