Fitch Assigns Funcef's Asset Manager Rating of 'High Standards'

SAO PAULO--()--Fitch Ratings has assigned an International Asset Manager Rating of 'High Standards' to Funcef - Fundacao dos Economiarios Federais (Funcef). The Rating Outlook is Stable.

KEY RATING DRIVERS

The 'High Standards' rating assigned to Funcef reflects Fitch's opinion that the investment platform and operational structure of the manager are strong relative to the standards applied by institutional investors in international markets.

Funcef's rating factors in its association with Caixa Economica Federal (Caixa - IDR 'BB'/Outlook Negative), sponsor of the pension plan. Funcef is a not for profit foundation established to manage the resources to support the complementary pension benefits for Caixa's employees. The asset manager also benefits from a disciplined investment process combined with a conservative risk approach and strict controls. The rating further considers its good technological structure.

The asset manager rating applies only to activities in the domestic market in traditional (liquid) financial assets and does not include its real estate assets, direct ownership of companies, private equity investments, fund administration and custody services. All these segments have their own processes and policies and are properly segregated from the liquid investments area.

In Fitch's opinion, Funcef's main challenges are to close its actuarial deficit in order to reestablish the balance of asset and liabilities in the pension plan, consolidate its investments team, maintain the performance of its funds in line with the suitable benchmarks, strengthen its IT contingency infrastructure, and fend off the allegations of inappropriate conduct in private equity investments made by the 'CPI dos Fundos de Pensao'.

The 'High Standards' rating is based on the following assessments:

Company: High

Controls: High

Investments: High

Operations: Good

Technology: Good

Company

Funcef is the pension plan for the employees of Caixa. Established in 1861, Caixa is the second largest government owned bank and the third largest bank in Brazil by total assets. The organization manages three different plans (Novo Plano, REB and REG/Replan). Novo Plano and REB are variable contribution (VC) plans that pay annuities (in monthly installments) to its participants. REG/Replan is a defined benefit plan (DB), which in 2006 was divided into two classes (one for members that decided to maintain the contributions to the DB and another for the people that stopped contributing to it and started contributing to the Novo Plano). Funcef has more than 139 thousand plan participants, and most benefits are currently being paid to members of REG/Replan, as it is the oldest plan.

The pension plan has AUM of BRL53.7 billion with BRL34.1 billion in liquid investments managed in-house, with the remainder invested in private equity (PE), direct investment in private companies and third party managers. The AUM of liquid strategies by type of funds in December 2015 was: fixed income (87%) and equity (13%). All strategies have well defined benchmarks and funds have performed in line with them.

Funcef has an accumulated deficit of around BRL13.2 billion. The reasons for the deficit are mainly a decreasing in the value of one of its main equity positions (Vale -in which Funcef is part of the control group) and in losses in private equity investments, as Sete Brasil - a company currently in bankruptcy reorganization. The position in Vale, although being a liquid security, is managed by DIPAR, the area responsible for PE management and not part of the rating's scope. Funcef has been investigated by a congressional committee ('CPI dos Fundos de Pensao') regarding some of its investments in private companies and possible issues arising from the influence of the federal government on its investing decisions. The pension plan is currently under investigation to evaluate if any wrongdoing or misdemeanor occurred.

Controls

The asset manager (AM) is properly segregated from the fund sponsor with solid governance structure and extensive usage of committees. Risks management and compliance structures are dedicated and independent, reporting directly to the Director of Planning and Controllership. Internal auditors report to the foundation's Advisory Council. The group has active plan participants that elect three directors responsible for the controls and administrative activities. Also, the fund sponsor appoints 1/4 of the members of its Technical Investment Committee to provide oversight on the investments.

Investments

Funcef presents a good structure with 40 employees in the investment process and low turnover in the team. The investment area is segmented by equity and fixed income (FI). Equity (16 people) is subdivided into Public Equity and Deal Sourcing for Private Equity (Business Development), while FI (15 people) is subdivided in Credit Analysis and PM/trading. The pension plan also has a department responsible for macroeconomic analysis and asset liability management (ALM - 8 people). All the investment process is overseen by a CIO. The PMs and analysts responsible for FI and Equity are also in charge of selecting and monitoring third party asset managers that manage a percentage of the AUM of the pension fund.

The investment process combines a top down view with fundamental bottom-up analysis. The decision making process is very well defined and stable. There are weekly and monthly committees to define and evaluate strategies, risks, performance, as well as daily morning meetings. All the strategies work as building blocks to construct a portfolio that match the required exposures defined in the ALM process. The funds have well defined performance drivers and risk limits in accordance to the investment strategies. Each investment team has the needed skills and experience to manage specific strategies. The AM manages a good range of portfolios and a complete set of strategies (passive, enhanced index, active).

Operations

The pension plan has a solid operations structure supported by scalable procedures for fund processing, relying on a good platform provided by a well-regarded vendor in the Brazilian market (Drive system). The operations team is composed of experienced professionals in middle and back office departments. Fiduciary administration and custody are outsourced to Caixa (the plan's sponsor) and Bradesco (long standing relationship). The interface with administrators and custodians are not automated.

Technology

Funcef benefits from a solid IT structure and relies on 69 dedicated professionals to support its activities. The IT team is experienced and segmented in functional areas such as: infrastructure, systems maintenance and software development. The IT department usually prefers to utilize well regarded solutions from third parties instead of developing systems internally, only doing so if an affordable system is not available.

The business is supported by a complete infrastructure, including mainframe, with well-defined procedures, routines and permissions with a tight security policy. Funcef's processes present a good level of automation but enhancements in the level of integration between the different systems would reduce the operational risk and consolidate the foundation's processes. Funcef does not have a back-up site or secondary mainframe, only daily backup of its stored data. The implementation of a business continuity plan (BCP) that includes such features would enhance its contingency capabilities thus strengthening its overall IT structure.

Company Profile

Funcef, established in 1977, is the third largest pension plan in Brazil with BRL53.7 billion in AUM as of December 2015, according to the Brazilian Association of Closed Pension Funds (Abrapp). The plan is sponsored by Caixa Economica Federal, a state owned financial institution, and assists more than 139 thousand participants.

RATING SENSITIVITIES

The rating of Funcef - Fundacao dos Economiarios Federais may be sensitive to significant adverse changes to any of the aforementioned rating drivers, mainly in the case of a weakening of its financial profile, widening of the pension's deficit, high professional turnover, or deterioration in its processes and policies. Additionally, if Funcef is found guilty of any of the allegations presented by the "CPI dos Fundos de Pensao", the increased perceived reputational risk of the organization may adversely impact its rating. A material deviation from Fitch guidelines for any rating driver could lead to the rating being downgraded by Fitch.

To obtain additional information on Fitch's asset manager rating criteria, please refer to the criteria mentioned below, available on the agency's websites at 'www.fitchratings.com' or 'www.fitchratings.com.br'

Date of Relevant Rating Committee: May 18, 2016

Additional information is available on www.fitchratings.com

Applicable Criteria

Asset Manager Rating Criteria (pub. 06 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=747701

Relatᅢᄈrio de Metodologia: Anᅢᄀlise e Rating de Gestores de Recursos (pub. 04 Nov 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873367

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005105

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Alexandre Yamashiro
Director
+55-11-4504-2606
Fitch Ratings Brasil Ltda.
Alameda Santos, 700 - 7th floor - Cerqueira Cesar
or
Secondary Analyst
Tiago Carrara
Associated Director
+55-11-4504-2217
or
Committee Chairperson
Davie R. Rodriguez, CFA
Senior Director
+1-212-908-0386
or
Media Relations
Jaqueline Carvalho, Rio de Janeiro, +55 21 4503 2623
jaqueline.carvalho@fitchratings.com
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Alexandre Yamashiro
Director
+55-11-4504-2606
Fitch Ratings Brasil Ltda.
Alameda Santos, 700 - 7th floor - Cerqueira Cesar
or
Secondary Analyst
Tiago Carrara
Associated Director
+55-11-4504-2217
or
Committee Chairperson
Davie R. Rodriguez, CFA
Senior Director
+1-212-908-0386
or
Media Relations
Jaqueline Carvalho, Rio de Janeiro, +55 21 4503 2623
jaqueline.carvalho@fitchratings.com
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com