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Fitch Affirms Royal London Cash Plus and Enhanced Cash Plus Funds
October 3, 2016 / 4:31 PM / a year ago

Fitch Affirms Royal London Cash Plus and Enhanced Cash Plus Funds

(The following statement was released by the rating agency) LONDON/PARIS, October 03 (Fitch) Fitch Ratings has affirmed the following two sub-funds of the UK-domiciled OEIC, Royal London Bond Funds ICVC, both managed by Royal London Asset Management Ltd (RLAM): Royal London Cash Plus Fund: 'AAAf' / 'S1' Royal London Enhanced Cash Plus Fund: 'AAf' /'S2' The affirmation of the Fund Credit Quality Ratings is driven by the high and stable credit quality of the funds as measured by their weighted average rating factors (WARF), which are consistent with the ratings. The affirmation of the Fund Market Risk Sensitivity Ratings is driven by the funds' low sensitivity to interest rate and spread risks, as reflected in the funds' maturity profiles. KEY RATING DRIVERS Weighted Average Credit Quality The cash plus fund's weighted average credit quality is very high, as indicated by the fund's WARF, which was 0.14 at end-August 2016. The fund's investment guidelines allow a minimum credit quality of 'F1' or equivalent for cash instruments, UK government securities and supranational issuers with a minimum 'AA' rating, and corporate bonds with a minimum 'AA-' rating. The fund also invests in covered bonds, typically of at least 'AA' credit quality. The enhanced cash plus fund's weighted average credit quality is high, as indicated by the fund's WARF, which was 0.3 at end-August 2016. This WARF indicates a borderline 'AAAf' Fund Credit Quality Rating; however, Fitch has chosen to affirm the fund at 'AAf' based on the results of its WARF stress testing, which indicate that any downgrades or extension of credit risk in the portfolio could push the WARF into the 'AAf' range. The fund only invests in investment-grade securities and may invest up to 20% of its assets in ABS, MBS, and covered bonds. Portfolio Sensitivities to Market Risks The cash plus fund has a very low exposure to interest rate and spread risks. The weighted-average maturity (WAM) to reset date (WAM, which measures interest rate sensitivity) of the fund was 112 days and its weighted average life (WAL) to final maturity date (which measures sensitivity to spread risk) was 312 days, resulting in a market risk factor well within the 'S1' Fund Market Risk Sensitivity Rating range as of end-August 2016. Interest rate risk is managed with a duration limited to three years, although duration has been stable at around 0.4 years over the past 12 months. The enhanced cash plus 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 WAM to reset date (a proxy for duration) was 200 days as of end-August 2016. The fund may be exposed to spread risk as there is no limit on weighted-average final maturity and given a maximum legal final maturity limit of 10 years for all securities, save for ABS and MBS. The fund had a WAL (a proxy for spread duration) of 424 days as of end-August 2016. Potential exposure to longer-dated securities leads Fitch to assign a conservative 'S2' Fund Market Risk Sensitivity Rating, whereas the fund's market risk factor would indicate a 'S1' rating based on the end-August 2016 portfolio composition. Neither fund uses leverage or takes foreign currency exposures. Fund Profiles The sub-funds are domiciled in the UK, are regulated by the UK's Financial Conduct Authority and are UCITS-compliant. The cash plus fund's performance objective is to achieve +0.5% to +0.75% per annum gross of fees above seven-day LIBID over a rolling 12-month period. The enhanced cash plus 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 cash plus fund but with the potential for higher yield and a corresponding increase in risk. The cash plus fund's total assets stood at approximately GBP2bn and the enhanced cash plus fund's at GBP330m. The 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 pension company. RLAM managed a total of around GBP88bn in assets, of which around half were in fixed income as of end-March 2016. RATING SENSITIVITIES The ratings may be sensitive to material changes in the funds' credit quality or market risk profile. A material adverse deviation from Fitch's guidelines for any key rating driver could cause Fitch to downgrade the ratings. For example, if credit deterioration occurs such that the WARF increases beyond criteria levels for the ratings assigned, the ratings may be downgraded. Fitch's WARF stress testing shows that the ratings of both funds are robust at the current levels. The stress tests for the enhanced cash plus fund also show that despite the fund's base WARF indicating a 'AAAf' rating, the fund's credit quality profile is nonetheless more consistent with a fund in the 'AAf' rating range. Potential downgrades to the Fund Market Risk Sensitivity Rating are limited in scope, given the funds' low sensitivity to interest rate and spread risks, and the funds' investment guidelines. Contact: Primary Analyst Alastair Sewell, CFA Senior Director +44 20 3530 1147 Fitch Ratings Ltd 30 North Colonnade London E14 5GN Secondary Analyst Charlotte Quiniou, CFA Director +33 1 44 29 92 81 Committee Chairperson Gregory Fayvilevich Senior Director +1 212 908 8151 Media Relations: Rose Millburn, London, Tel: +44 203 530 1741, Email: rose.millburn@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bond Fund Rating Criteria (pub. 22 Aug 2016) here Additional Disclosures Solicitation Status here Endorsement Policy here ail=31 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 WEB SITE AT 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. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. 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Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. 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