1. Introduction
J O Hambro Capital Management (“JOHCM”) is a performance-led active investment management company, offering its institutional and wholesale client base differentiated regional equity, global equity and multi-asset strategies.
JOHCM invests for the long term and with high conviction. Its nimble, highly experienced investment teams use rigorous analysis to identify the best investment opportunities in their investment universe. They then take measured risks to build distinctive portfolios intended to outperform an appropriate benchmark over a full market cycle. JOHCM's portfolios will typically look very different from their benchmarks and many peer funds; its fund managers are looking to beat the market, not match it.
JOHCM's fund managers have complete investment freedom, subject to risk criteria and investment restrictions. There is deliberately no ‘house’ view on economies, markets, sectors or stocks. This leads to a diversity of views and approaches across its investment teams. However, all of our fund managers do appreciate that their actions and decisions can affect practices in the entities in which we invest, in turn affecting the environment, our stakeholders, and the community.
We understand that we have both a duty and an interest in managing this influence and with that in mind have set out the JOHCM approach to stewardship below. Its broad aim is to prevent and reverse negative decisions made by investee companies, in order to maximise their long-term value. It is JOHCM’s intention to become a signatory to the 2020 version of the Financial Reporting Council’s Stewardship Code (the “Code”). JOHCM was a signatory to the previous version of the Code.
JOHCM has a long history of talking to companies about matters of strategy, remuneration and financial performance and welcomes the recent increase in the depth and breadth of investors’ stewardship and engagement activity.
2. Approach to Engagement
Our success as an asset manager has been founded upon experienced fund managers with proven investment pedigrees and these carry weight, improving our ability to effect change when engaging with companies. Accordingly, the principles of the Code are integrated in the investment processes of the individual investment teams, rather than being devolved to a separate team.
JOHCM currently runs 20 investment strategies, principally investing in equities. Each of its investment teams is small and has investment autonomy. All of JOHCM’s fund managers recognise the value of engagement, and JOHCM sees engagement effectiveness as predicated on investment teams devising their own engagement strategies, styles and engagement topics; each align with the team’s purpose and value proposition to clients.
JOHCM’s fund managers aim to understand industry dynamics and structural changes as well as any company-specific issues for each of the companies in which they invest. They then use best practice in governance (capital allocation and the remuneration structures which drive those decisions), social policies (encouraging companies to work with all their stakeholders) and environmental factors (improving the environment in which they operate) to support value-creative growth in that company over the long-term.
JOHCM’s Investment Director and Risk team provide comprehensive oversight of the investment teams and their strategies. On a quarterly basis, there is a formal review that incorporates an analysis of the performance, decision-making, risk profile, fund liquidity, compliance and the environment, social and governance (“ESG”) characteristics of the holdings, such as flags which indicate changing ESG performance.
JOHCM believes that this structure, with each fund team conducting its own analysis and engagement, provides a greater benefit to clients than those investment management companies with separate ESG or stewardship teams. Furthermore, many of its strategies have concentrated portfolios which allow the fund managers to perform detailed analysis of their investments and to focus their attention to a greater extent on those areas where their engagement can have the greatest effect.
3. Conflicts of Interest
JOHCM’s approach to conflicts management consists of the following stages, set out in the firm’s Conflicts of Interest Policy:
- Identification of conflicts of interest
- Recording of conflicts of interest in the JOHCM Conflicts Register
- Implementing appropriate procedures and measures to prevent or manage conflicts of interest which have been identified
- Monitoring the effectiveness of JOHCM’s conflicts management arrangements, including the Conflicts Policy itself
- Provision of information to clients, including disclosure of conflicts of interest where required, provided that disclosure may only be used as a last resort where the arrangements established by JOHCM to prevent or manage conflicts are not sufficient to ensure, with reasonable confidence, that risks of damage to client interests will be prevented
- Reporting to senior management in relation to conflicts of interest.
A summary of the Conflicts of Interest Policy can be found here: JOHCM Conflicts of Interest Policy
4. Monitoring of and Engagement with Investee Companies
The investment process for each fund management team is focused on thoroughly understanding on an on-going basis the character and quality of investee companies, the risks and the areas of potential improvements. ESG factors are, to varying degrees, incorporated in our assessment of:
- the performance of the business and the execution of the strategy;
- capital allocation decisions; and
- the risk within the business and the industry.
Each team of JOHCM fund managers has several ESG tools available on which they can draw to carry out their analyses, but it is our belief that ESG analysis is not something separate from the investment process, and therefore these tools do not replace fundamental and integrated analysis.
At a JOHCM Group level, JOHCM uses MSCI’s ESG analysis and Sustainalytics to monitor potential areas of concern pertaining to our holdings. These tools also allow us to analyse the profile of each investment strategy against its investment benchmark and access detailed analysis from these providers. Companies which fall into the lowest category on MSCI’s Business Involvement Screening Research are reviewed for justification of the holding by the fund manager and ratings downgrades are monitored to ensure we capture the changing risk profiles of our investments. This analysis is incorporated into the regular quarterly review of each strategy conducted by JOHCM’s Investment Director.
It is worth noting that the rate and nature of change is often as important as the level of the ESG rating itself. Much of the engagement by JOHCM fund managers is with companies with lower ESG ratings with a view to helping them improve their practices, which we believe will ultimately create more value for our investors.
JOHCM fund managers frequently discuss a variety of issues with executive and non-executive officers, informed by our company analysis, including ESG assessments. Where any ESG concerns are identified, depending on the type, urgency and severity, the fund manager will initiate engagement with a company's board, executive management and/or its advisers. The fund managers often discuss concerns and feedback directly with company management. Occasionally event-related issues trigger immediate escalation of specific governance and strategy concerns to the senior independent director or company chair, using the UK Corporate Governance Code as their guide for both UK and non-UK holdings.
Subject to applicable market conduct rules, JOHCM fund managers occasionally act with other investors where they believe such collaboration will increase the chances of bringing about change. Equally, they may from time to time engage with other stakeholders such as regulators or industry bodies when they believe that broader collaboration on an issue may have a meaningful impact.
During the course of 2019, JOHCM fund managers were in close contact with boards of a range of companies, primarily seeking to improve management behaviour, incentives and strategic decisions.
The examples below refer to these companies in generic terms as some of the discussions are private and ongoing.
- The fund managers initiated a discussion with the property developer U+I Group, because they felt that the company was underperforming in its engagement on ESG issues relative to where it should be and had shown little progress in recent years.
Specifically, the team highlighted a lack of clear stated policies on bribery and corruption issues (G), a poor score on green building (E) which is particularly disappointing given the company prides itself on its urban regeneration credentials, and weak health and safety scores (S) driven by a lack of targets for improvement and responsibility in these areas. Following this engagement, they anticipate significant progress on all these fronts over the next 12 months.
- The fund management team actively engaged with the Chairman and the management team on how Glencore could become a better 'corporate citizen'. The team's engagement with Glencore is a highly active case in point. For now, it has committed to deprioritise coal within its mix, but, in time, we consider that it would not be a surprise to see that operation spun out of the group entirely - a move that the fund managers would welcome and encourage. The Chairman has also committed to improve the group's governance performance and that has already manifested itself with a number of key management changes - the fund managers would anticipate more. Glencore is an example of a company where the fund management team has begun to see improvement in ESG issues but which needs to do considerably more, otherwise the team will most likely review their position.
- A fund management team was about to vote against the remuneration proposals for Northgate, linked to the Redde transaction, as they believed they were poorly designed, quantum was too high and the growth hurdle rates were too low, until the day before when the team's engagement led to material changes being made, when the vote was changed.
- The fund managers worked with the Japanese biotech company, Peptidream, on board diversity and other measures to improve their approach to governance. Peptidream has addressed and improved these issues as reported at their latest results presentation (Q4 2019).
- The fund managers engaged with the a2 Milk Company, which, as a result, now has a plan to improve how they address environmental issues.
- Engagement often starts before most investors are even aware of the issue. For example, one team questioned the managements of Kao Corp and Aekyung on their plastic packaging policies; they engaged with L’Oréal on the company’s use of micro beads; and they confirmed the absence of phthalates in products produced by Givaudan and Symrise.
- Another team had ESG meetings with several of the major trading houses in Japan. These meetings gave the team an opportunity to question them about the changes they had made to improve the functioning of the board, their plans to reduce greenhouse gas emissions, the reduction in their thermal coal assets and their shareholder return policies.
The above examples give a flavour of the discussions that JOHCM fund managers have had with companies during 2019. Most discussions highlighted above form part of an ongoing, constructive dialogue between JOHCM fund managers and the management of investee companies, which occurs primarily behind closed doors. JOHCM is happy to discuss specific situations in more detail wherever possible.
5. Voting
JOHCM has implemented robust written policies and procedures designed to ensure that, when voting proxies in respect of the securities that it manages for its clients:
- it does so in the best interest of its clients, addressing any conflicts that may arise between its interests and those of its clients;
- it discloses to clients how they may obtain information from the firm about how the firm voted with respect to their securities; and
- it describes to clients its proxy voting policies and procedures and, upon request, furnishes further details of these policies and procedures to clients.
JOHCM has established procedures to ensure that all proxies that are received are properly distributed and voted on a timely basis in the best interest of the client.
To support this, JOHCM has engaged Broadridge Proxy Edge and ISS Proxy Exchange to facilitate its voting and engagement activities. ISS is used for research and recommendations and Broadridge Proxy Edge is used to vote. For any significant provider to JOHCM, we will perform a due diligence review of that provider which is periodically updated. The degree and frequency of the due diligence will be commensurate with the importance of the relationship to JOHCM’s operations and the materiality of the risk.
The JOHCM Operations team will gather details of all upcoming Annual General Meetings and Extraordinary General Meetings. Details of the agendas will be circulated to all relevant fund managers for consideration.
Where research, including (but not limited to) research from proxy advisers, highlights issues which do not represent best practice, the agendas are also shared with the Investment Director for consideration. These are the votes which JOHCM considers to be the most significant and therefore meriting the greatest attention. In these cases and others if appropriate, the fund managers may choose to discuss these issues directly with company management. If necessary, they will escalate governance and strategy concerns to the senior independent director or company Chairman when shareholder value and shareholders’ rights are being infringed, using the UK Corporate Governance Code as their guide for UK holdings, and applying the same principles to non-UK holdings. Fund managers may engage in discussions with other investors where appropriate and in compliance with market conduct rules.
The fund managers have discretion to make a voting decision based upon their careful analysis of the proposals, their engagement with the company and/or any available third party research. Where the fund managers are in agreement with the proposals, and they are in investors’ best interests, then JOHCM will vote in favour of them.
The fund manager’s decision is communicated to the Operations team where an authorised individual will submit the proxy vote using Proxy Edge.
JOHCM understands the importance of voting proxies and will cast its vote proxies in the best interest of its clients. Should a conflict of interest arise between JOHCM's interests and those of a client, JOHCM will arrange a discussion with such client to review the proxy voting materials and the conflict and will obtain the client's consent before voting. If JOHCM is not able to obtain the client's consent, JOHCM will take reasonable steps to ensure, and must be able to demonstrate, that those steps resulted in a decision to vote the proxies in the best interests of the client.
JOHCM's voting records are held on Broadridge’s ProxyEdge system; JOHCM Proxy Voting 2019
JOHCM is happy to discuss its voting activity or discourse with company management as appropriate, should clients or potential clients have a particular interest.
7. Reporting
A version of this document is published annually to provide an overview of JOHCM’s stewardship activities and incorporates our annual proxy voting record. This is available from JOHCM’s website or from our Client Services team. Equally, we are happy to engage directly with our investors and clients to explain our approach to any aspect of this policy, as effective stewardship ultimately helps to drive the investment returns they are seeking.
J O Hambro Capital Management Limited
JOHCM Funds (UK) Limited
28 July 2020
