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 - 100
Number of Corporate Actions - 59
Summary of Corporate engagements
Sample Examples of ESG driven investment decisions
We engaged with National Express on a range of environmental issue as part of our Carbon Emissions Engagement Policy.
This was a very detailed and largely successful engagement – we have identified specific data points which we will track and measure to ensure National Express continue to improve on their environmental credentials. We were please to hear they plan to publish new net zero Group targets very shortly which would align to a 1.5 degrees Celsius target following the success they have had in reaching their 2 degrees Celsius targets. The area which is holding back the decarbonisation of UK Bus is the lack of hydrogen infrastructure – they have currently submitted a bid together with TfWM for funding as part of the ZEBRA funding through the National Bus Strategy, for up to 200 Hydrogen vehicles. For their coach business EV technology doesn’t currently work due to the high speed and long distance of these routes so national hydrogen infrastructure will also be required for refuelling a national network. Despite the challenges National Express are facing in transforming there bus fleet, this is an area where we must see change in order to meet carbon reduction targets and wider net zero targets. We were provided with a full breakdown of the fuel type of their bus fleet in NA, UK and Europe. Their current portfolio is very heavily weighted to diesel vehicles, particularly in their UK operations – we fully expect this to improve and will monitor this closely. We learned they may look to issue ESG labelled debt in the future. Additionally in order to finance the transition to zero emissions vehicles they may too in change their asset ownership model to something like the ROSCO model in the UK – this is certainly a positive from an ESG and credit perspective, good for momentum. National Express has clear climate reduction targets with ambitious goals to operate a fully zero emission fleet - by 2030 in their UK bus business and by 2035 in the UK coach business.
Participated in Nationwide's ‘Being a responsible business & leading the greening of UK homes' call to understand the steps they are taking to improve the environmental credentials of the home in their mortgage books.
Very comprehensive update from NWIDE on their environmental strategy and thoughts on the ‘greening’ of the overall housing market. The nature of their business is very strong on S&G however they acknowledge there is room for improvement on E. They have full CO2 and EPC coverage of their mortgage book - they used AI and machine learning to interpolate data to populate those without coverage. They are building a not-for-profit 239 home neighbourhood to create a new movement in housing, these buildings with be EPC A rated - they will not used gas but heat pumps. They are actively engaging with the energy sector on what they can do in the 'greening' and retrofitting of current properties – mostly on insulation and different boilers. However they did emphasise that to drive significant change in the housing sector the government must produce a long term retrofitting strategy - this is key to net zero 2050 targets. They will consider ESG labelled bonds going forward however, given their already strong ESG credentials they do acknowledge that the label is not needed to ensure their bonds are eligible for sustainable mandates. Lastly they are watching the trend that is emerging between EPC rating and house prices as buyers are becoming ever more energy conscious. Overall this was a very engaging and informative call.
We had a call and follow up email with BPCE to discuss their green HLFCT deal. The deal is labelled green based on the use of proceeds, we wanted more information on the details of how these funds would be allocated. Additionally we were particularly concerned that 60% of the pool has missing EPC data.
BPCE came back with particularly long answers around the use of proceeds and the inability to have 100% EPC coverage on the pool. We still think the use of proceeds for green deals in ABS is not effective and could flag greenwashing. We do not consider or recognise this deal to be green given 60% of the pool has no EPC data. However, BPCE did provide some assumptions on pool EPC by looking at current French stock and information comparing EPC by jurisdiction which was very useful.
We contacted IR to determine what proportion of revenues are from the sale of alcohol.
Unfortunately they refused to provide this data. This was particularly disappointing in the context of rapidly growing investor interest in ESG disclosure and increasing proportions of assets being placed in ESG mandates. It is inconsistent with the sizeable focus their corporate website appears to place on its Sustainability section. We understand the need to keep a certain amount of information proprietary but to be unwilling to be transparent enough to disclose which 5% bucket this falls in is very opaque. We are awaiting responses from other UK supermarkets and will consider a blog to highlight the lack of transparency in this sector.
|We agreed the STIPS and allocation with the manager for the CIFC 5 deal. However JPM called us one day before pricing notifying us that the main PM had resigned the night before. They were shocked like us and weren't expecting it.||
The resignation of the main PM (who generated much of the performance) was another governance flag for us. We will remain uninvested until they find a suitable replacement.