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Moody’s assigns rating to a new South African government bond ETF

Moody’s Investors Service has assigned a bond fund credit rating of A2 and a market risk rating of MR4 to the Clade Government Bond Exchange-Traded Fund, South Africa’s first fixed-income

Moody’s Investors Service has assigned a bond fund credit rating of A2 and a market risk rating of MR4 to the Clade Government Bond Exchange-Traded Fund, South Africa’s first fixed-income ETF.

The fund was officially launched on March 5 and is registered for trading on the Bond Exchange of South Africa, which is also responsible for its regulation.

‘The ratings are based on the credit quality of the fund’s allowable investments and its management relative to the fund’s investment objectives,’ says Moody’s associate vice-president Christos Costandinides.

‘The market risk rating addresses the fund’s expected sensitivity to changing interest rates due to their respective duration and average weighted maturity profiles as well as credit risk pertinent to the government of South Africa.’

The fund’s investment manager is Clade Investment Management, an independent regional investment advisor based in Cape Town. The fund aims to replicate as far as practicable the price and yield performance of the BESA Government Bond Index (Govi) by investing in a portfolio of bonds that substantially represents all the constituent bonds of the Govi index, in substantially the same weighting.

‘The fund’s credit rating is based on its portfolio profile as determined by the benchmark content with all benchmark constituents issued by the government of South Africa and carry a Moody’s global scale local currency issuance rating of A2,’ Costandinides says. ‘The maturity-adjusted weighted average expected loss of the fund’s portfolio is comparable to the expected loss of an A2-rated security.’

The composition of the benchmark index is representative of the outstanding issuance in the South African government bond market. The credit rating represents the South Africa government global scale rating for issuance of debt in local currency. The rating has been assigned to the fund as the securities contained in the benchmark are denominated in Rand and sold to Rand-based investors.

The fund’s market risk rating represents Moody’s opinion on the expected future volatility in net asset value. ‘This is based on analysis of historical benchmark results, typically longer-term, as well as future expectations and market risk that may arise from a fund’s investment strategy and the instruments used to facilitate that strategy,’ Costandinides says.

As of May 16, the Govi index comprised nine constituents with individual modified duration profiles ranging from 1.75 to 9.57 years, and an index-weighted average modified duration of 5.2 years. Over the past seven years the benchmark’s historical weighted average modified duration has ranged between 4.5 years and 5.3 years.

The fund does not currently make use of derivatives nor are there plans to engage in derivative-based investing in the foreseeable future. The fund does plan to engage in securities lending transactions to supplement its income, governed by the law of South Africa and conducted under a general master securities lending agreement. The fund’s custodian, Société Générale Johannesburg, will act as its agent.

Clade’s operations relating to the ETF, with the exception of portfolio management, are outsourced. All operational functions, including administration, custody and compliance, are contracted to licensed third parties.

Rather than issuing common stock, the ETF issues debentures with no fixed coupons at a price equivalent to the NAV at the time of issue. The NAV and portfolio holdings per debenture will reflect the nominal of the underlying bonds and will be calculated on a daily basis by an independent administrator, and provided to authorised participants. The debenture structure is designed to offer at least the same rights to shareholders as a share structure in the event of bankruptcy as well as to provide sufficient regulatory protection to investors.

Clade Investment Management is 40 per cent owned 40 by the Clade Group, which as of February had around ZAR8bn (EUR818m) in assets under management in non-discretionary assets arising from structuring transactions and approximately ZAR20m (EUR2m) in private equity assets

The asset manager has some ZAR1.7bn (EUR174m) in assets under management and employs 13 people. Clade Investment Management established its first index product, the Clade Enhanced Index Fund, in October 2004, and subsequently created the South African Hedge Fund Index, a domestic rules-based fund of hedge funds.

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