OREANDA-NEWS. Fitch Ratings has affirmed Shanghai-based HFT Investment Management Co., LTD (HFT IM) National Scale Asset Manager Rating at 'Highest Standards(chn)'. The Outlook has been revised to Negative from Stable. The affirmation includes HFT IM's Hong Kong-based 100% subsidiary HFT Investment Management (HK) Limited.

KEY RATING DRIVERS
HFT IM's rating recognises the company's experience in managing institutional assets, strong governance structure and disciplined risk-embedding portfolio management processes. The rating is further supported by the quality of the company's risk and control framework and efficient operations, with a strong ability to support mandates and investors' customisation needs.

The revision to Negative Outlook reflects HFT IM's main challenges to stabilise senior management and investment teams further to higher staffing turnover in 2014, notably in the equity department. Suitable recruitments have been made, but HFT IM still faces the challenge of training and integrating replacement hires. The Negative Outlook also reflects the asset manager's weakened franchise due to greater investor scrutiny following personal fraud allegation against five former portfolio managers and adverse developments in a strongly competitive Chinese asset management industry, notably for mutual funds.

HFT IM's 'Highest Standards(chn)' rating is based on the following category scores:

Company: High (from Highest)
Controls: Highest
Investments: Highest
Operations: Highest (from High)
Technology: High

Asset Manager Ratings are assigned on a descriptive scale based on Fitch's assessment of the manager's investment and operational platform. Asset Managers are rated 'Good Standards', 'High Standards' and 'Highest Standards', relative to the standards applied by institutional investors in the relevant national market.

Asset manager operations in the 'Highest Standards' category demonstrate an operational framework that Fitch considers superior relative to national institutional standards.

Company
HFT IM benefits from an independent, distinct institutional profile, its expertise on greater China assets, and strong shareholders. HFT IM has a track record of profitability and can support its domestic and international business despite current consolidation, primarily in the mutual fund industry, leading to a less favourable product mix.

Controls
HFT IM has an efficient risk and control framework, which fully incorporates its subsidiary. Fitch still views the compliance and control environment as strong despite the recent allegation by the regulator against five former equity portfolio managers of personal front-running on insider information in July 2014. As part of the investigation, the regulator has examined the personal trading activities of a large number of Shanghai-based fund managers. As far as Fitch is aware, the allegations relate solely to personal trading activities and did not affect any of the funds managed by HFT IM or its clients. HFT IM responded adequately, conducting thorough self-assessment, in conjunction with BNP Paribas Investment Partners and implementing several measures to strengthen staff compliance training, direct management oversight responsibility and controls on personal dealing filing.

HFT IM's risk management control set-up is multi-level, adequately staffed and aligned with international standards. Operational risk management uses a broad set of risk identification and management techniques. Portfolio compliance controls are embedded into portfolio management, pre- and post-trade.

Investments
HFT IM's investment processes are formalised and uniformly applied across the two locations. More autonomy and visibility has been given to fixed income portfolio management, with staffing resources now more clearly separated from the equity team. The research-driven equity investment approach makes a strong use of model portfolios for portfolio construction. Investment quality management is sound and overseen by the investment committee. It is responsive to identified areas of underperformance through process adjustments.

Operations
The highest standards in the operations score reflect support from administration specialists, automated workflows between agents and the effectiveness of the operating model. Processes and procedures have been enhanced to better support settlement, absolute return investments and ETFs management. Improved investor access to funds via e-commerce platforms has been an important development. In Fitch's view, HFT IM has a strong ability to support customisation needs for institutional investors and provide relevant and informative investor reporting.

Technology
HFT IM benefits from a well-built business platform developed around vendor front office systems that are synchronised between the two locations. The framework is enhanced by a dedicated portfolio analytics solution. HFT IM has upgraded its research and investment communication platform and has in place effective, recently strengthened business continuity and disaster recovery procedures. It is challenged to keep modernising the platform in a fast-changing competitive and regulatory environment.

Company Profile
Incorporated in April 2003, HFT IM is a Sino-foreign joint venture asset management company. Haitong Securities Co. Ltd., one of China's top-tier securities firms, owns 51% and BNP Paribas Investment Partners BE Holding, a fully-owned subsidiary of BNP Paribas Investment Partners, owns 49%. HFT HK acts as the international arm of HFT IM servicing the QFII (Qualified Foreign Institutional Investor) and RQFII (RMB Qualified Foreign Institutional Investor) business.

HFT IM had CNY109bn assets under management end-2014 and employed 199 staff, of which 15 are based in Hong Kong.

RATING SENSITIVITIES
The rating may be downgraded as a result of material adverse changes to any of the aforementioned rating drivers, notably through weakened financial conditions, heightened staff turnover or deterioration of processes and policies.

Fitch will consider revising the Outlook to Stable in the next 12 to 24 months should HFT IM demonstrate its ability to retain experienced investment professionals, develop a cohesive senior management team around its newly-hired CEO, and restore investors' confidence. This would reflect Fitch's greater confidence in HFT IM's long-term ability to maintain the highest national standards of its investment platform and operational framework.

Conversely, should the company suffer material staffing turnover relative to other Chinese asset managers and subdued asset development compared with peers, the rating may be downgraded.

For additional information about Fitch's asset manager ratings guidelines, see the criteria referenced below.