London – Fitch Ratings has assigned the Northern Trust Global Funds PLC – The Sterling Conservative Ultra Short ESG Fund a Fund Credit Quality Rating of ‘AAf’ and a Fund Market Risk Sensitivity Rating of ‘S1’. The fund is managed by Northern Trust Asset Management, a subsidiary of Northern Trust Corporation (AA-/Stable/F1+).
Key Rating Drivers
The ‘AAf’ Fund Credit Quality Rating is driven by the high credit quality of the fund as measured by its weighted average rating factor (WARF) and its investment guidelines.
The ‘S1’ Fund Market Risk Sensitivity Rating is driven by the low sensitivity of the fund to interest rate and spread risks, as reflected in its short maturity profile.
The fund pursues an ESG strategy. The manager applies certain ESG criteria to manage the fund and follows an exclusionary approach to define the investable universe. Specifically, the investable universe excludes weapon and tobacco producers, violators of the U.N Global Compact, and those involved in any notable ESG controversies.
Northern Trust Asset management fully integrates MSCI’s ESG issuer ratings in their investment process. The investment manager makes the security selection and constructs the portfolio while considering each issuer’s ESG ratings in its fundamental research and relative-value analysis. The ESG framework is a neutral factor in Fitch’s rating analysis.
High Average Credit Quality
The ‘AAf’ Fund Credit Quality Rating considers both the fund’s actual and prospective credit quality. Fitch calculated a WARF of 0.37 for the portfolio as of 30 June 2020, which is in line with its ‘AAf’ criteria benchmark. (ie 0.3 – 1.0), little changed from 0.37 as of 29 May 2020 and 0.38 as of 30 April 2020. Its investment guidelines limit it to investment-grade fixed-income securities only.
Low Sensitivity to Market Risks
The fund has low exposure to interest-rate and spread risks. The fund had a market risk factor of 0.67 at 30 June 2020, within the ‘S1’ range of 0 – 2.0. The fund targets a weighted average maturity of six months, with all securities typically maturing within three years.
Fund Profile
The fund was launched on 6 August 2019 with a stated investment objective to provide moderate liquidity while maximising income and preserving capital via investing in investment-grade fixed-income securities.
Fitch views the legal and regulatory framework of the fund satisfactory. The Sterling Conservative Ultra Short ESG Fund is a sub-fund of Northern Trust Global Funds Plc, a Dublin-domiciled ICVC fund pursuant to the UCITS regulation. As of end-June 2020, the fund’s total assets stood at GBP50 million. The fund has daily dealing with T+2 day settlement period. The fund has a concentrated but stable investor base, with close scrutiny of the fund’s inflows and outflows.
Investment Manager
Fitch views Northern Trust Asset Management as a suitably qualified, competent and capable investment manager for the fund. Northern Trust Asset Management is a global asset manager with USD 1.1 trillion of assets under management at end-June 2020, of which around 47% was in fixed-income products. Northern Trust Asset management is a subsidiary of Northern Trust Corporation (AA-/Stable/F1+)
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- In light of the COVID-19 outbreak, Fitch has performed baseline and downside stress tests on the fund. These stress tests included downgrades on entities in the fund’s portfolio and outflows. Fitch’s stress test results show that the fund’s credit quality is robust under its COVID-19 baseline and downside stress cases, in addition to Fitch’s standard stress tests. However, the Fund Credit Quality Rating may still be sensitive to material changes in the fund’s credit quality. A material adverse deviation from Fitch’s guidelines for any key rating drivers could cause Fitch to downgrade the rating.
- Potential downgrades to the Fund Market Risk Sensitivity Rating are limited in scope, given the fund’s low sensitivity to interest rate and spread risks, and the fund’s investment guidelines.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- For the Fund Credit Quality Rating, an upgrade is unlikely, unless the fund changes its investment strategy to focus only on the highest-rated securities and reduce its maximum permissible duration. For the Fund Market Risk Sensitivity Rating, as the rating is at the highest possible level on Fitch’s rating scale, it cannot be upgraded.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
