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Essential Intelligence: Analytics

Fund Volatility Ratings

Forward-looking opinions about a fixed-income investment fund's sensitivity to changing market conditions.

We assign Fund Volatility Ratings to bond funds and other managed pools of fixed-income assets, including cash-enhanced funds, exchange traded funds (ETFs), fixed-income hedge funds, local government investment pools, unit investment trusts, and preferred shares trusts. Fund Volatility Ratings are typically used in combination with Fund Credit Quality Ratings.

Benchmarking Credit And Market Risks in Fixed-Income Funds
As an investor in fixed-income funds, you may face several types of risks, for example, default, credit-spread, interest-rate, yield-curve, liquidity and concentration risks.

How Can You Strengthen Your Analysis of These Risks?
We believe that understanding these risks requires, in particular, an analysis of all of a fund's investments and ongoing monitoring of the fund's changes in position. Analyzing the underlying investments can be a time-consuming process. This is particularly the case when comparing the aggregate risk of one fund versus another. Since a fund's investments are not static, it may also be useful to understand the fund manager's style and the qualitative processes underlying the fund's investment philosophy. Lastly, ongoing surveillance may help to assess the fund manager's performance over a given time period.

The combination of our Fund Credit Quality and Volatility Ratings  can help you by providing an independent and objective analysis of certain risks, against which you can systematically benchmark different fixed-income funds.

Our Fund Credit Quality and Volatility Ratings provide an independent view, based on a set of objective, public criteria, on:
  • The overall exposure to default risk inherent in each fixed-income fund
  • A fund's exposure to changing market conditions that lead to share price and return volatility
  • The managers of a fund and their investment strategies

What Are Volatility Ratings and How Do They Work?

In addition to credit factors, changes in market conditions can affect the net asset value of a fund. So we developed an additional Volatility Rating to complement the Fund Credit Quality Rating. A Fund Volatility Rating is not a credit rating.

The volatility rating scale, which ranges from 'S1' (lowest sensitivity) to 'S6' (highest sensitivity), expresses S&P Global Ratings' current opinion of a fixed-income fund's sensitivity to changing market conditions.

The Volatility Ratings analysis focuses on measuring quantifiable portfolio risk factors including interest-rate, yield-curve, credit, liquidity, options and concentration risk. In addition, we also evaluate the fund's total return's historical volatility. The effects of various portfolio strategies, such as the use of leverage, hedging, and derivative instruments, are also factored into the rating.

Management Assessment
The fund's managers can have a significant impact on the fund's risk profile. This is why we conduct an assessment of the fund's management for all fund ratings. The primary goal of the assessment is to evaluate the managers' effectiveness in maintaining an investment policy that is consistent with the fund's stated investment goals.

We consider the following as part of the management assessment:
  • Experience and track record
  • Credibility and commitment to policies
  • Operating policies and risk preferences
  • Effectiveness of internal controls

We perform monthly surveillance of the fund to form a view on whether any changes in the portfolio and management operating policies may alter the fund's credit or market risk and, therefore, the rating. S&P Global Ratings also conducts an annual management review to identify any changes in management, policy, strategy, and operations.

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