OREANDA-NEWS. Fitch Ratings has published the Royal London Enhanced Cash Plus Fund's Fund Credit Quality Rating of 'AA' and its Fund Volatility Rating of 'V2'. The fund is a sub-fund of the UK-domiciled OEIC, Royal London Bond Funds ICVC and was launched in May 2015. It is advised by Royal London Asset Management (RLAM).

KEY RATING DRIVERS
The 'AA' Fund Credit Quality Rating is driven by the fund's high actual and expected weighted average credit quality and distribution of ratings, taking into consideration its investment guidelines and stress scenarios Fitch has developed on the basis of those guidelines. Fitch notes the investment manager's intention to manage the fund to a 'AA' weighted average credit quality.

The assignment of the 'V2' Fund Volatility Rating reflects the fund's low sensitivity to market risk factors such as interest rate and spread risks, again taking into consideration the actual and prospective portfolio construction, notably the fund's potential exposure to longer-dated securities, including stress scenarios. Lastly, the rating also recognises the investment advisor's capabilities and resources.

Asset Credit Quality
The fund's weighted average credit quality is high as indicated by its weighted average rating factor, which was 0.57 at end-January 2016, at the upper end of the 'AA' Fund Credit Quality Rating range in Fitch's rating criteria (0.4-1.1). The fund only invests in investment-grade securities and, as of end-January 2016 'AAA' securities represented the largest share in its portfolio. The fund may invest up to 20% of its assets in ABS, MBS, and covered bonds, typically of at least 'AA' credit quality.

Portfolio Sensitivity to Market Risks
The fund has a low exposure to market risk factors such as interest rate and spread risks. The fund manages interest rate risk to a target duration band of one-to-two years with a limit of three years. Its weighted average maturity to reset date (a proxy for duration) was 255 days as of end-January 2016.

The fund may be exposed to spread risk as there is no limit on weighted-average final maturity and a maximum legal final maturity limit of 10 years for all securities, save for ABS and MBS. The fund had a weighted average life (a proxy for spread duration) of 521 days as of end-January 2016. This potential exposure to longer-dated securities leads Fitch to assign a conservative 'V2' Fund Volatility Rating, whereas the fund's market risk factor would indicate a 'V1' rating based on the end-January 2016 portfolio composition.

Fund Profile
The fund's investment objective is to minimise risk to capital while providing income and capital growth in excess of money market rates. It has a similar investment approach to the existing Royal London Cash Plus Fund, with the potential for higher yield and a corresponding increase in risk.

Investment Advisor
RLAM was established in 1988 and is part of the Royal London Group, a mutual society. Royal London is the UK's largest mutual life and pensions company. RLAM managed a total of GBP84.5bn assets as of end-December 2015, of which approximately 41% were in fixed income and 8% in cash products.

To maintain bond fund ratings, HSBC, the administrator of these funds, provides Fitch with portfolio information, including details of the portfolio's holdings and credit quality. Fitch closely monitors the credit composition of the portfolio, the credit counterparties used by the manager and the overall market risk profile of the investments.

RATING SENSITIVITIES
The ratings assigned to the fund may be sensitive to material changes in the credit quality or market risk profile of the fund. A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be downgraded by Fitch.

If negative rating migration occurs to the extent that the portfolio's WARF increases significantly, the Fund Credit Quality Rating is at risk of being downgraded. Specifically, Fitch estimates that a downgrade of the largest five positions, in the end-January 2016 portfolio, by two notches may lead to a downgrade of the Fund Credit Quality Rating to 'A'.