OREANDA-NEWS. Fitch Ratings has completed a peer review of European short-term bond funds (STBFs). Based on its review, Fitch affirmed 10funds' ratings.

The affirmations reflect the high and broadly stable credit and market risk profiles of the funds. For more information refer to the fund-specific rating action commentaries published on 3 October 2016, available on www. fitchratings. com, and listed below.

Asset Growth Reflects New Investor Interest

The combination of the prevailing ultra-low interest rate environment and pending money fund reform is pushing traditional money fund investors - primarily corporate treasurers - to consider different fund types. In particular they are considering whether STBFs can deliver them an incremental yield benefit while maintaining conservative credit and market risk profiles, notably for more strategic or longer-term cash balances.

STBFs' assets under management have been growing rapidly, reaching EUR132bn at end-June 2016, a 53% rise in three years. However, they remain dwarfed by the size of the money fund sector at EUR1.2trn.

The 10 STBFs in Fitch's peer review had combined assets under management of GBP24bn as of end-August 2016.

Credit Profiles Heterogeneous But Broadly Stable

When considering STBFs corporate treasurers face a considerably more heterogeneous product offering compared with money funds. They are accustomed to the constant net asset value per share offered by some short-term money funds as defined by ESMA.

Outside of the short-term money fund space there are standard money funds, which are variable net asset value (VNAV) funds and can have a weighted average life of up to 12 months compared with the 120 days in short-term money funds. Beyond these maturity limits, funds fall outside of ESMA MMF definitions.

We estimate that standard money funds represented about 35% of European MMF assets at end-August 2016, up from only 30% two years ago. Low investment-grade assets are frequently held in European VNAV funds and most notably in standard money funds, where two-thirds of funds invest in 'BBB' or 'BBB-' securities. But there are substantial variations in the actual fund allocation to such securities, resulting in funds having materially different credit risk profiles.

Stress Testing Results Show Credit Resilience

Fitch's most recent criteria update introduced additional stress tests to complement the agency's analysis of funds' weighted average rating factors (WARFs). Fitch applies specific stress tests to the WARF to assess the rating's sensitivity to downward rating migration of specific exposures. The STBFs in Fitch's peer review showed resilience to these stress tests at their current rating levels.

Low Market Risk Sensitivity

In all cases the STBFs show low or very low market risk sensitivity. On a relative basis, total returns or changes in net asset value are expected to exhibit fairly high to very high stability across a range of market scenarios. These portfolios offer low to very low risk exposure to interest rate, credit spread and currency risks.

Global Bond Fund Rating Criteria

Fitch updated its Global Bond Fund Rating Criteria for rating portfolios of debt and debt-like securities on 22 August 2016. At the same time, the bond fund ratings scales were revised to include the addition of an 'f' suffix to the Fund Credit Quality Ratings. The 'f' suffix is intended to better distinguish these ratings from traditional credit ratings assigned to individual issues and issuers. In addition, previously assigned Fund Volatility Ratings were renamed Fund Market Risk Sensitivity Ratings, and the related rating scale revised to 'S1' to 'S6' (from 'V1' to 'V6').

-Aberdeen Liquidity Fund (Lux) - Ultra Short Duration Sterling Fund: 'AAAf'/'S1'

-CCLA - CBF Church of England Deposit Fund: 'AAAf'/'S1'

-CCLA - COIF Charities Deposit Fund: 'AAAf'/'S1'

-Henderson Institutional Cash Fund: 'AAAf'/'S1'

-IIFIG Government Liquidity Fund: 'AAAf'/'S1'

-Royal London Bond Funds ICVC - Royal London Cash Plus Fund: 'AAAf'/'S1'

-Insight Liquid ABS Fund: 'AAAf'/'S2'

-Lyxor EuroGovies Risk Balanced Fund: 'AAf'/'S2'

-Royal London Bond Funds ICVC - Royal London Enhanced Cash Plus Fund: 'AAf'/'S2'

-Amundi 3M: 'Af'/'S1'