Fitch Ratings has affirmed the 'Strong' Investment Management Quality Rating of Porto Seguro Investimentos Ltda (PSI).

The Rating Outlook is Stable.

PSI's rating applies only to the company's activities in the domestic market and does not consider other activities of the manager and the Porto Seguro group. The other companies of the group operate in the insurance, private pension plans and credit products areas. All these activities have their own processes and policies and are segregated from PSI.

KEY RATING DRIVERS

PSI's 'Strong' rating reflects Fitch's opinion that the asset manager has strong investment capabilities and operational characteristics in relation to the investment strategies it offers.

The rating also reflects the manager's solid and well-defined investment process, well-organized and segmented organizational structure, experienced investment team, and strong risk and compliance controls. Additionally, the rating reflects continuous improvements to the manager's technological infrastructure, including its front-office system, as well as the supervision and support of its shareholder, the Porto Seguro group, one of the largest insurance groups in Brazil, with synergies across commercial, operational and technological matters.

PSI posted a slight decrease in assets under management (AUM) in the first half of 2021 (-1.8% against an increase of 9.4% for the industry), to BRL20.5 billion in June 2021 (including managed portfolios). The decrease in AUM was due to outflows related to two large investors.

In Fitch's opinion, PSI's main challenges are consolidating its third-party investment process, improving its franchise in higher value-added funds, automating its liquidity risk system and diversifying its investor base.

The 'Strong' rating is based on the following assessments:

Investment Process: Strong

Investment Resources: Excellent (from Strong)

Risk Management: Excellent (from Strong)

Investment Performance: Consistent

Company & Client Servicing: Strong

Investment Process

PSI's investment process is solid and well-structured, with well-defined strategies and limits, based on regular committees and in-depth research. The manager has ten open-ended investment funds, segregated by passive fixed income, active fixed income, multimarket, equity and fund of funds (FoFs). PSI's investment process is driven by a top-down view in conjunction with proprietary bottom-up analyses of companies for equity funds and private credit. The macroeconomic research team closely interacts with portfolio managers, including actively participating in portfolio asset allocation, and portfolio managers have autonomy to operate within each mandate while observing pre-established limits. PSI has performance and risk attribution reports that allow managers to assess whether portfolios are in compliance with policies and strategies, learn from mistakes and adjust their investment process.

Investment Resources

The revision of the score to 'Excellent' from 'Strong' reflects the continuous improvement of PSI's proprietary front and middle-office system following the completion of important enhancements, which include order management, pre-trading controls and automatic reconciliation with external service providers, among other resources.

PSI has a robust and well-organized organizational structure, with formalized relations with the other companies in the Porto Seguro group. The organizational structure has consistently expanded, currently being comprised of 50 professionals, 29 of whom are in the investment team. The company is well segmented, with a CEO, CIO, CRO, distributor relationship executive, and six portfolio managers, as well as other experienced and qualified professionals.

Key-person risk is low, with no relevant turnover in the company despite the change of the CEO in 2020 due to the changes in executives among group companies. The risk control and compliance areas function within the manager, but are completely segregated from the investment team. These areas report directly to the manager's CEO.

PSI benefits from the group's corporate IT structure, which provides good support for the company's projects. In recent years, the manager has made several investments in its systems and, in 2021, created its own IT area, dedicated exclusively to the asset management business.

In 2020 and 2021, PSI completed important developments in its front and middle-office system, such as automatic order execution, pre-trading compliance and automatic reconciliations with external service providers, among other features. The automation and integration of systems with external service providers has improved significantly, obtaining positive results in terms of efficiency and operational risks. The middle and back office and risk areas are responsible for the reconciliation of all trading orders and securities positions, with standardized and integrated procedures.

Risk Management

The revision of the score to 'Excellent' from 'Strong' reflects the improvements realized with the implementation of the pre-trading module, among other automatic reconciliation features, for the compliance services.

PSI is supervised by several external entities, including Brazilian regulators. The PSI risk structure is robust, with a robust set of controls. Market risk controls are system based, with a customized solution provided by Lote45. Operational risk and internal audit are carried out by different areas of the Porto Seguro group, although with procedures dedicated to the fund manager's business. PSI has a strong set of codes, policies and controls in place, and has not experienced significant breaches, even during the crisis caused by the coronavirus pandemic. The manager also employs a conservative credit risk approach, both for the group's insurance resources and for its third-party mandates.

Investment Performance

The risk-adjusted performance of PSI's funds has been consistent and aligned with its objectives and relevant peers over the last 36 months ended in June 2021. Most strategies, including fixed income, pension, and multimarket funds, ranged from the first to the third quintile in comparison with the peers in the analyzed period.

Company and Client Servicing

PSI is a wholly owned subsidiary of the Porto Seguro group, one of the largest insurance groups in Brazil, recognized for its solid experience and excellence in customer service. Founded in 1945, the group is controlled by the Garfinkel family, with the Itau Unibanco group (AAA (bra)/Stable) as an important minority shareholder with 43% of the group's holding company. PSI was the 47th largest asset manager in Brazil in June 2021, with AUM of BRL15.7 billion, according to the Brazilian Association of Financial and Capital Market Entities (Anbima). The Porto Seguro group has a long history of managing its resources (since 1996), and founded PSI in 2014 to offer its investment products to third parties. PSI and the group have been profitable and the investment business is an important line of services provided by the group.

In June 2021, the AUM consisted of fixed income funds (58%), pension plans (25%, largely fixed income), multimarket (14%) and equity (3%). The investor profile was composed of internal group assets (51%), pension funds (24%), distributors (12%), consortium companies (10%) and others (3%).

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Increasing the scale, diversifying the AUM base, improving its franchise in higher value-added funds, and consolidating its third-party investment process could benefit the 'Investment Process' and 'Company & Customer service.' Automating the liquidity risk system could also benefit rating. Such improvements, taken together, could have a positive impact on the rating.

Factors that could, individually or collectively, lead to negative rating action/downgrade: -

PSI's rating may be sensitive to significant adverse changes in any of its key rating drivers mentioned above, especially in case of a weakening of its financial profile, high key staff turnover or deterioration of its processes and policies. A material deviation from Fitch guidelines for any key driver could lead to a rating downgrade.

RATING ACTIONSENTITY/DEBT	RATING		PRIOR
Porto Seguro Investimentos Ltda.	IMQR	Strong 	Affirmed		Strong

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Additional information is available on www.fitchratings.com

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