This document outlines the approach taken at TwentyFour Asset Management LLP (“TwentyFour”, the “Firm”) to enact comprehensive and effective stewardship with specific reference to the Financial Reporting Council’s (FRC) UK Stewardship Code . Responsibility to our clients lies at the heart of everything that we do, driving us to perform, protect clients’ interests and be transparent.
TwentyFour is a limited partnership (company no. OC335015) based in London. Formed in 2008, we are a fixed income only investment manager. As of Q1 2020 we have over £16 billion of assets under management from a range of clients, including pension funds, corporates, local authorities, insurers, wealth managers and financial institutions.
This document will set out the relevant policies and procedures enacted at our Firm as well as our philosophy and culture that manifest in our relationship with our clients, our people, our Firm’s infrastructure, and how stewardship and integrating environmental, social and governance (ESG) principles play a key role in this.
Graeme Anderson, Chairman
Institutional investors should publicly disclose their policy on how they will discharge their stewardship responsibilities.
As a partnership TwentyFour believes that its long term future is aligned with that of our clients, and our stewardship responsibilities are key to this. Central to our business’ long term future lies a high standard of internal and external stewardship. We pride ourselves on our rigorous detail oriented investment approach, which aims to achieve superior risk-adjusted returns for our clients while retaining a strong focus on capital preservation.
Our people drive every aspect of our business. Global fixed income markets are broad and complex, with many areas of specialism. This has led us to create a portfolio management team with very diverse backgrounds in terms of market segment and geographical expertise. We always believe that the most influential person in the room is the person who has the most knowledge of the subject in question, no matter their level of seniority.
Moreover, by seeking to be a responsible employer we aim to achieve below-market staff turnover, thus providing continuity of experience across the firm (for more information see our Corporate and Social Responsibility Statement )
Investment Process & ESG
Our investment process has evolved over the years, though at its core it has remained consistent, with an easy to understand monthly top-down and daily bottom-up process, with a weakly ‘validation’ of our asset allocation. Importantly, our process is easily repeatable and can consistently be applied to every company that issues, manages or services any instrument in which we invest. The process itself is not unique but we believe that our key differentiator is the focus, experience and talent of our team. Both our top-down and bottom-up decisions are taken as part of a team based exercise which we believe benefits general oversight and promotes good governance. No part of our investment process is outsourced and is based on our own research. Where appropriate, and at the Firm’s own expense, third party investment research, including from brokers, is also used.
As more fully described under Principle 3 below, our portfolio managers meet the management of every company whose securities we invest in, or who manages or services any instrument in which we invest – both prior to investment and on an ongoing basis. If a company is taking action which we believe is detrimental to the interests of investors or the market as a whole, we have various ways with which we can engage with them on our clients’ behalf. Any engagement is formally recorded by issue, the desired outcome, the form of engagement, the company’s response and any action subsequently decided by us.
As part of our detailed bottom-up credit analysis a potential investment is allocated to one of the portfolio managers, who will then conduct a detailed analysis of the investment and present it to the portfolio management team for further scrutiny and challenge and, if necessary, further analysis can be carried out. If any portfolio manager cannot get comfortable with the risk-adjusted return profile, we will not invest.
In addition, we believe that Environmental, Social and Governance (ESG) factors can have a material impact on the future performance of our investments. As such, explicitly considering ESG factors is embedded, or integrated, in our investment process for all the funds and accounts that we manage. Our Responsible Investment policy is explained here. We believe that it is one thing to describe a framework, but for it to be truly impactful it needs to be ‘owned’ by all the portfolio managers rather than a separate team. The process also has to be robust and easy to use if it is to be truly successful. To that end we have invested considerable resource to extend our proprietary Observatory portfolio management system to incorporate a model for ESG factors.
We are strong believers in assessing a company’s ESG momentum, or transition to an improved ESG performance. That is, does a company have a demonstrable plan to improve key areas of ESG weakness? If so it may be better to support a company through its transition rather than to make improvements more difficult by starving it of capital. Better future outcomes are surely more important than blunt rules.
As fixed income investors we do not have votes at companies’ Annual General Meetings, but this does not prevent us from engaging on behalf of our clients when we feel this is appropriate. As fixed interest investors we manage ‘corporate actions’ such as consenting or not to repurchase offers, bond exchanges and covenant modifications, among other matters. In 2019 we have elected on 28 corporate actions on behalf of our clients.
As part of our stewardship responsibilities, we actively manage our counterparty selection process to ensure that we minimise the counterparty credit risk faced by the clients and funds on whose behalf TwentyFour executes securities transactions. This process is managed and overseen by our Risk and Compliance functions.
We believe that transparency with regards to our funds’ objectives, performance and construction is a crucial part of our relationship with, and responsibility and accountability to, our clients. We achieve this through multiple media including monthly factsheets, semi-annual fund reports, investor roadshows, investor group updates, an annual conference, website content, whitepapers and blogs.
We believe our clients should always be kept informed of our general market opinions, and that we should also seek to impart thought leadership on specific aspects of the fixed income market through our whitepapers and blogs. In particular, during periods of severe asset price stress we feel that communicating with our clients is paramount.
Institutional Investors should have a robust policy on managing conﬂicts of interest in relation to stewardship which should be publicly disclosed.
The Firm maintains a formal Conflicts of Interest Policy & Conflicts Record which is reviewed on a regular basis and is publicly available on our website by clicking here.
The Firm recognises that the provision of investment management services to our clients could potentially give rise to conflicts of interest entailing a material risk of damage to the interest of one or more of our clients. Senior management within the Firm are responsible for ensuring that systems, controls and procedures are adequate to identify and manage conflicts of interest. The Firm’s Compliance department assists in the identification and monitoring of actual and potential conflicts of interest, and reports on this to the Firm’s Risk and Compliance Committee on a monthly basis.
Where conflicts, or potential conflicts, are identified the Firm is committed to ensuring that they are effectively and fairly managed so as to prevent these conflicts from constituting or giving rise to a material risk of damage to the interests of clients. Where it is not possible to prevent actual conflicts of interest from arising, the Firm will try to manage the conflicts of interest by:
• Disclosure to the Client;
• Establishing an information barrier; or
• Declining to provide the service.
The below conflicts have been identified to specifically relate to our stewardship responsibilities, details of the safeguards the Firm has put in place to manage these potential conflicts are set out in the Firm’s Conflicts of Interest Policy:
• Personal Account Dealing;
• Client Orders and Allocation of Trades;
• Dealing in Own Funds; and
• Insider Dealing.
Institutional investors should monitor their investee companies. Effective monitoring is an essential component of stewardship. It should take place regularly and be checked periodically for effectiveness.
In order to fully understand the companies issuing the bonds in which we invest, our portfolio managers meet the management of every company that issues, manages or services any instrument in which we invest – both prior to investment and as part of monitoring on an ongoing basis. We will not invest if any company involved in a transaction does not pass our rigorous due diligence. This work supplements the analysis that we do on the reports and documentation produced by the company. Where appropriate, we will also draw on investment banking research, other third party research (paid for by TwentyFour) and peer group analysis in addition to our own findings.
By getting to know the companies and understanding them, we believe that we avoid investing in companies where governance is poor, which can often be the root cause of an unsuccessful business, or one which could experience negative surprises which would likely affect the value of the bond. Our engagements with each company include a wide range of topics to enable portfolio managers to assess the quality of the company and their management. Debt financing has become a more important source of capital for companies over the last few decades, which means that as bondholders we are afforded good access to company management. As well as the financial analysis, the portfolio managers will also engage on other factors relevant to the performance of their bonds. This includes ESG questions, as we believe the long term sustainability of a company (defined not only as the ability to pay coupons and repay principal, but also perceived industry reputation) is another important factor in a successful business, particularly where the ability of issuers to refinance transactions on an ongoing basis is an important consideration. Any additional information obtained regarding ESG matters can be recorded in our ESG database.
Our Multi-Sector Bond team had 120 face-to-face meetings with company management over the course of 2018, and our Outcome Driven team had around 75. Our Asset-Backed Securities team had face-to-face meetings with all 36 CLO managers that we invest (or could invest) with, and in addition met around 10 other companies involved in various related transaction roles (originators, servicers and sponsors). These statistics do not include monitoring activities the various teams have had with individual firms over email or telephone.
Institutional investors should establish clear guidelines on when and how they will escalate their stewardship activities.
We take our stewardship responsibilities seriously and always act in the best interests of our clients. As more fully explained in principle 3, we conduct a significant amount of due diligence on issuers with whom we invest, which enables us to avoid companies that we believe do not meet our high standards in strategy, performance and ESG factors.
Issues can arise, however, post-investment, and where we are concerned about specific matters such as governance, management or treatment of bondholders, the portfolio managers will engage with the appropriate senior management or board member of the company involved. Within our proprietary ESG model, housed in our Observatory portfolio management system, we have a template which enables portfolio managers to log any company engagement by the following steps;
- Nature of the issue of concern
- Desired outcome
Our system also captures any associated email correspondence, write-up, blog or any other related documents.
We generally keep such discussions private as we believe better outcomes can occur this way, but we have on occasion published blogs discussing issues that we have found difficult to resolve and we felt deserved to be brought to our clients’ or the broader market’s attention.
National Grid Blog
Generally, if we have not been able to resolve an issue satisfactorily, we would not invest in bonds issued by those companies, however we would continue dialogue to ensure, as far as possible, they understand why we are not investing in their bonds and that we are kept up to date with any developments. If we are already invested in the bonds it is possible that the matter will result in us exiting the investment, at which point transparency may be delayed in order to avoid compromising the interests of our clients.
Institutional investors should be willing to act collectively with other investors where appropriate.
We believe that acting collaboratively with other investors and market participants can lead to better outcomes for clients and the market in general, and as such we are very happy to do so when appropriate. We have actively worked with other managers to help improve the governance of the sectors in which we operate, which we believe is beneficial for all of our respective clients.
TwentyFour is regularly consulted as an advisor by the Bank of England, the PRA/FCA, the UK Treasury, The European Commission and the European Banking Authority, as well as a number of other EU finance ministries (BaFin, DNB, and Bank of France etc.).
We are in our fifth term as vice-chair of the Securitisation Board of the Association for Financial Markets in Europe (AFME) and are also a member of the Bank of England Residential Property Forum. Our objective is to collaborate with these institutions, particularly with regards to the ongoing development of the regulatory framework for securitisation, with the aim of ensuring that market participants and policymakers alike work together to develop and maintain the most suitable regulatory environment for the ultimate benefit of investors. This takes up a significant amount of our time, but we feel it is in the best interests of not only our clients, but the industry as a whole.
Our Asset-Backed Securities team is at the heart of the governance of the sector and therefore in a prime position to identify and assist to mitigate market-wide and systematic risks. One example of where we have worked with other investors and the broader industry is the Prime Collateralised Securities (PCS) initiative, of which we are one of the founding partners. PCS is an industry-led non-profit organisation, founded following the financial crisis, which was initially funded by voluntary contributions from industry participants to create a best practice label for ABS market structures and collateral (www.pcsmarket.org). The initial aim of the label was to further enhance the standards of quality and transparency of the securitisation market, and identify transactions which met best standards to ultimately broaden the investor base and provide a sustainable source of funding for the real economy. As part of the EU’s Capital Markets Union project the basic premise of PCS has subsequently been adopted by regulators as part of the new regulatory securitisation framework which came into force at the beginning of 2019 and includes the new Simple, Standardised and Transparent (STS) designation for qualifying securitisations, a best practice standard which will allow appropriate regulatory recognition and treatment such as more preferential capital treatment for labelled securities. Following the introduction of the new regulatory framework, PCS remains a not-for-profit organisation and has adopted the role of a regulated third party verification agent for the new STS regime, and TwentyFour maintains a role on its markets advisory committee and as a board member of its UK entity.
Institutional investors should have a clear policy on voting and disclosure of voting activity.
TwentyFour is a fixed income boutique and as such does not invest in company equity, meaning we do not have votes at company annual general meetings.
We do, however, complete on behalf of our clients ‘corporate action’ decisions as more fully described in Principle 1 above. These decisions generally occur on a sporadic basis, are of bond specific nature, and the decision will generally be an economic one. All corporate actions are made on a case-by-case basis by TwentyFour.
Notwithstanding a fixed income manager’s lack of equity voting rights, we do believe that we are able, and required, to take stewardship responsibilities seriously. This is especially so today given the increasing importance of debt in company’s capital structures. We have commented on this more fully in Principles 1 and 4.
Institutional investors should report periodically on their stewardship and voting activities.
Following on from our comments in Principle 6, we can do more to report on our stewardship activities as fixed income managers.
Number of Borrower Meetings / updates - 84
Number of Corporate Actions - 59
Summary of Corporate engagements
Sample Examples of ESG driven investment decisions
As part of our carbon emissions engagement policy we reached out to Heimstaden (European REIT) to understand how they plan to improve their poor environmental score. We were particularly concerned by the deterioration of their environmental credentials following the acquisition of a more ‘dirty’ real estate company.
While there is a lot of work to do, we were pleased by the roadmap and detail Heimstaden outlined in their response. Heimstaden was one of the first pan-European residential real estate companies to commit to the Science Based Targets initiative (SBTi) and they will reduce their greenhouse gas emissions in line with the Paris Agreement’s 1.5˚C global warming level. Regarding their recent acquisition of 42,500 units in Czech Rep which increased their carbon intensity, even on a per square meter basis, Heimstaden will invest approximately SEK 3 billion in fuel shifts and energy efficiency measures. 5000 of these units have local boilers in the apartment blocks – they will focus on shifting from inefficient coal or gas based local boilers to more efficient central gas boilers (which can be fuelled with biogas) – the work is ongoing and will be completed within 6-7 years. It is worth noting that in 2019-20 management demonstrated they can reduce emissions from energy efficiency measures such as insulation of walls, attics and roofs, LEDs & sensors, smart control systems and optimization of heating systems – they plan to take these steps as part of their five pillar climate roadmap outlined below and thus we should expect emissions to decline in the coming years.
2. Fuel shifts
3. Energy provider improvements
4. Energy efficiency improvements
5. Encourage tenants to reduce energy usage through the following measures
Following a Bloomberg article regarding gender pay gap for UK investment banks, HSBC had one of the largest. We reached out to understand what HSBC were doing to rectify this.
HSBC acknowledged the issue and have a plan in place to address this and more generally on improving diversity across their business. They have targets they are looking to achieve by 2025 and have people assigned to ensure and promote D&I across the business. We appreciate that this is not a quick fix so will look to review the statistics in c.6months when we should have updated figures in their CSR report.
During our 1x1 earnings meeting we made clear that we were not happy with the governance during Covid.
The company paid the maximum dividend out according to the covenants in spite of leverage going up due to Covid. Also in Q1 there was a shareholder loan taken out of the company. While legal this is not what we would expect in the midst of a pandemic. We expressed our concerns and disappointment to management and we will not roll our exposure if they decide to tender. Due to these concerns the momentum score and the overall score were punished.
We requested information on a new CMBS deals, specifically the CO2 emissions of their assets and their stance regarding net zero.
We were pleased they were able to report their emissions across their 40 sites, however their commitment toward net zero could be stronger and this is something we will monitor going forward.