Fitch Affirms Fator Administracao de Recursos' National Asset Manager Rating at 'M2-(bra)'

SAO PAULO & RIO DE JANEIRO--()--Fitch Ratings today affirmed the National Asset Manager Rating 'M2-(bra)' (M2 minus (bra)) of Fator Administracao de Recursos Ltda. (FAR).

The 'M2-(bra)' rating is assigned to asset managers that demonstrate low vulnerability to operational and investment management failure compared with other asset managers in the same country.

FAR's National Asset Manager Rating reflects the asset manager's long track record in equities and multimarket funds, supported by the adequate quality of its investment process, with an emphasis on macroeconomic research and its proprietary fundamentalist analysis of companies (bottom up). The rating also considers FAR's good processes of controls, policies and compliance, as well as the ongoing investments to support those activities, in addition to the appropriate practices for funds accounting, settlement and custody.

Banco Fator S.A. (Fator) and its affiliated companies, such as FAR, have undergone a significant restructuring process. Changes were made in the composition and roles of FAR's senior management team in 2012 but without significant impacts on its business model and investment decision-making process. In the short term, this has had a neutral effect on funds' performance and flows of the assets under management (AUM).

The investment process remains aligned with local market best practices. Decisions are made on a collegiate basis and based on macroeconomic research and fundamentalist analysis of companies to support asset allocation. The portfolio management structure is segmented by type of strategy, allowing team specialization.

However, a longer period will be necessary to verify if the stability in portfolios investment style will remain with the new organization of the senior management. The asset manager maintains a relatively lean structure and new changes on the investment team could introduce risks of continuity for its development in terms of AUM flows, processes and control.

Roseli Machado, FAR's primary executive in Brazil since the creation of the company, left the executive board in August 2012. She will be dedicated to develop new projects for the asset manager overseas. The change in the structure is part of a project that intends to expand the asset manager's business to offer solutions to foreign and local investors in the medium term. Her base will be in New York, in order to develop networks with foreign investors for domestic products fundraising. FAR also aims to stimulate the sales of products with cross-border investing to offer wide diversification to its local investors, in the extent allowed by regulations, as a complement to its existing strategies.

Roseli Machado continues to contribute to the asset manager's investment process, despite her new role. Marcos Paolozzi was also hired in October 2012 as Director of fixed income and derivatives, previously under the responsibility of Damont Carvalho in the last seven years. Patricia Stierli has assumed FAR's general management and continues to be responsible for the equities strategies and research team.

Risk management relies on good controls, policies, degree of automation and formalization. These processes have been improved following the continuous enhancements made since 2009, when the team was strengthened and investments were made in controls and systems. The risk, compliance and internal control structures are corporate-wide for the Fator group and adequate for the current AUM and regulatory requirements, with appropriate independence and supervision. Funds have not presented market risk limit breaches. Deviations in concentration limits were low and promptly addressed.

The asset manager's AUM flows are expected to be favored in 2013, as well as of its main competitors. The lower local interest rates environment may continue to stimulate the migration to riskier assets in Brazilian industry. On the other hand, FAR has a concentrated client base, with institutional investors historically representing around 77% of the total AUM. Furthermore, it has shown high AUM volatility, especially in periods of higher risk aversion. AUM totaled BRL3.9 billion in September 2012 (BRL3.6 billion in 2011 and BRL5.9 billion in 2010), with around 35% in equities funds.

FAR relies upon good quality of outsourced services for fund accounting, settlement and custody, primarily provided by specialized institutions such as Itau Unibanco Holding S.A. (Local Currency IDR 'A-'/Outlook Stable). Nevertheless, the asset manager's middle and back office areas carry out reconciliation procedures to avoid operational failures in the settlement of positions and the calculation of fund net asset value. FAR has also benefited from improvements to its internal controls. The company systematically reviews the efficiency ratios of its primary processes, which are applied to its main service provider.

The asset manager also has adequate technological platforms, with basic security resources, supported by the corporate structure. The contingency plan is satisfactory and is formally tested annually, with redundancy for the critical systems.

Among the key challenges for FAR is to present lower AUM volatility and higher diversification of its client base. Other challenges include the development of the new organizational structure of the senior team, sustain good performance on a recurring basis throughout market cycles and continuous improvements in controls, as well as the implementation of the international fundraising strategy in the medium and long terms.

FAR's rating 'M2-(bra)' is based on the following score categories, which represent a scale from '1' to '5', '1' being the highest possible:

Organizational Structure and Teams: 3.00

Risk Management and Controls: 2.25 (from 2.50)

Portfolio Management: 2.50 (from 2.00)

Investment Administration: 2.25 (from 2.50)

Technology: 3.00

FAR was established as an independent asset manager in 1997 and focuses on active portfolio management of equity and multi-market fund classes, which are more volatile by nature. The distribution between these products has changed, although historically about 50% of AUM is related to equity strategies. According to the Associacao Brasileira das Entidades dos Mercados Financeiro e de Capitais (Anbima), FAR was the 49th largest Brazilian asset manager in September 2012 with AUM of BRL3.9 billion and the 19th in equity funds.

FAR is a wholly owned subsidiary of Banco Fator S.A. with a track record in equity research and transactions, mainly in mid- and small-caps companies listed on BM&FBovespa (the Brazilian stock, commodities and futures exchange). It was one of the pioneers asset managers in this sector.

The rating is sensitive to adverse changes in any key driver of its classification, which could be altered in the event of a significant deviation from Fitch's guidelines.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Related Criteria and Research:

--'Reviewing and Rating Asset Managers' (Aug. 13 2010);

--'National Scale Asset Manager Rating Criteria' (July 2, 2010);

--'Banco Fator S.A.' (Nov. 13, 2012).

Applicable Criteria and Related Research:

Reviewing and Rating Asset Managers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547947

National Scale Asset Manager Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=536665

Banco Fator S.A.

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=692989

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