ECONOMYNEXT – Fitch Ratings has maintained the National Fund Credit Quality Rating of Capital Alliance Investment Grade Fund, which invests in Sri Lankan government securities, at ‘BBf(lka)’ and its National Fund Market Risk Sensitivity Rating at ‘S4(lka)’.
“The National Fund Market Risk Sensitivity rating reflects Capital Alliance Investment Grade Fund’s moderate to high sensitivity to interest-rate and spread risk,” Fitch said.
The fund size has increased to around LKR55 billion as of end-March 2025, Fitch said.
The full statement is reproduced below:
Fitch Affirms Capital Alliance Investment Grade Fund at ‘BBf(lka)’/’S4(lka)’
Fitch Ratings – Shanghai/London – 16 Apr 2025: Fitch Ratings has affirmed Capital Alliance Investment Grade Fund’s National Fund Credit Quality Rating at ‘BBf(lka)’ and its National Fund Market Risk Sensitivity Rating at’S4(lka)’.
KEY RATING DRIVERS
The fund invests directly and indirectly in Sri Lankan government securities, as well as financial institutions and non-bank financial institutions (NBFIs). Fitch’s recent recalibration of the Sri Lankan national rating scale and ratings upgrades on 10 Sri Lankan banks and 10 Sri Lankan NBFIs have a positive impact on the fund’s rating headroom.
NATIONAL CREDIT QUALITY
The fund’s National Fund Credit Quality Rating considers both its actual and prospective credit quality. Its weighted-average rating factor (WARF), Fitch’s proprietary measure of fund credit risk, was 5.2 at end-March 2025, within the ‘BBBf(lka)’ rating range of 2.1-6.1. However, we recognise that the fund’s investment guidelines allow an increase in its exposure to lower-rated assets to the level, which could lead the WARF to move to the ‘BBf(lka)’ range.
A fund’s WARF is a function of the credit ratings of the securities held in a fund’s portfolio and their remaining term to maturity, weighted by market value. Fitch bases the WARF on the agency’s ratings where available. We assume, for the purpose of the WARF calculation, that securities that are not publicly rated by any globally recognised rating agencies carry ‘CCC(lka)’ ratings.
MODERATE TO HIGH SENSITIVITY TO MARKET RISKS
The National Fund Market Risk Sensitivity rating reflects Capital Alliance Investment Grade Fund’s moderate to high sensitivity to interest-rate and spread risk. The fund’s weighted-average maturity was nine months and its weighted-average life was 16 months at end-March 2025. The asset manager adjusts the fund’s duration based on market developments. The investment guidelines allow the fund to have a longer duration.
FUND PROFILE
Capital Alliance Investment Grade Fund is an open-end fixed income fund that mainly invests in Sri Lankan banks and non-bank financial institutions. The fund seeks to obtain a high level of current income, targeting a competitive return consistent with liquidity and preservation of capital.
The fund was launched in 2013 and is domiciled in Sri Lanka. It is authorised and regulated by the Sri Lankan Securities and Exchanges Commission. The fund’s assets are segregated with the trustee, Deutsche Bank AG, Colombo Branch, a subsidiary of Deutsche Bank AG (A-/Stable/F2). The fund size has increased to around LKR55 billion as of end-March 2025.
INVESTMENT MANAGER
We regard Capital Alliance Investments Limited as a suitably qualified, competent and capable investment manager for the fund. The manager was founded in 2011 and is majority owned by Capital Alliance Limited, with a minority holding by Sri Lanka Insurance Corporation Limited. The manager was the country’s second-largest investment manager, with a market share of about 21% and total assets under management of LKR132 billion in unit trust funds as of end-January 2025.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
The National Fund Credit Quality Rating could be downgraded if the portfolio suffers negative rating migration or if the fund’s strategy changes to invest in more lower-quality securities. The rating is also sensitive to exposures that are not publicly rated by a globally recognised rating agency and where Fitch may have more conservative credit views than other rating agencies. The National Fund Market Risk Sensitivity Rating could be downgraded if the fund’s investment strategy changes to allow it to increase duration risk significantly.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
The National Fund Credit Quality Rating could be upgraded if the fund adjusts its investment guidelines to focus only on higher-quality securities. The National Fund Market Risk Sensitivity Rating could be upgraded if the fund’s investment strategy facilitates a shorter duration. (Colombo/Apr17/2025)