OREANDA-NEWS. Fitch Ratings has downgraded State Street Flexible Asset Allocation Plus Fund's Fund Quality Rating to 'Good' from 'Strong'. The fund is managed by State Street Global Advisors (SSGA).

KEY RATING DRIVERS

The downgrade reflects difficulties experienced by the fund in time asset allocation adjustments and portfolio construction decisions, leading to disappointing performance in 2015 and so far in 2016 relative to its objective and peers. The fund's proprietary MRI (market regime indicator) efficiently identifies changes in risk regimes driving broad asset allocation bands but implementation windows and tactical asset allocation decisions prove challenging at times of volatile market conditions. Allocation bands have been updated recently to allow more judgmental flexibility.

The fund rating was placed 'Under Review' in January 2016 to determine whether the recent underperformance reflected a temporary setback or a more structural deterioration in the ability of the investment process to navigate through the cycle and ultimately deliver on its ambitious performance objective to outperform cash by 4%.

Fund Presentation

State Street Flexible Asset Allocation Plus Fund is a sub-fund of SSGA Luxembourg SICAV with EUR73m of assets at end-August 2016. The fund is long-only, and invests globally in all major asset classes. It aims to outperform Euribor 1-month by at least 4% over five years (annualised), with controlled volatility (not exceeding 12%), while minimising drawdowns (maximum drawdown of 10%) in volatile markets. It has been managed under the current investment approach since December 2012. Prior to May 2015, the fund was a France-domiciled SICAV.

Investment Process

A key input in the portfolio construction is the MRI, a proprietary macro indicator developed in 2001. It systematically identifies prevailing market regimes and trends on the basis of investors' risk aversion across multiple markets and regions. In Fitch's view, the MRI approach fosters efficiency and discipline in the investment process.

Portfolio construction is disciplined, and follows a predefined asset allocation mix corresponding to prevailing market regimes, as defined by the MRI. These were recently reviewed to allow more flexibility and leave more room to judgmental views on sub-asset classes and geographical regions, which drive tactical positions. The final portfolio is implemented through direct holdings, funds, ETFs and listed derivatives, primarily futures. Enhancements of option-based strategies are in the pipeline for more granular strategic timing and more robust drawdown management.

Resources

The fund is managed by a Paris-based team of four, led by Frederic Dodard, with 19 years of experience and Head of EMEA Investment Solutions Group at SSGA. Gregory Taieb is the fund's lead portfolio manager. The team is supported by a well-staffed research team. SSGA's investment resources are solid, including a global trading desk and an investment risk team.

The fund benefits from SSGA's operational and risk control framework. The IT environment is built around a combination of third-party and proprietary systems, supporting well-controlled workflows.

Track Record

The fund returned minus 1% in 2016 to end-August (I share class), underperforming its reference index and Lipper peer group category. This was primarily due to untimely portfolio de-risking in January, February and June 2016, as reallocation decisions are typically implemented over a two-week period. The July market rebound was, however, better captured. The fund's three-year performance is above peers but lagging behind the cash + 4% objective.

Fund Manager

SSGA is the investment management arm of State Street Corporation (AA-/Stable/F1+). It is a global asset manager with USD2.3trn in assets under management as of mid-2016, including USD2bn in in absolute return/flexible strategies. It employs more than 2,500 staff globally.

RATING SENSITIVITIES

The rating may be sensitive to material changes in the investment or operational processes, or in resources dedicated to the fund. A material adverse deviation from Fitch's guidelines for any key rating drivers could result in a downgrade of the rating. For example, this may be manifested in significant structural deterioration in the fund's performance or an excessive deviation from risk objectives. Key person risk is limited for this fund, but model risk exists.