News Column

Fitch Affirms ARX Investimentos Ltda.'s Rating at 'Highest Standards'

July 8, 2014

RIO DE JANEIRO & SAO PAULO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the International Scale Asset Manager Rating at 'Highest Standards' for ARX Investimentos Ltda. (ARX). The Rating Outlook remains Stable.

KEY RATING DRIVERS

ARX's 'Highest Standards' ratings reflects Fitch's opinion that the company's investment platform and operating framework are superior relative to the standards applied by institutional investors in international markets.

The affirmation reflects the strong franchise and corporate governance principles of its controlling owner, The Bank of New York Mellon Corporation (BK, Issuer Default Rating; 'AA-'/Outlook Stable by Fitch). It also factors in the quality of the risk management and compliance framework, in addition to the robust fiduciary administration and custody process. The rating is also based on the well-structured investment process, supported by macroeconomic and fundamental analyses and on ARX's sound technological platform.

ARX's rating only applies to its activities in the domestic market in traditional funds and does not include its overseas asset management activities and the area of third-party funds of funds, as well as the fiduciary administration services which are provided by another company within the group. These activities have their own processes and policies, segregated from the management of traditional funds.

In Fitch's opinion, the ARX's main challenges are reducing its exposure to key person risk in the investment process and expanding recognition of its franchise in multimarket funds to further improve its product mix. The asset manager also faces strong competition from managers offering more sophisticated funds, whose impact is greater at asset managers with a smaller product mix.

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

Company: Highest Standards

Controls: Highest Standards

Investments: High Standards

Operations: Highest Standards

Technology: High Standards

Company

ARX has a robust organizational structure and corporate governance framework. It is a wholly owned subsidiary of BK, a strong global financial conglomerate, and maintains sound profitability as one of the parent's main business lines. ARX has developed great experience in equity funds since 2001.

ARX maintained BRL13.5 billion in AUM at March 30, 2014. The manager experienced a 6% decrease in the assets under management (AUM) during the first quarter of 2014 was offset by the addition of an international investor during the next quarter, which maintained the AUM practically stable in the period.

The participation of equity funds has decreased from 24% in December 2011 to 15% in March 2014, being offset by the multimarket funds, from 13% to 19% over the same period. Interbank (DI) and short-term funds, as well as offshore funds maintained participation of 25% and 23%, respectively, in March 2014. ARX's investor profile consists of pension funds (16%), distributors (22%), foreign investors (29%) and third-party investment funds for 26% of AUM in March 2014.

Controls

ARX's risk and compliance management benefits from the BK group's strong controls and policies. Control and governance practices are adequate for the higher complexity and scope of company's risks and those of the funds under management. Fund limit breaches have not been relevant, with only a few concentrations related to price movements, which were quickly resolved.

Investments

The investment process is well-structured, supported by committees and solid proprietary analyses. ARX also has ample access to market information. However, ARX has a lean management team relative to the complexity of its investment strategies that involve assets with greater volatility. Despite its highly qualified and experienced investment team, and the well-elaborated process, the key person risk remains, given the autonomy of the portfolio managers in making decisions, as well as the executive turnover. Since 2010, the multimarket fund team has experienced a large turnover, the most recent of which, at year-end 2013.

Operations

Fiduciary administration is carried out by another company that is part of the group, entirely segregated from ARX. This company is well-recognized in its segment of operation for rendering services to other asset managers, and is one of the largest in the local market. Custody is outsourced to well recognized external providers, such as Banco Bradesco S.A. The operating activities rely on standardized, integrated and automated processes. The manager's middle office area carries out a thorough reconciliation of the whole process to avoid operating failures.

Technology

ARX has a solid technological platform, including both proprietary and third-party systems. It is in the final stage of implementing a new front and middle office system, EZE Software, which is expected to further improve the operating process integration, through real time positions, pre-trading blocks and alerts and automatic processing of orders.

Founded in 2001, ARX was acquired by BK in 2008, becoming its wholly-owned subsidiary. With BRL13.5 billion in assets under active management in March 2014, it is one of the main independent asset managers in Brazil, focused on equity and multimarket fund strategies. According to the Associacao Brasileira das Entidades dos Mercados Financeiro e de Capitais (Anbima), it was the 12th largest Brazilian asset manager with AUM of BRL21.7 billion (including all assets under management). The remaining BRL8.2 billion relates mostly to the management of interbank (DI) funds, used as one of the services provided to other asset managers for which the BK group provides fiduciary administration.

BK has a strong franchise as a global third-party asset manager. Present in 36 countries, it is the world's largest custodian and fiduciary agent of securities and ranks among the 10 largest in several other businesses, such as third-party asset management, with global AUM of USD1.6 trillion in March 2014. In Brazil, the group also has a fiduciary administration company and ranks seventh in the local market, with a total of BRL115 billion of assets under administration.

RATING SENSITIVITIES

ARX's rating could be sensitive to relevant adverse changes to any of its rating drivers, particularly in case of a weakening of its financial profile, high turnover of key staff, or deterioration in processes and policies. An important deviation from Fitch's guidelines for any key driver could also lead to a rating downgrade.

To obtain additional information on Fitch's criteria for rating asset managers, consult the criteria mentioned below, available on Fitch's websites, 'www.fitchratings.com' or 'www.fitchratings.com.br'.

Applicable Criteria and Related Research:

--'Asset Manager Rating Analysis and Criteria' (May 6, 2014).

Applicable Criteria and Related Research:

Asset Manager Rating Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=838578

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary analyst

Pedro Gomes, +55-11-4504-2604

Director

Fitch Ratings Brasil Ltda.

Alameda Santos, 700, 7th floor, Cerqueira Cesar

Sao Paulo - SP - CEP: 01418-100

or

Secondary analyst

Alexandre Yamashiro, CAIA, +55-11-4504-2606

Director

or

Committee Chairperson

Davie R. Rodriguez, CFA, +1 212-908-0386

Senior Director

or

Media Relations, New York

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


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