S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Other Criteriadynamic portfolio process consistent with its statedinvestment goals. Standard & Poor’s believes thatthese meetings are central to a meaningful fund ratingservice. Management assessment considersexperience and track record in portfolio management,operating policies and risk preferences, credibilityand commitment to policies, and the extentand thoroughness of internal controls.ExperienceStandard & Poor’s judges each fund managementteam on its own merits. Focus is placed on the waythe fund is managed in relation to its shareholderbase and stated investment objectives. Standard &Poor’s closely examines how daily operations of thefund are conducted. This examination includes, butis not limited to, organizational structure, oversight,and depth of staff. An experienced fund managerwith a proven track record in money market fundsgreatly enhances a fund’s safety. This manager doesnot necessarily have to make every investment decision,but should be closely involved with fund oversight.It is also necessary to distinguish between anexperienced stable NAV pool or money marketfund manager and someone who has experiencemanaging long-term investments. Managing a stableNAV fund is very different from managing abond fund with a variable share price. Investmentpolicies and strategies that may be very prudent forbond funds can be disastrous for money marketfunds. The precision necessary to run a stable NAVpool or money market fund successfully requires adifferent mindset than is required in managingother fixed-income vehicles. An experienced fixedincomemanager does not necessarily translate intoan effective stable NAV pool or money market fundmanager. Therefore, Standard & Poor’s emphasizesthe level of experience in managing money marketfunds or stable NAV pools in its review of fundmanagement. Lack of experience can result in alower rating, more stringent ratings criteria (such asa shorter WAM), or both.Operating procedures and risk preferencesStandard & Poor’s evaluates the fund manager’soperating procedures and risk preferences in conjunctionwith each rating. A key component of thisreview is the investment decision-making process.Numerous investment decisions are made daily forall money market funds or stable NAV pools.Standard & Poor’s examines how these decisions aremade, who is charged with executing them, and theoversight procedures that are in place. Standard &Poor’s also focuses on the amount, type, and qualityof information used in making policy and investmentdecisions. This includes the size and capabilitiesof the credit research staff, the access to currenteconomic data and analysis, and the types of on-linebusiness information services used.Credit quality is one area that should be documentedwith formal written procedures. A fundadviser should establish an approved investment listas well as policies for adding or removing namesfrom that list. Additionally, a process and methodologyfor periodically evaluating the credit qualityof all approved investments should be established.Standard & Poor’s also expects clear and explicitinvestment policies for the pool including the use ofvariable rate securities (VRNs), structured notes,and derivative instruments. Fund investment policiesshould incorporate procedures on the approval,risk measurement, control, and limits related tothese investments. Fund managers should be able topresent an analytical basis for determining thatsuch securities are indeed eligible fund investmentsand have a reasonable likelihood of maintaining orrepricing to par at each reset until maturity. Thisanalytical basis should include a review of historicalindex behavior and sensitivity analysis.Internal controlsStandard & Poor’s closely considers the internalcontrols of fund advisers and pool managers.Included here are pricing policies, NAV deviationprocedures, depth of staff, stress-testing capabilities,asset flow monitoring, trade ticket verification, systemsbackups, and disaster recovery. Accurate pricingis a key factor in maintaining a stable NAV.Standard & Poor’s expects all investment advisersof rated money funds to have the ability to priceportfolio securities and calculate a fund’s actualNAV in-house, and to do so periodically. Advisersare expected to compare the market value of thefund to its amortized cost value on a weekly basis.In addition, managers should have built-in proceduresto check the pricing of outside providers andquestion any discrepancies that may occur.Investment advisers need to be able to calculateNAV, but they also need to have explicit writtenplans for dealing with any material deviation. NAVdeviation procedures are the responsibility of thepool’s manager and the advisory board, and shouldnot be left to a third-party administrator.Fund managers should also be reasonably preparedfor the unexpected. This entails the ability toperform “what if” and stress test analyses. Forexample, a fund manager should be able to calculatethe impact of any security purchase on the fund’sWAM. This calculation should factor in the influenceof sudden or unexpected redemptions in conjunctionwith the security purchase. In addition, fund managersshould have the ability to stress test both individualsecurities and entire portfolios. Individualsecurity tests should estimate price sensitivity under318 Standard & Poor’s Public Finance Criteria 2007