As a partnership, we believe that our long term future is aligned with that of our clients. In order to achieve this we have built a firm which blends the advantages of an ‘institutional’ infrastructure with the cultural dynamism of a boutique. We pride ourselves on our rigorous detail orientated investment approach, which aims to achieve superior risk-adjusted returns while retaining a strong focus on capital preservation.
At TwentyFour Asset Management we believe that ESG (Environmental, Social and Governance) considerations can have a material influence on the value of our investments. As such we have a formal framework which incorporates ESG factors into our investment process. We have a fourteen strong ESG steering group representing all areas of our business including three partners. Ultimately our investment and firms ESG policy and strategy reports to, and is governed by, the TwentyFour Asset Management’s Executive Committee.
We believe that investment returns can be enhanced and protected by taking ESG considerations into account in our investment process. We recognise that ESG is, in truth, a complex and evolving subject, however, at the highest level we feel that there are two main objectives; enhancing investor returns and to play our part in promoting better societal and environmental outcomes.
As a fixed income boutique we always tell our clients that if you buy a bond at launch, the best that can be achieved is to get your coupons and your money back. In a way this statement explains why there is a symbiotic relationship between fixed income investing and ESG considerations. By definition we need to be investing in companies whose business model is sustainable. A company making short run abnormal profits because of a socially predatory business model runs the risk of being regulated, litigated against or publically shamed out of business. The company may provide an equity buyer a suitable return for the risk but that risk is not appropriate for a long term bond holder with a defined return profile. Some pay-day lenders have been examples of this. In this context we think that many fixed Income investors have been instinctively following ESG principles without calling them such. We recognise that we can do more however.
There are many recognised ESG models and for an asset manager the choice between these has important implications for that company’s investment process and its client risk and reward profile. Ultimately, one client’s ESG values are likely to be different from another and these may change over time. Fundamentally we feel that it is not for TwentyFour Asset Management to impose investment restrictions on our client’s money (notwithstanding generally accepted legal requirements, such as cluster munitions or slavery). For this reason we believe that our client’s objectives are best served by adopting an Integration approach, though we can, and do, run portfolios with client requested screening attributes.
As part of our integrated investment approach we believe that every member of the investment team is required to ‘own’ the process. We do not believe that sub-contracting out ESG to an individual or separate team can truly be effective in an integrated investment process. All investment professionals at TwentyFour Asset Management are responsible for including ESG factors in their investment decisions and this forms part of their appraisal process.
Currently, statistical evidence (Barclays Equity Gilt Study 2017) shows the strongest correlation between performance and Governance, which is an area we have focussed on since our firm’s inception. One of our principles is to regularly meet companies we invest in. Being situated in London is a strategic advantage in this respect, as is having many partners with multiple decades of investment experience. Having said that, we fundamentally believe that social and environmental issues will become greater drivers of returns in the future.
Having such an experienced investment team also helps us to engage effectively with companies and our industry. As a fixed income boutique our voting rights are limited but we still engage with companies when we feel it is correct to do so. At an industry, and even regulatory and Government level we also actively engage for the benefit of our clients and industry which, we outline further below.
An integration approach means that we are disciplined in including ESG parameters in our overall investment relative value analysis. In other words, ESG considerations are explicitly part of our investment process. As an anchor to our ESG investment process we utilise a third party database in order to help provide measurement and context. This data has been incorporated into our proprietary ‘Observatory’ relative value database. The data covers a comprehensive number of ESG parameters for publically listed companies. This helps us in a number of ways. It allows our Portfolio Managers to place an issuers ESG profile on a relative basis compared to its peers. We are thus better placed to identify the financial implications of any specific ESG risks including current controversies. Momentum (whether the company is on an improving ESG trend) through time is captured and finally our analysis highlights any areas where we specifically require to think about or engage with a company.
Just as we utilise company ratings, but never rely on them as we always conduct our own research, it is the same with ESG in that we do not solely rely on third party output. Depending on our interaction with a company or our knowledge of industry trends we are able to adjust scores as appropriate. There is a structural problem facing fixed income investors in that not all issuers are publically listed entities so the information set available in some instances may be sparse, or just very different. In such cases we have to conduct even more of our own analysis. Our model prompts portfolio managers with the most relevant standard questions regarding ESG factors which facilitates a consistent basis for such analysis.
Asset Backed Securities do not fit neatly into the model of corporates that ESG databases cover. While the sponsor or originator of the deal will likely be covered in the database, the issuer is typically a Special Purpose Vehicle (SPV), set up solely for the purpose of issuing the bonds. Given the limited operational scope of the SPV there is little opportunity for the issuer to engage in activities covering ESG, however that does not mean that the sponsor’s business, the asset pool, the servicing of the underlying loans and so on are impossible to analyse through an ESG lens. Fortunately, as our clients know, in this strategy we build our own models for every security considered. We have constructed a number of data requirements that we feel are appropriate for structured credit and which are consistent with our ESG database. As mentioned our level of engagement is proportionately higher for these transactions. Thus we have integrated ESG factors into our Asset Backed Securities investment decisions.
Our ESG investment process from a top down view, which is implemented by every member of the portfolio management team, can be described as;
In summary, we have produced a consistent framework across our strategies which integrates ESG into our existing relative value decision making process. Importantly, we have really focussed on making our model flexible and easy for portfolio managers to use. Sometimes ESG factors will be the dominant driver in an investment decision, other times much less so. Crucially our model has the ability to evolve and is flexible enough to adapt to future regulatory or client demands.
We believe in actively engaging on behalf of our clients at a company, industry and regulatory level. As fixed income investors, our voting rights are limited, thus engagement as a fixed income manager is somewhat different to that of managers in the equity space. Our level of engagement is relatively high when appropriate. There are a number of reasons for this though central is the experience level of our partners and portfolio managers who can easily engage with companies or industry bodies at the highest level when necessary. With respect to some issuers we will interact with them at multiple levels, from senior to junior debt, ABS to whole loans.
Our buying power also gives us the opportunity to engage. This is particularly the case in our Asset Backed Securities business where we are more often than not directly influencing the structure, asset mix and terms of a transaction.
We also engage on behalf of our clients at the industry and regulatory level. TwentyFour Asset Management is an advisor to the Bank of England, the PRA/FCA, the UK Treasury, the European Commission the European Banking Authority and a number of other EU Finance Ministries. Our firm is the only UK asset manager who are founding partners of the Prime Collateralised Securities (PCS) initiative. We are in our fifth term as vice-chair of the Association for Financial Markets in Europe (AFME) and a member of the Bank of England Residential Property Forum.
As mentioned above we can and do run funds which screen out investments or sectors. Our risk systems and models can easily accommodate client requests but this has so far been done on a segregated fund basis.
We believe that our integrated approach across our strategies achieves the main objectives of responsible investing and is in the interest of our clients. We have more to do and while we do not have all the answers we will always seek to improve our process through time. We will not however engage in the ‘arms race’ to have the largest profile with the most badges in an attempt to impress with our ESG credentials. That particular trend will reduce competition and at the margin will actually be negative for the advancement of responsible investing. As the industry evolves we have the platform to incorporate information and techniques where it makes sense for our investors and as such we are happy to openly engage with our clients to discuss ideas or requirements.
Graeme Anderson, Chairman