Credit concentration is a systemic issue in South Africa, affecting most or all variable rate money market funds, as well as other fixed income funds which are essentially cash strategies, according to Global Credit Ratings (GCR).

Omega Collocott, Head: Financial Institution Ratings at Global Credit Ratings (GCR), said that money market funds are ‘cash strategies’, and such funds typically offer mandates which emphasise capital preservation, and high levels of income and liquidity.

"Furthermore, regulatory limitations require such funds to invest in mainly short-term, variable rate investments issued by large and highly rated institutions. These requirements, together with the fact that most financial instruments which meet the classification of ‘money market instruments’ are issued by banks, implies that money market fund investments are largely limited to investments in paper issued by the large domestic banks," she told Africa Global Funds.

Collocott added that South Africa’s banking sector is highly concentrated, with the top five banks controlling around 90% of all banking assets.

"Consequently, domestic money market funds’ portfolios are naturally highly exposed to investments in the top five banks. All the money market funds rated by GCR have counterparty exposure of at least 80% to the top 5 South African banks," she explained.

Collocott said that counterparty concentration risk of South African money market funds can be slightly reduced by such funds investing in other types of highly rated short-term paper (issued by, for example, local branches of foreign banks, corporates, parastatals or the government, or structured transactions).

"However, the supply of such instruments is limited, and may have credit, yield or liquidity features which are undesirable given the conservative mandates of money market funds. So, the mechanisms for reducing counterparty concentration risk are limited, which is why the issue is considered to be structural, and a largely outside the control of investment managers," she said.

GCR currently rates seven funds in the South African market, four of which are money market funds.

All of the money market funds which have been accorded GCR fund ratings in 2016 have received ‘AA+(ZA)’ ratings with Stable Outlooks.

For example, the Investec Money Market Fund and the Investec Corporate Money Market Fund were the latest funds to receive ‘AA+(ZA)’ ratings from GCR.

Collocott said that ratings are typically reviewed on an annual basis.

"However, GCR conducts ongoing surveillance on all its ratings. Stability in ratings is desirable, and long-term ratings reflect a three to five year view. Consequently, rating changes usually reflect substantial changes in the analytical factors underlying the ratings," she said.

She added that money market funds do not require ratings.

"Funds which are rated typically do so in order to fulfil the requirements of their investors. At present, GCR has concluded public ratings on four money market funds, while ratings of additional funds are underway," she said.

Global Credit Ratings (GCR) rates the full spectrum of security classes and accords both International Scale and National Scale ratings, spanning around 25 countries across the African continent.