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

Other CriteriaPortfolio and historical risk analyses often yieldsimilar results and reflect a long-term commitmentto a particular investment objective and risk-tolerancelevel by the fund’s adviser and portfolio manager.Where there are significant differencesbetween the current risk and historical risk profiles,management assessment becomes particularlyimportant. Discussions with fund managementabout investment policies and strategies, asset selection,internal research capabilities, and portfoliorisk monitoring help Standard & Poor’s to assessthe fund’s current and ongoing risk profiles. ThePrincipal Stability Fund Ratings (Stable NAV Pool) DefinitionsA principal stability fund rating (also known as a money market fund rating) is notdirectly comparable with a bond rating due to differences in investment characteristics,rating criteria, and creditworthiness of portfolio investments. For example, amoney market fund portfolio provides greater liquidity, price stability, and diversificationthan a long-term bond, but not necessarily the credit quality that would beindicated by the corresponding bond rating. Ratings are not commentaries on yieldlevels. A principal stability fund rating is not a recommendation to buy, sell, or holdthe shares of a fund. Further, the rating may be changed, suspended, or withdrawnas a result of changes in or unavailability of information related to the fund.AAAmFund has extremely strong capacity maintain principal stability and to limitexposure to principal losses due to credit, market, and/or liquidity risks.AAmFund has very strong capacity to maintain principal stability and to limit exposureto principal losses due to credit, market, and/or liquidity risks.AmFund has strong capacity to maintain principal stability, but is somewhat moresusceptible to principal losses due to adverse credit, market and/or liquidity risks.BBBmFund has adequate capacity to maintain principal stability. Nevertheless, adversemarket conditions and/or higher levels of redemption activity are more likely tolead to a weakened capacity to limit exposure to principal loss as a result of higherexposure to credit, market and/or liquidity risks.BBmFund has uncertain capacity to maintain principal stability, and is vulnerable toprincipal losses resulting from its exposures to credit, market, and/or liquidtiyrisks.DmFund has failed to maintain principal stability resulting in a realized or unrealizedloss of principal.GThe letter ‘G’ follows the rating symbol when a fund’s portfolio consists entirely ofdirect U.S. government securities.Plus or minus ratings may be modified (except ‘AAAm’) to show relative standing withinthe rating categories.primary goal is to evaluate the adviser’s effectivenessin maintaining an investment policy that isconsistent with the fund’s stated investment objectivesand investors’ expectations.The ratings analysis focuses on measuring quantifiableportfolio risk factors, including interest-raterisk, yield curve risk, credit risk, liquidity risk,options risk, and concentration risk. In addition,Standard & Poor’s also evaluates the pool’s totalreturn historical volatility. This review involves twotypes of analysis. First, the identification centers onthe level of volatility and distribution of monthlyreturns of the pool over a minimum of 36 monthsin relation to certain fixed-income asset classes andindices that Standard & Poor’s tracks on an ongoingbasis. The second analysis is focused on understandinghow past volatility relates to the pool’sinvestment objectives, the portfolio constructionprocess (including risk controls), and the fund’soutcome as a result of market developments thatoccurred during the period under review. The relevanceof this part of the analysis in the final volatilityrating will depend on the second step in the ratingprocess, or the portfolio analysis.The analysis of current portfolio risk is undertakento confirm (or not confirm) the continuation ofpast investment policies and their attendant risks.Portfolio analysis is designed specifically to evaluatewhether the fund has a greater chance of losingmore money (i.e., experience greater volatility) inthe short term than historical volatility of returnswould suggest. An abnormal short-term loss is onethat is inconsistent with the fund’s history, currentmarket conditions, or the fund’s stated investmentobjectives. Furthermore, while higher risk is oftenassociated with higher returns, higher risk alsomeans a greater uncertainty over all outcomes. Riskor volatility can manifest itself in either a continuousfashion or at discrete intervals, in which casethe illusion of low volatility can often prevail for anextended period of time. For example, interest-ratesensitive funds (such as funds that invest in highlycreditworthy securities like U.S. Treasury securities)often exhibit more volatility than funds that investin low-grade, high-yield, or illiquid securities; however,at times, these funds can exhibit high toextremely high volatility due to investor sentimentregarding increased default or liquidity risks.Portfolio analysis often incorporates stress-testingtechniques that examine the portfolio’s returns (orexpected returns) under various market scenarios,as well as for different portfolios. Portfolio levelrisk analysis is focused on understanding thesources or factors that contribute to risk, which, formost bond funds investing in marketable fixedincomesecurities, includes interest-rate/option risk,credit risk, and liquidity risk.322 Standard & Poor’s Public Finance Criteria 2007