London/Shanghai – Fitch Ratings has downgraded CSOP US Dollar Money Market ETF’s International Fund Credit Quality Rating to ‘AA+f’, from ‘AAAf’ and affirmed its Fund Market Risk Sensitivity Rating at ‘S1’. The fund is managed by CSOP Asset Management Limited.
Key Rating Drivers
The downgrade reflects the fund’s increasing exposure to lower-rated assets in the ‘BBB’ category and the resulting drop in the credit quality of the asset manager’s investment strategy.
Credit Risk
The fund predominately invests in time deposits. Exposure to counterparties rated in the ‘BBB’ category rose to 25% in mid-July 2020, from 10% in February 2020. The remainder are ‘A’ rated assets. The asset manager intends to maintain its exposure to ‘BBB’ rated assets in the medium term. The fund’s weighted-average rating factor (WARF) was above 0.3, which indicated an International Fund Credit Quality Rating in the ‘AAf’ category at mid-July 2020. The rating was downgraded to ‘AA+f’ as the WARF was close to the lower limit of the ‘AA’ range between 0.3 and 1.0.
Market Risk
The fund’s exposure to interest-rate and spread risk is low due to its short maturity profile. The asset manager keeps the weighted-average maturity (WAM) and weighted-average life (WAL) below 60 days and 120 days, respectively. The WAM was 31 days in mid-July 2020.
Investment Manager
Fitch regards the investment manager as suitably qualified, competent, and capable of managing the fund consistently with the rating, with sufficient operational resources and expertise.
CSOP Asset Management Limited, established in 2008, is a leading money fund ETF provider in Hong Kong. China Southern Asset Management Co., Ltd. is CSOP’s major shareholder. CSOP had total assets under management of USD6.3 billion at end-2019 and manages three money fund ETFs: CSOP Hong Kong Dollar Money Fund ETF, CSOP US Dollar Money Fund ETF and CSOP HK Dollar Money Fund ETF.
Rating Sensitivities
- Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
The fund’s International Fund Credit Quality Rating is sensitive to changes in the credit quality of the portfolio assets. Further deterioration of the credit quality of the underlying assets could lead to a further downgrade.
- Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
An upgrade of the International Fund Credit Quality Rating is possible if the credit quality of the underlying assets improves and the investment strategy supports the improvement in the long term. Fitch does not expect a change in the Fund Market Risk Sensitivity Rating given the short duration of the portfolio.
Applicable Rating Criteria
Fitch rates CSOP US Dollar Money Market ETF under its Bond Fund Rating Criteria. The fund is regulated under the money market fund section of the Hong Kong Securities and Futures Commission’s Code on Unit Trusts and Mutual Funds, but Fitch believes the characteristics of the vehicle as an ETF differentiate it from other money market funds. Specifically, the ETF structure means that investors only interact with distributors and authorised dealers, as opposed to traditional mutual funds in which an investor can subscribe or redeem directly with the fund. The ETF therefore provides intermediated liquidity to investors, as opposed to the direct liquidity provided in a mutual fund. Fitch’s money market fund criteria are focused on money market funds that provide direct liquidity to investors. Furthermore, the ability of listed ETF shares to be transacted on the secondary market means that there is the risk of bid or offer deviating from net asset values, driven by market technicals or investor behaviour.
Additional information is available on www.fitchratings.com
