Fitch Affirms Insight Liquid ABS Fund at 'AAAf'/'S2'
The affirmation of the Fund Credit Quality Rating is driven by the very high and stable credit quality of the fund as measured by its weighted average rating factor (WARF), which is consistent with a 'AAAf' Fund Credit Quality Rating. The rating also recognises the investment advisor's capabilities and resources managing asset-backed securities (ABS).
The affirmation of the Fund Market Risk Sensitivity Rating is driven by the fund's low sensitivity to interest rate and spread risks, as reflected in the fund's maturity profile. The rating also recognises the potential exposure of the fund's ABS investments to weaker liquidity in stressed market conditions and the potential for increased spread risk given the ability of Insight to extend its weighted average life (WAL) profile.
KEY RATING DRIVERS
Weighted Average Credit Quality
The fund's weighted average credit quality is very high, as indicated by the fund's WARF, which was 0.11 at end-August 2016. Investments are concentrated in the 'AAA' category, comprising approximately 90% of the portfolio at end-August 2016. The fund's investment guidelines contain a minimum 'AA-' rating on individual securities, based on Insight's methodology, which takes the highest rating of the three major international credit rating agencies. Fitch's methodology takes its own rating or, if not available, the lower of the other two major agencies.
Portfolio Sensitivities to Market Risks
The fund has a low exposure to interest rate risk given its investment in ABS securities (which are typically floating-rate with a three-month reset). Its weighted average maturity (WAM) was 60 days at end-August 2016. The fund's investment guidelines limit duration to 1.5 years above the fund's benchmark, 3m GBP LIBOR.
The fund's investment guidelines allow for a maximum portfolio WAL of five years, with no limit on the WAL of individual ABS. The WAL of the fund has been maintained at around two years since launch. Fitch has calculated a market risk factor which implies a 'S1' Fund Market Risk Sensitivity Rating, based on end-August 2016 portfolio holdings.
However, the 'S2' Fund Market Risk Sensitivity Rating also accounts for the potential for greater spread risk and longer WAL profile compared with other funds rated 'S1'. The possibility of extension risk has also been factored into the 'S2' Fund Market Risk Sensitivity Rating. The fund hedges non-base currency exposures to GBP via forward contracts, with a +/- 0.25% of net asset value (NAV) tolerance allowed. The fund does not utilise leverage.
The fund seeks to achieve its investment objective through a portfolio of ABS securities, and aims to outperform 3m GBP LIBOR by 0.5% per annum. The fund invests across several ABS sectors, primarily prime RMBS, but also including autos, credit cards, buy-to-let, CMBS and CLOs. It focuses on European ABS, primarily UK and Dutch, although it also has small allocations to the US and Australia.
The fund has daily dealing with a T-4 day settlement period. Liquidity risk is mitigated by a structural exposure to the Insight ILF GBP Liquidity Fund (AAAmmf), of between 5%-10% (around 5.3% as of end-August 2016). Furthermore, the prospectus allows the fund to be closed to redemption (gated) at the discretion of the board if redemptions exceed 10% on a given day. Nonetheless, fund liquidity will be somewhat reliant on the secondary ABS market, which may become limited during stressed market conditions.
The fund is a UCITS-compliant sub-fund of the Ireland-domiciled ICVC Insight Global Funds II plc, which also includes an ABS-based fund launched in 2007, the Insight Libor Plus Fund. The fund had total assets of GBP935m as of end-August 2016.
Fitch assesses Insight as suitably qualified and capable of managing the fund. Insight was established in 2002, and is one of 13 specialist asset managers owned by Bank of New York Mellon (AA/Stable/F1+). Insight managed GBP499bn of assets as of end-June 2016, and the secured finance/ABS team managed GBP9.3bn as of end-August 2016.
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 the rating assigned, 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.