severe interest rate movements. Portfolio testing
should stress the fund’s assets in aggregate under the
same interest rate scenarios, but should also measure
the impact of dilution on NAV assuming sizable
redemption activity.
It is also important to have detailed contingency
management and disaster recovery plans that are
tested periodically. Earthquakes in Los Angeles and
San Francisco, floods in Houston and the Blackout
in the Northeastern U.S. are just a few past exam-
ples of situations in which emergency action plans
had to be executed.
Standard & Poor’s rated government investment
pool(GIP) indices
Standard & Poor’s Rated GIP Indices are perform-
ance indicators of rated GIPs that maintain a stable
net asset value (NAV) of $1.00 per share. As of
September 2006, there are three Government
Investment Pool indices:
■Standard & Poor’s Rated Government
Investment Pool Index/All
■Standard & Poor’s Rated Government
Investment Pool Index/Government
■Standard & Poor’s Rated Government
Investment Pool Index/General Purpose Taxable
These indices provide a simple average of seven-
day and 30-day net and gross yields, average days to
maturity, as well as the total assets of all pools pub-
licly rated in Standard & Poor’s two highest money
market fund rating categories: ‘AAAm’ and ‘AAm’.
Variable Net Asset (NAV) Pool Ratings Criteria
Standard & Poor’s ratings criteria for variable net
asset value (NAV) investment pools are the same as
its fund credit and volatility ratings criteria.
Therefore, all references to bond funds in the fol-
lowing ratings criteria article also apply to govern-
ment investment pools (GIPs) or any other longer-
term pools of assets managed, like a fixed-income
bond fund, that provides a variable NAV.
Ratings approach and process
Standard & Poor’s assigns credit quality and
volatility ratings to GIPs that invest in fixed-income
assets. The credit quality rating assigned to a fund
addresses the level of protection its portfolio hold-
ings provide against losses from credit defaults.
Credit quality ratings, which range from ‘AAAf’
(highest level of protection) to ‘CCCf’ (least protec-
tion), are based on an analysis of the fund’s overall
portfolio credit quality.
Volatility ratings offer a current opinion of a
fund’s sensitivity to changing market conditions.
Volatility ratings, which range from ‘S1’ (lowest
volatility) to ‘S6’ (highest volatility), are based
on an analysis of a fund’s investment strategy
and portfolio level risk, including interest-rate
risk, credit quality, liquidity, concentration, call
and option risk, and currency risk. The effects of
various portfolio strategies, such as the use of
leverage, hedging, and derivative instruments, are
also factored into the rating. The goals of
Standard & Poor’s analysis are to uncover risk
sources in a managed fund’s portfolio and invest-
ment strategies and to assess the potential impact
on its rate of return and NAV variability.
Standard & Poor’s monitors each fund’s portfolio
holdings on a monthly basis to maintain current
and accurate assessments of its credit quality and
volatility profile.
Standard & Poor’s assigns volatility and credit
quality ratings to funds on a request basis. To
maintain the accuracy of the ratings, Standard and
Poor’s requires fund management to provide portfo-
lio and investment information to Standard &
Poor’s on a frequent and timely basis. The rating
process is described below.
The rating process for bond funds or variable
NAV pool ratings includes an analysis of their port-
folio level risk, historical performance, and manage-
ment. After receiving and analyzing the information
required for a rating, Standard & Poor’s will con-
duct a face-to-face management review meeting.
Standard & Poor’s meets with fund management
officials to evaluate the effectiveness of fund man-
agement in implementing a portfolio strategy that is
consistent with its stated investment goals. The
meeting is focused on the following topics:
■Depth and stability of the fund management
team
■Investment philosophy
■Operating policies, internal controls, and risk
preferences
■Credit risk
■Duration profile
■Use of leverage
■Investment targets
■Performance history
Upon completion of the management meeting,
the Standard & Poor’s analyst then discusses his or
her findings with a ratings committee and makes a
rating recommendation. The committee is com-
posed of at least three senior analysts, as well as the
lead and backup analysts. The committee reviews
and discusses the information uncovered in the
analysis and any open items from the management
meeting, then votes on a rating(s) for the fund.
Once a rating is issued, Standard & Poor’s moni-
tors the fund on a monthly basis to ensure that any
changes in the portfolio or the fund management’s
operating policies do not alter the fund’s rating(s).
Standard & Poor’s also conducts an annual man-http://www.standardandpoors.com 319Government Investment Pool