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Fitch Downgrades Ignis Absolute Return Government Bond Fund to "Good"
January 22, 2015 / 4:17 PM / 3 years ago

Fitch Downgrades Ignis Absolute Return Government Bond Fund to "Good"

(The following statement was released by the rating agency) PARIS/LONDON, January 22 (Fitch) Fitch Ratings has downgraded Ignis Absolute Return Government Bond (ARGBF) Fund's rating to "Good" from "Strong", removing it from "Under Review". The fund is managed by Ignis Asset Management (Ignis). The downgrade reflects the adverse impact of significant staff turnover in October 2014. Subsequent fund drawdowns in October have challenged the robustness of the fund's investment and risk management processes, and the ability of the fund to maintain its long-term performance track record. In our view, the staff turnover has resulted in a reduction in staffing depth and expertise, which is difficult to replace in the short term, given the unique skill set required by the fund and in the context of the acquisition of Ignis by Standard Life Investments (SLI). Fitch, however, notes that the quality and planned expansion of the new team are evidence of SLI's commitment to the fund. ARGBF's negative performance in 2014 was a result of poorly diversified portfolios, which in turn underlined the shortcoming of the fund's portfolio construction process. In Fitch's view, ARGBF would benefit from more formal guidelines for position-sizing, theme and risk diversification, such as those found at higher-rated absolute return funds, by allowing it to build more balanced portfolios with greater downside protection, in line with its objectives. Nevertheless, Ignis considers the current level of diversification in the fund as appropriate. KEY RATING DRIVERS 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 4%-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 GBP1.17bn in assets under management (AUM) as of end-2014. 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 short-term conviction, using a variety of derivative instruments. Resources The core ARGBF investment team was renewed in October 2014, following the departure of five members, including three of the four main portfolio managers (PMs). Two SLI PMs have now taken over the vacated roles, and the fund is recruiting to strengthen its derivatives trading and daily risk control functions. Track Record Despite a cumulative 15.6% return since launch, the fund suffered from drawdowns in August and October 2014, which resulted in a negative net return in 2014. The fund faced challenges in position-sizing, theme and risk diversification as well as downside risk management as a result of a significant short position on US interest rates until October 2014. Losses since the team departed on 13 October have, however, been recouped and the fund's net asset value is back to its 7 October level. Fund Manager Ignis is a UK investment management company, with GBP60bn AUM at end-June 2014. On 1 July 2014, SLI, a global asset manager with GBP192bn AUM at end-June 2014, confirmed its acquisition of Ignis AM. Ignis's integration with SLI is in progress. 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 expands, stabilises and demonstrates it can operate effectively, and if investment and risk management processes are strengthened, ultimately leading to a longer-term performance that is in line with or above absolute return and risk objectives. To receive forthcoming Fund Quality Rating research, opt in here For more information, please see www.fundmanagement.fitchratings.com Contact: Primary Analyst Manuel Arrive, CFA Senior Director +33 1 44 29 91 77 Fitch France S.A.S. 60 rue de Monceau Paris 75008 Secondary Analyst Richard Woodrow, CFA Associate Director +44 203 530 1388 Committee Chairperson Alastair Sewell, CFA Senior Director +44 203 530 1147 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available on www.fitchratings.com. The sources of information used to assess this rating were the public domain and Ignis Investment Services Limited. Applicable criteria, 'Fund Quality Rating Criteria', dated 16 September 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Fund Quality Rating Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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