Hot on the heels of last week's "Advance Notice Of Proposed Criteria Change: Principal Stability Fund Ratings Criteria," Standard & Poor's released another research piece, "Methodology For Evaluating Fund Management In Principal Stability Fund Ratings," which discusses the role management and potential parental support plays in a fund's rating. The "RatingsDirect" piece says, "Understanding the strengths and weaknesses of fund management is an essential part of Standard & Poor's Ratings Services' principal stability fund ratings (PSFRs).
It continues, "When we analyze a fund, we evaluate fund management's effectiveness in implementing a dynamic investment process consistent with the fund's stated goals, objectives, and PSFR category. When we assign a PSFR, we seek to determine fund management's level of risk tolerance. Management's willingness and ability to operate the fund within a set of risk tolerances are important components of our ratings evaluation. From time to time circumstances will cause a fund to exceed its own defined risk tolerances."
S&P says, "We are providing more clarity on our PSFR methodology so market participants better understand our approach to analyzing how fund management responds to issues that temporarily (e.g., usually one to five business days) move a fund beyond the quantitative criteria for our PSFRs. These temporary issues have included an unexpected lengthening of a fund's weighted average maturity (WAM), unforeseen deterioration in the credit quality of an investment, and volatility of a fund's net asset value (NAV)."
"As each of these situations arises, we determine whether rating changes are needed based on the severity and impact on the fund's NAV and potential for further decline in light of the fund management's responsiveness. Historically, fund management has quickly and proactively dealt with a majority of these instances. Although many of these circumstances have been addressed within five business days, under certain circumstances a longer period of time may be consistent with maintaining a current PSFR. However, if the situation impairs the fund's NAV, it is likely to result in a negative rating action," says the ratings agency.
S&P explains, "We conduct weekly surveillance of a rated fund's statistical information and portfolio holdings. The methodology and procedures outlined below are part of the initial and ongoing dialog we maintain with each rated fund. This report is intended to explain how we apply our qualitative PSFR criteria when analyzing a particular fund that falls outside or does not fully meet the quantitative PSFR criteria for a given PSFR rating category. This report includes answers to frequently asked questions posed by users of our ratings."
Finally, they say, "The criteria for Standard & Poor's 'AAAm' PSFRs are characterized by, but not limited to, the following: Maximum WAM of 60 days or less; Minimum of 50% in 'A-1+' securities, and maximum of 50% in 'A-1' securities; Maximum final maturity of floating-rate securities is two years; and Daily marked-to-market NAV (per share) range of $0.9975 to $1.0025." S&P explains, "Our assessment does not rely on a fund sponsor's willingness and/or ability to support a rated fund's NAV. However, we will review and assess the measures a sponsor chooses to take to support its NAV during times of market stress or when a fund sponsor decides to take action to support the fund's NAV or liquidity."
