By Manuel Arrive, Senior Director Fitch Ratings
In a review of the rating covering Sciens’s Fund of Hedge fund (FoHF) and Managed Account Platform (MAP), Sciens Fund of Funds Management Holdings Ltd. has been rated as having High Standards and with a stable outlook by Fitch Ratings. Sciens Capital Management LLC (SCM) began alternative asset management activities in 1994 and currently has USD3.1bn under management (both in direct investments and advisory), managed by a staff of 40 on the FoHF side.
A proprietary integrated technological platform at Sciens enables a high level of automation of workflows and supports discipline in investment and risk management processes. Accordingly the rating primarily reflects the robustness and scalability of Sciens investment, operational and technological platform.
Fitch notes that the recent expansion of the MAP makes it a strategic priority to restore profitability and growth to the whole firm. However, the company has continued to suffer from staff turnover and attrition, resulting in the currently observed low levels of staff. So stabilising staffing resources and expanding from current minimum levels to support business growth and maintain execution standards must be made a key objective for Sciens. In additions the company has to replace the custodian of the MAP at the end of July (as a result of the current custodian’s withdrawal from this business), while mitigating operational risk in the interim.
A further and overarching challenge for Sciens is that the company has to accelerate fund raising to increase the revenue base and profitability while, at the same time, diversifying the investor base. All this has to be achieved in a still challenging environment for medium-size alternative asset managers.
Fitch’s ratings process for FoHFs includes scoring a firm across five categories. These are the scores and comments for Sciens FoHF business:
Company: Good – Sciens has demonstrated solid resilience and adaptability in a fund of hedge funds industry that remains under pressure. The company has continued to expand and diversify its managed accounts offering, which is at the centre of its growth strategy. Profitability has increased in 2012 from the 2011 low levels, principally as a result of cost reduction. In 2013, AUM growth (MAP AUM increased from USD504m to over USD786m as at end of June, but this represents USD986m of assets on which the Platform receives a fee) and performance fees increasing should contribute to higher revenues.
Sciens demonstrates an overall solid organizational structure and governance mechanisms, with adequate separation of businesses and functions. The continued staffing turnover and attrition over the past 12 months has led to the current low levels relative to business size. In Fitch’s view, this tends to increase key person dependency and individual workload, particularly for MAP personnel, legal and FoHF PM, while placing greater strain on the company’s sound controls.
Controls: High – The overall control environment of Sciens is sound. Control functions consist of a dedicated risk team within a separate affiliate and compliance officers. Investment risk management and compliance monitoring are very strong, supported by solid data management, risk analytics and reporting capabilities, a key differentiator for Sciens. Operational risk management is well embedded throughout the organization and benefits from automated workflows, documented procedures and system-based controls.
Investments: High -The investment process is disciplined and well documented, based on a robust blend of fundamental and quantitative analysis. The competitive advantage of the fund’s research and portfolio construction stems from deep access to underlying hedge fund data and risk analysis capabilities.
Operations: High – Sciens’s operations platform is robust, enabling a controlled, fully automated implementation of workflows with a variety of service providers. FoHF investment administration is handled by Sigma Asset Management (Guernsey) Limited, the manager of the funds.
Technology: Highest – A proprietary integrated technological platform, risk analytics and centralised in-house data management capabilities are the company’s key strengths. Sciens also makes available to investors an interactive look through application that allows them to perform in-depth analysis of managed accounts.
Additional information is available on www.fitchratings.com