SAO PAULO & RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has affirmed the International Scale Asset Manager Rating at 'Good Standards' for Equitas Administracao de Fundos de Investimentos Ltda. (Equitas). The Rating Outlook remains Stable.
KEY RATING DRIVERS
Equita's 'Good Standards' rating reflects Fitch's opinion that the manager's investment platform and operating framework are good relative to the standards applied by institutional investors in international markets.
The rating factors in Equita's strong investment process which is supported by in-depth proprietary research. The rating also takes into consideration the experienced senior investment team, adequate control structure, appropriate governance reinforced by the company's partnership model, in addition to the well-defined investment process supported by in-depth proprietary research. The rating also benefits from the outsourcing of fund fiduciary administration and custody to well-established and specialized service providers, such as BNY Mellon and BTG Pactual.
The rating assigned to Equitas only applies to its local Brazilian activities in traditional funds and does not include its overseas operations, which have their own processes and policies.
In Fitch's opinion, Equitas' key challenges are reducing the AUM volatility, diversifying its client base as well as providing good investment performance and financial results in a backdrop of greater local competition and in periods of market stress. Other challenges include the continuous improvement of resources and internal controls capabilities to face projected AUM growth including the development of the investment team to address 'key-person risk' as well as the deployment of initiatives for distribution to new type of investors.
Equitas' 'Good Standards' rating is based on the following assessment:
Company: Good
Controls: Good
Investments: High
Operations: Good
Technology: Good
COMPANY
Founded in 2006, Equitas is a boutique independent asset manager established in a partnership model which reinforces the company's governance and the stability in the senior management. The asset manager is composed of 19 professionals, 11 in investment, with expertise in long only, long biased and long & short strategies. The two founding partners are the co-portfolio managers and a group of three other partners perform key functions in risk, trading and research. The overall structure is lean but adequate considering the current level of AUM and number of investment strategies, as well as the support of specialized third party service providers in compliance, risk controls and operational activities.
AUM growth in recent years has been strong, with a 47.6% compound annual growth rate (CAGR) since April 2012 (Initial Rating). This growth has presented a high volatility, though, in 2011 Equitas experienced an abrupt fall from BRL795 million (2010) to BRL454 million (2011), and back to BRL752 million (2012). This process is happening again, with a fall of AUM from BRL1346 million (December 2013) to BRL910 million (1Q'14). The asset manager's funds presented in the short term a below its historical average risk-adjusted performance relative to the objectives and peers, specially their long & short funds, which has contributed to the decrease in assets. The asset managers' distribution is in large part conducted by third party distributors (45%) as well as fund allocators (24%), and also include pension funds (14%), family offices (10%), and others (7%). Regarding manager's funds, the long & short strategy maintains a substantial amount of the AUM (60%) against long biased (22%) and long only (18%). The predominance of the long short strategy has been diminishing. The historical AUM increase and past good fund performance have contributed to an increase in the company's profitability, although diminishing AUM volatility is a key challenge.
CONTROLS
The risk control framework, which is not segregated, is adequate and the functions are under the responsibility of a major executive partner, COO/CRO. Market and liquidity risk management rely on good controls with adequate level of automation. Risk metrics are well-integrated in investment guidelines with clear and segmented limits by asset and strategy level which are more restrictive than the overall portfolio limits.
Equitas monitors market risks and liquidity in all its portfolios and funds on a daily basis. The funds have not experienced market and liquidity risk breaches or deviation in investment policy constraints. Compliance and internal controls have basic resources but the outsourcing of fiduciary administration to well-established financial conglomerates, BNY Mellon (96% of the AUM) and BTG Pactual (4% of the AUM), contributes to the appropriate practices according to regulatory requirements.
INVESTMENTS
Investments resources are adequate and the discipline is strengthened by the detailed and formalized investment guidelines which also provide good capabilities for investment decision tracking and performance attribution metrics. There is a certain level of centralization in decision-making process, despite the utilization of committees.
Equitas focuses mainly in bottom-up fundamentalist equity strategies as long-biased, long-only and primarily in long-short (60% of AUM) funds. The long & shot funds have two different risk profiles: The lower risk fund (Equitas Equity Hedge) has a limit of gross exposure of 120% and -5% to +5% of net exposure, whereas the higher risk fund (Equitas Zenith) has a limit of gross exposure of 250% and -15% to +15% net exposure. The investment process is supported by the high quality of in-depth proprietary research for a selected universe of companies with utilization of diversified investment strategies. The investment team is organized with separation of functions among portfolio management, trading and research. The research team has been strengthened to extend the coverage of companies; they also utilize economic consultants for macroeconomic research.
OPERATIONS
Equitas relies upon the good quality of outsourced fiduciary administration and custody services, provided by specialized institutions, primarily by companies of the BNY Mellon and Bradesco groups, both well-known institutions, with solid asset pricing and daily net asset value (NAV) calculations. Nonetheless, the manager's middle office area carries out adequate reconciliation procedures in order to avoid operational failures in the settlement of positions and in NAV calculations. The reporting to institutional investors presents good standards with comprehensive analysis of metrics and investment rationale.
TECHNOLOGY
The technological platform that serves the company's overall requirements counts on adequate support, security and contingency resources. The asset manager's critical databases for fund assets and liabilities are maintained by the fiduciary administrator. The processes are partially automated by using macro-based Excel spreadsheets and integrated with the systems of external service providers, such as those of the fiduciary administrator and brokerage houses. An external front office system, Eze Castle, was implemented in 2014 and is in its final adjustments, expected for the second semester of 2014. This system improved the productivity and control of activities, besides broadening capabilities and automation. Its functionalities sophisticates their asset allocation, market and order follow-ups, portfolio managing and in checking orders and prices with administrators and brokers. Equitas' contingency back up resources are appropriate.
COMPANY PROFILE
Equitas is a boutique independent asset manager in a partnership model with AUM of BRL910 million as of March 2014. The company, headquartered in Sao Paulo, Brazil, was created for corporate finance advisory in 2003 and has been dedicated solely for investment management services since 2006. Portfolio management is performed with an equity multi-strategy approach for three main fund classes that seek to achieve long term risk-adjusted performance above the respective benchmarks. The distribution is oriented mainly through financial institutions platforms, independent advisory firms, multi and single family offices, and more recently to local pension funds and foreign investors.
RATING SENSITIVITIES
The rating assigned to Equitas Administracao de Fundos de Investimentos Ltda. could be sensitive to important adverse changes in any of the key drivers mentioned above rating drivers. Specifically, notably a weakening in its financial profile, high turnover of executives or deterioration in its processes and policies. Furthermore, it will be important for Equitas to develop investment structure, systems and controls further, to be more scalable should the firm seek to add new strategies or if AUM materially increases. An important deviation from Fitch's guidelines for any key driver could also result in a rating downgrade.
To obtain additional information on Fitch's asset manager rating criteria, refer to the criteria mentioned below, available at the agency's websites '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' (May 6, 2014).
Applicable Criteria and Related Research:
Asset Manager Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=747701
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=838597
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