SAO PAULO & RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has affirmed the International Scale Asset Manager Rating of Schroder Investment Management Brasil Ltda. (Schroder Brasil) at 'High Standards'. The Rating Outlook was revised to Negative from Stable.
Key Rating Drivers
The 'High Standards' rating assigned to Schroder Brasil reflects Fitch's opinion that the investment platform and operational framework of the asset manager are strong relative to the standards applied by institutional investors in international markets.
The revision of the Outlook to Negative reflects the challenges Schroder Brasil faces in the near- to intermediate-term as it restructures its operations, resulting in substantial staff turnover and modifications to its investment process as the firm repositions itself following a recent significant reduction in assets under management, and net losses reported since 2011.
The affirmation of Schroder Brasil's rating factors in its integration with the parent, Schroders Plc (Schroders Plc, IDR 'A+'/Outlook Stable), which mitigates concerns with respect to staff turnover and near-term business challenges, considering the global strength and franchise of the parent company. Additionally, Schroder Brasil's investment process as well as the risk controls and compliance areas also benefit from this relationship.
The rating for Shroder Brasil applies to its activities in the local Brazilian market managing traditional funds. The group's main company, Schroder Investment Management, based in London, has an International Scale Asset Manager Rating of 'Highest Standards/Outlook Stable'.
Fitch believes that Schroder Brasil's main challenges will be related to its restructuring efforts including reducing turnover amongst its investment professionals, improving investment performance in its funds, diversifying its client base and improving profitability.
The 'High Standards' rating is based on the following assessments:
Company: from Highest to High
Controls: High
Investments: from High to Good
Operations: High
Technology: High
Company
Schroder Brasil is part of a profitable and solid global asset management group. Schroder Brasil's financial results, however, have been deteriorating, as the manager has experienced significant reductions in AUM, in part a consequence of underperforming investment returns posted by its equity funds. The reduction in equity fund AUM, going from BRL3.1 billion in 2010 to BRL277 million in September 2013, has resulted in significantly lower revenues from administration and performance fees. While the firm has increased AUM in its fixed income funds to BRL2.1 billion from BRL517 million in the same period, as a result of lower fees on this business, this increase was not enough to offset the decline on the equity funds side. Overall, AUM decreased 35% during the first nine months of 2013. The company implemented significant cost reductions as a result of the decline in equity fund AUM during 2013.
As of September 2013, its AUM per type of fund comprised fixed income (74%), multimarket (13%), equity/long only (10%) and long and short (3%), a significant change from 2010 when fixed income and equity strategies made up 13% and 76%, respectively.
The asset manager relies on a solid organizational structure and corporate governance, following the global group's methodologies. Despite the large reduction in the number of professionals, from 34 in December 2012 to 20 in September 2013, Fitch believes that Schroder Brasil maintains an adequate structure for the number of funds and investment strategies, focused on equity/long only and on macro fixed-income, as well as long and short.
Controls
Risk and compliance controls are sound and well-formalized, following the global group's methodologies and policies. The manager maintains a strong relationship with the parent, which regularly participates in its monthly risk and compliance committees and carries out internal audits, thus strengthening the segregation of its activities and the supervision of its policies and controls. These factors have minimized the turnover in the market risk and liquidity areas. The current market risk and liquidity manager was hired in 2013. Fund limits have not reported relevant breaches, which are promptly resolved.
Investments
Notwithstanding its well-established investment processes based on committees and supported by solid systems and wide access to the markets, Schroder Brasil has experienced high turnover on its investment team, primarily in the equity funds group, due to the weak fund performance since 2010. At year-end 2013, the equity/long-only portfolio manager, the long and short portfolio manager, two traders and three of the four equity analysts were released. One fixed income portfolio manager, one fixed income analyst and one long and short co-portfolio manager remained. The multimarket portfolio manager also left the company in 2013.
Two Brazilian-based analysts in the global group, covering emerging markets, took over the equity funds process. One of the analysts in this team was appointed as portfolio manager in 2014. This manager reports to the head of Latin America domiciled in London. The fixed income team, which has not experienced turnover, now reports to the fixed income manager in Argentina.
Operations
Administration and custody activities are outsourced to three large financial conglomerates (Banco Bradesco S.A., Citibank and Itau Unibanco Holding S.A.), which enhance the segregation of its activities. The processes are in compliance with regulations and best-market practices and are supported by solid technological platforms. Services are standardized, fully integrated and automated, under the supervision of the middle office area, with wide reconciliation of all its operations.
Technology
Schroder Brasil relies on sophisticated management systems, risk control and back office, benefiting from the group's corporate structure with some systems in common. These systems enable pre-trading blocks and alerts, as well as fully automated and integrated managerial reports with reconciliation, trading and compliance processes. Contingency plans are robust, with back up of all critical systems and regular tests.
Company Profile
Schroder Brasil is a fully owned subsidiary of Schroders Plc and dates back to 1994, when the group opened an office in Brazil for equity analysis. Headquartered in London, with a footprint in 27 countries, Schroders Plc has a strong franchise as a global asset manager with AUM of GBP212 billion as of September 2013. It was founded in 1804 and has been listed at the London Stock Exchange since 1959, being controlled by the Schroder Family.
Rating Sensitivities
Schroder Brasil's rating is sensitive to relevant adverse changes to any of its above mentioned major fundamentals, mainly in case of weakening of its financial profile, high professional turnover or deterioration in its processes and policies. A relevant deviation from Fitch's guidelines for any key factor could also result in a rating downgrade.
For further information on Fitch's asset manager rating analysis, please refer to the methodologies mentioned below, which are available at the agency's websites, at 'www.fitchratings.com' or 'www.fitchratings.com.br'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Asset Manager Rating Criteria' (April 22, 2013).
Applicable Criteria and Related Research:
Asset Manager Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=706476
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=821456
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