OREANDA-NEWS. Fitch Ratings has affirmed the "Strong" Fund Quality ratings of five funds managed by Petercam Institutional Asset Management (Petercam IAM) and placed another under review. The list of rating actions is as follows:

Petercam Equities Euroland (PEE1): affirmed at "Strong"
Petercam Equities Europe (PEE2) affirmed at "Strong"
Petercam Equities Europe Sustainable (PEES) affirmed at "Strong"
Petercam Securities Real Estate Europe (PSRE) affirmed at "Strong"
Petercam Equities World Sustainable (PEWS) "Strong" rating placed Under Review
Petercam L Bonds Government Sustainable (PBGS) affirmed at "Strong"

Fitch has placed the "Strong" rating of PEWS "Under Review" following the departure of Bart Baetens, the lead Portfolio Manager (PM) of the fund since 2008. A. Roose, who was a member of the global equity team, will take over as lead PM, with D.Dury, PM at Degroof, joining as co-manager. Fitch views Mr. Baetens as a key component of the fund's investment strategy. The agency expects to resolve the "Under Review" status of the fund in the next six months. Fitch will closely monitor the fund during this period to determine if the capacity of the fund to achieve its objectives and outperform peers is structurally modified.

The 'Strong' rating reflects the funds' active, long-term investment approach, which is primarily based on bottom-up fundamentals selection, and also incorporates top-down thematic views and the SRI-ESG criteria for the relevant funds. Overall, the funds benefit from strong, broadly stable, staffing and IT resources. The merger between DeGroof Fund Management and Petercam IAM creates some uncertainties, but should have no rating impact, as the limited overlaps between the two companies' product range and strategies are expected to leave the current investment teams and processes of the funds unaffected.

KEY RATING DRIVERS
Fund Presentation
PEE1, PEE2, PEES, PSRE and PEWS are UCITS IV-compliant Belgium SICAV. PBGS is UCITS IV-compliant Luxemburg SICAV.

PEE1, PEE2, PEES, PSRE invest in European equity. Specifically, PEES invests according to their socially responsible investment (SRI) or environmental, social and governance (ESG) criteria. PSRE invests in European real estate equities. PBGS and PEWS also follow a sustainable approach, investing in sovereign bonds from OECD countries and global equities (with an emerging market bias), respectively.

Investment Process
Petercam European equity funds (PEE1, PEE2, PEES, and PSRE) follow an active, long-term investment approach, primarily based on bottom-up fundamental stock-picking and which also incorporates top-down thematic views. The funds are fully invested, and have a quality growth, mid-cap bias. In Fitch's view, the four European equity fund's investment edge originates from its focus on under-researched, quality small to mid-cap companies. Portfolio construction is not constrained by the funds' benchmarks, although risk guidelines limit deviation from the benchmark.

PEES's eligible universe of around 250 stocks is derived from a filtering process using third-party and proprietary SRI-ESG scoring factors, which the fund sees as determinants of sustainable growth.

PSRE is managed against a customised benchmark, the Petercam European Property Shares (PEPS) index.

PEWS invests in 50 equally weighted large-cap global companies that it views as potential market leaders and comply with Petercam's sustainability criteria. Geographical allocation is based on the Oxford Economics' 2025 GDP forecasts and focuses on companies' sales location rather than on their domicile. The fund has an EM, quality growth bias and is exposed to the financial sector.

PGSB's investment process is based on a quantitative analysis using over 50 criteria that rank OECD countries by sustainability metrics. The top 50% of countries by ranking are eligible for investment. The PMs aim to weight their allocation towards countries with the highest SRI rankings. The fund is fully invested, with a bias towards 'AAA'/'AA' rated eurozone government bonds.

Resources
Investment decisions are taken collectively by the two (or three) PMs of the funds. A dedicated equity analyst team of nine, specialised by sector, conduct equity research on European stocks. For real estate stocks, global equity stocks and sovereign, PMs conduct their own research.

An independent investment risk team of four oversees and challenges the PMs' decisions, making full use of third-party risk analytics.

Funds managed under a sustainable approach benefit from the support of an advisory board and a dedicated SRI coordinator. Petercam IAM has outsourced its middle office and IT functions to Lombard Odier since 2012.

Track Record
PEE1 has performed strongly in 2015, achieving a top quintile performance, outperforming both peers and the index. PPE2 has also outperformed, generating a second quintile performance. However, both funds performed poorly in 2014 due to their underweight positions to large capitalisation stocks and utilities, combined with poor stock-picking. Over a five year period, PEE1 has achieved a top quintile performance.

PEES's performance has lagged the index and (broad) peers over one, three and five years to November 2015. As a consequence its Lipper Leader scores for consistent return (for Belgium) were 1 over a three-, five- and 10 year-period to November 2015. However, its six-month rolling Jensen's alpha (a measure of risk-adjusted performance) has been improving since August 2014, returning to positive territory in 4Q15 for the first time since May 2013.

PSRE has delivered first quintile performance over three and five years to November 2015, outperforming its benchmark net of fees with lower volatility, thereby meeting its objective. It is likely to underperform peers in markets where UK real estate performs strongly, given the benchmark's and fund's lower weighting to the UK compared with peers.

PEWS, which has been managed with the current strategy since 2008, has been an average performer in its global equity category. EM and the exclusion of the financial sector explain most of its performance deviation from the indicative benchmark, MSCI World.

PBGS has been an average performer in its category, underperforming since 2012 the JP Morgan EMU Government Index, which is used for reference only, given the fund's restricted SRI universe. The fund's performance is explained by its bias towards highly rated, rates-sensitive rather than credit-sensitive eurozone government bonds.

Fund Manager
Petercam IAM is a wholly owned subsidiary of Bank Degroof Petercam. The merger of Bank Degroof and Petercam completed in October 2015 will be followed by the merger of the two asset management subsidiaries in early 2016. In Fitch's opinion, the merger between Degroof and Petercam should leave core investment processes and front-office staff largely unaffected but could lead to changes in support and control functions, operating model and technological platform. Petercam IAM and Degroof had EUR30bn assets under management (AUM) at as at end-September 2015. The company's historical focus has been in European assets and investors.

RATING SENSITIVITIES
The rating may be sensitive to material changes in the investment or operational processes or resources dedicated to the fund. A material adverse deviation from Fitch's guidelines for any key rating driver could result in a downgrade. For example, notable structural deterioration in the fund's performance or departure of PMs (to which PSRE and PEWS are deemed more sensitive) or a substantial operational loss due a merger-related process failure, may cause a downgrade.

The PSRE fund could be upgraded to 'Excellent' if it meets Fitch's criteria for a 'Strong' track record and if PMs demonstrate stock picking skills in markets that historically have not been core to Petercam's expertise.

PEEI may be upgraded if the fund can demonstrate that 2014 was an isolated event in an otherwise strong long-term track-record. This would be demonstrated through consistent outperformance on a risk-adjusted basis over five years and more.

Further, continued weak performance of PEES would likely result in the fund being placed 'Under Review' or downgraded.