A Presentation by
Credit Rati
JCR-VISCommercial Banks
RATINGS OF PENSION FUNDS
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Role of Credit Rating Agencies in the new Voluntary Pension
System – Rating and investment performance measurement
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August 11, 2005
Credit Rati
JCR-VISCommercial Banks
The main and proper role of credit ratings is to enhance
transparency by reducing the information asymmetry
between investors and investees.
As financial market complexity and borrower diversity
increased over time, investors and regulators have
placed greater reliance on the opinions of credit rating
agencies.
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The strength of the rating agencies’ global franchise
and the core of their expertise in assigning ratings,
provides them a forte to stand on.
Credit Rati
JCR-VISCommercial Banks
• Internationally, fluctuations in the capital markets
upended fund managers’ forecasts regarding returns and
the cost of providing benefits (to corporate pension
plans)
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• At the end of 2002, 90% of all defined benefit pension
plans in the United States were under-funded
• In October 2003, the Pension Benefit Guaranty
Corporation (PBGC) estimated that the total funding gap
was roughly $350 billion
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Credit Rati
JCR-VISCommercial Banks
Internationally, mutual funds are being assessed both
on the basis of performance and stability of NAV.
Some of the ratings methodologies in use include:
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• Performance Rankings
• Principal Stability Fund Ratings
• Fund Credit quality ratings
• Fund Volatility Ratings
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The ability of fund manager is of paramount
importance in any fund rating. This is assessed
through Management Quality Rating
Credit Rati
JCR-VISCommercial Banks
JCR-VIS introduced its methodology on mutual funds in 2000,
followed by product updates in line with international practices.
• October 2003: JCR-VIS Mutual Funds Rating Methodology
Entity Ratin
(Management Quality Ratings, Fund Stability)
• July 2004:
Mutual Fund Performance Rankings
(Star Rankings)
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Credit Rati
JCR-VISCommercial Banks
Mutual Fund Performance Rankings
Management Quality Ratings
Entity Ratin
Fund Stability Ratings
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A significant weight of performance rankings is
taken into the management quality ratings, which
in turn is built into the fund stability ratings
Credit Rati
JCR-VISCommercial Banks
Based on quantitative factors
Risk adjusted return of individual funds compared to
the best in the peer group, which includes funds
investing in largely the same asset class
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Haircuts applied for liquidity and concentration
(sectoral and individual scrip) risks
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Credit Rati
JCR-VISCommercial Banks
JCR-VIS - Mutual Fund Performance Ranking Scale
MFR-5(s) (Five Star)
MFR-4(s) (Four Star)
MFR-3(s) (Three Star)
MFR-2(s) (Two Star)
performance
MFR-1(s) (One Star)
(top 10%)
(next 22.5%)
(next 35%)
(next 22.5%)
Very good performance
Good performance
Average performance
Below average
(last 10%)
Weak performance
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•These rankings are reviewed on a half-yearly basis
•Rankings issued only after 2 years of track record
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Credit Rati
JCR-VISCommercial Banks
An opinion on the overall quality of the asset
management company (AMC) incorporating governance
related issues. Includes analysis of:
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• Organizational structure
• Quality of human resources
• Investment and risk management policies
• Internal control and information systems
scale depicts
a range of highest to weak standard
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Finance
Ratings
of management quality
Credit Rati
JCR-VISCommercial Banks
Measures:
• Relative sensitivity of a fund’s NAV and total
return to changing market conditions with an
emphasis on downside risk
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• Ability of a fund to maintain value and limit
exposure to losses
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Credit Rati
JCR-VISCommercial Banks
Categories of investment funds
Mortgage Funds
Money Market Funds
Bond Funds
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Real Estate Funds
Balanced Funds
Preferred Dividend Funds
Equity Funds
Junk Bond Funds
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Low
AAA(f)
Business Risk
AA(f)
A(f)
BBB(f)
High
BB(f)
B(f)
C(f)
Credit Rati
JCR-VISCommercial Banks
AAA(f)
B(f)
Entity Ratin
Highest degree of stability
in NAV. Risk is negligible
with very low sensitivity to
changing economic
conditions.
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Very low degree of stability
in NAV. Risk factors are
capable of fluctuating
widely if changes occur in
the economy.
Credit Rati
JCR-VISCommercial Banks
Performance Rankings –
for all three types of sub-funds
Management Quality Ratings –
for all fund management companies
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Stability Ratings –
for debt and money market sub-funds
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Credit Rati
JCR-VISCommercial Banks
Management Quality Ratings
FMQ-2
Fund Stability Ratings
Equity Money Debt
submarket subfund
subfund
fund
AA-(f) A-(f)
Rankings
5-Star 3-Star 4-Star
Entity Ratin
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Credit Rati
JCR-VISCommercial Banks
Ratings criteria not laid out for:
•Asset Management Companies (AMCs)
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•Life Insurance companies
•Central Depository Company
•Banks in which deposits can be placed by subfunds
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Credit Rati
JCR-VISCommercial Banks
AMCs fee should be linked to the fund’s performance
Some form of guarantee may also be considered after
annuity commences or a law could be enacted whereby
the accountholder would have a specific charge on the
bank account
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Credit Rati
JCR-VISCommercial Banks
Thank You
Entity Ratin
JCR-VIS Credit Rating Company Limited
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