OREANDA-NEWS. Fitch Ratings has affirmed Ignis Absolute Return Bond Fund's (ARGBF) Fund Quality Rating at "Good". The fund is managed by Standard Life Investments (SLI).

KEY RATING DRIVERS
The rating affirmation reflects the stabilisation of the investment platform following staff turnover and underperformance in late 2014. The company in 2015 hired two experienced lead portfolio managers (PMs), whose skill sets and experience are well-matched with the requirements of the fund, in Fitch's view. The agency also views favourably for the rating the strengthening of the fund's risk framework and derivatives trading capabilities. Finally, the fund has seen an improved track record over the last 12 months.

Fund Presentation
ARGBF is an absolute return government bond fund, seeking to deliver positive returns on a 12-month rolling basis, with a target volatility of 3%-6% a year and a maximum 10x gross leverage. The fund is a UCITS-compliant Luxemburg SICAV and was launched in March 2011. It had GBP311m in assets under management (AUM) as of end-February 2016. The fund will move to SLI's SICAV and will be rebranded in 4Q16.

Investment Process
The fund's research process aims to identify macroeconomic themes, which are expressed in forward-rate terms over a six-month investment horizon. A proprietary system, Clearcurve, deconstructs yield curves and pinpoints desired exposures. The focus on forward-rate analysis, supported by proprietary analytics, differentiates the fund.

The fund actively trades seven separate, lowly correlated, risk buckets (such as rates, FX and volatility), based on its macroeconomic views and the level of conviction, using a variety of derivative instruments. Stop-losses were implemented in 2015, increasing focus on downside risks. Decision-making is consensual. Each PM has a specific market focus but no PM owns a given risk bucket.

Resources
The team consists of four PMs, including two senior hires in September 2015, who brought deep derivatives trading experience. The core ARGBF investment team was renewed, following the departure of three main PMs, in October 2014, which coupled with drawdowns, triggered outflows. The ARGBF investment team has been integrated within the SLI's multi-asset division and wider SLI's infrastructure, while retaining its investment autonomy.

Track Record
The fund returned a cumulative 15% (second quintile) performance since launch to end- February 2016, with six of the seven risk buckets reporting a positive performance. Low correlation of returns across risk buckets and with credit and rates markets, and better drawdown management contributed to a first quintile performance over the one year to end- February 2016. However, the fund has delivered negative 12-month rolling returns since 3Q14, suffering from drawdowns in 2014 (significant short position on US rates) and, to a lesser extent, 2015 (higher bond correlation).

Fund Manager
SLI had GBP253bn AUM at end-December 2015. SLI acquired Ignis Asset Management Limited in July 2014.

RATING SENSITIVITIES
The rating may be sensitive to material changes in the investment or operational processes or resources dedicated to the fund. A material adverse deviation from Fitch's guidelines for any key rating driver could result in a downgrade. For example, this may be manifested in further significant structural deterioration in the fund's performance or excessive risk-taking.

Conversely, Fitch may consider an upgrade if the fund's new team demonstrates stability and that it can operate effectively over a longer period of time. This is provided that investment and risk management processes also continue to be strengthened in the areas of decision-making and risk budgeting, ultimately leading to a longer-term performance that is in line with or above absolute return and risk objectives.