Engagement forms a crucial part of our investment approach. As the stewards of our customers’ assets we aim to make investment decisions that deliver the best outcome for customers over the long term (10 years or more). To fulfil our fiduciary and stewardship duties, we believe it is our responsibility to work closely with asset managers that engage effectively with investee companies. This should include recognition of the importance of environmental, social and governance (ESG) considerations to support the transition to a more sustainable and fair economy. We trust that having effective engagagement ingrained in the underlying investment processes where appropriate is positive for customers’ long-term savings and financial security.
M&G does not itself engage directly with investee companies, instead relying on our chosen asset managers. We favour our managers engaging with investee companies by utilising active ownership practices such as shareholder voting, rather than restricting investment opportunities through exclusion. We believe that active ownership is essential to generating long term investment performance for our customers. We therefore appoint asset managers that positively influence corporate behaviour where appropriate.
For active investment strategies, our chosen asset managers’ investment processes are designed to select companies expected to outperform the relevant benchmark indices. M&G assess our asset managers’ investment processes periodically, including a review of their relevant policies covering shareholder engagement, voting and ESG. Included in the investment process, we expect our asset managers, at a minimum, to conduct effective monitoring of a company’s business strategy, financial performance, capital structure, non-financial performance and any other associated risk factors. We also expect asset managers to monitor ESG risks in line with their respective policies (which are regularly reviewed to ensure they are aligned with the M&G Asset Owner ESG Investment Policy), establish constructive dialogues, drive active engagement and responsible stewardship and also to exert influence where appropriate. We expect our managers to set a clear timeframe for the engagement activity and consider in advance any escalation which may be required if initial engagement efforts are unsuccessful. We also expect our asset managers to develop and follow a clear engagement escalation policy if key requests are not met. And finally, asset managers should actively participate in shareholder voting on our behalf in line with our Voting Standard where relevant, in keeping with their respective policies, and report the results of their voting to us.
In relying on our asset managers to vote on our behalf, we require that they make voting decisions in the best interests of M&G’s customers. We use our managers’ voting records to monitor how effectively they are engaging with company management. The due diligence activities we perform are also an integral part of our ongoing oversight process.
To enable effective engagement we also expect asset managers, on our behalf, to communicate with shareholders and other relevant stakeholders of investee companies; potentially cooperate with other shareholders and effectively manage conflicts of interest that may arise from their engagement. Any material communication and coordination, as well as significant conflicts of interest may be escalated to M&G for information and support with resolution.
We also use passive investment strategies, where the asset manager is required to match the portfolio to a specific benchmark index. Here, we would expect the asset manager’s Engagement and Voting Policy to continue to apply and vote responsibly on our behalf. While the purpose of the portfolio is to recreate the financial return arising from the benchmark index at a minimum cost, we believe effective stewardship improves companies’ financial performance and hence investment returns, for both passive and active portfolios.
M&G carries out due diligence and monitoring in respect of active ownership and engagement. Any significant issues or conflicts should be escalated to the Executive Investment Committee for further consideration. This policy applies to PAC, PPL and PIA only.
We believe in taking a long-term approach to investing. Our With Profits portfolios are invested on a long term time horizon, looking through short term (up to five years) volatility and drawdowns while seeking to optimise long-term risk-adjusted performance, in line with our customers’ financial needs. Broadly, our With Profits customers only bear a portion of the investment risk due to the impact of smoothing and guarantees, and the most appropriate time horizon for most customers to be exposed to investment risk is for the medium to long term, so five to 10 years or more. We believe that equities are a good asset to invest in to capture medium and long term returns, as investing a major proportion of our With Profits portfolios in equities allows us to capture the equity risk premium over the long term, whilst at the same time retaining flexibility to make meaningful tactical decisions over a shorter time horizon.
We may invest in equities either via a segregated mandate or via a collective investment scheme. The choice between these methods hinges on (a) achieving appropriate investment performance, (b) the relative risks , (c) the cost of investing and (d) the size of the mandate in question. We seek to optimise these variables to achieve the best investment outcome for customers.
For our With Profits funds, we invest in equities using M&G Investment Management (MAGIM) plus external fund managers, and Prudential Investment Managers South Africa (PIMSA). For the With Profits funds, MAGIM manages both segregated mandates and collectives, while PIMSA manages collectives. We employ a number of different equity strategies, across several geographic jurisdictions. We believe that investing in a broad spread of equity strategies and geographies creates diversification benefits, and ensures that our customers are not over-exposed to any particular set of risks over the medium to long term.
We select active investment strategies across large and small cap that are underpinned by robust investment processes, which would include active engagement with investee companies as a key element in selecting equities that would outperform the relevant benchmark index.
We primarily use a base fee and performance fee arrangement to incentivise our asset managers. The base fee is expressed in basis points of assets under management, and is accrued on a monthly basis. All our equity mandates, across all asset managers have an associated base fee. Not all mandates have a performance fee. None of passive investment strategies employ a performance fee, as the investment objective of a passive portfolio is to replicate the returns of a particular benchmark index, rather than to outperform it. A performance fee would not incentivise the manager of a passive equity strategy to meet the investment objective.
For active investment strategies (that is, where the manager is expected to outperform a particular benchmark index), we may use a performance fee arrangement where the manager is paid the performance related fee (PRF) if the three year annualised fund performance exceeds the three year annualised benchmark performance. The PRF is subject to a fee cap and a performance cap. There may be separate fee arrangements for collectives and segregated mandates investing into the same type of investment strategy, due to different administration costs. We expect managers to integrate non-financial factors into its security analyses and investment cases when selecting equities, and we expect to receive this service as part of the same fee arrangement.
We believe that the use of a performance fee aligns the manager’s incentives towards making decisions that result in sustained good investment performance over time. The manager has a portion of the remuneration from the equity mandate contingent on three year investment performance above three year benchmark performance, and the only way to consistently capture this portion is to outperform the benchmark index as required, over a rolling three year period. The rolling nature of the performance fee arrangement incentivises the manager to outperform over the medium to long term. The fee and performance cap are designed to disincentivise the manager from taking excessive risk in order to outperform the benchmark in order to earn the PRF.
We review each manager regularly, in order to verify that any investment performance was achieved using the agreed investment process, subject to all relevant restrictions, including restrictions on turnover costs. We may agree remedial actions with our asset managers to ensure that we continue to achieve investment performance that meets our customers’ needs.
Both base and performance fee arrangements for all mandates are reviewed approximately once every three years, with the last review completed in 2021. The review is based on comparison of the fee arrangements against available market data, as well as the results of our ongoing monitoring of our asset managers over the previous three years. Our investment management agreements with our asset managers are have no fixed term, but may be terminated with notice. They are also reviewed regularly, and no less frequently than annually.
We expect our managers to engage in trading activity consistent with their investment mandate and investment strategy. We expect our managers to report and explain portfolio turnover and associated costs regularly. We impose turnover limits for each mandate that are consistent with the manager’s trading style, as well as the level of risk taken in each mandate. Each manager is required to report on compliance with these turnover limits. If turnover in a particular period exceed an agreed turnover limit, the manager is required to explain why this occurred. If we believe that the increased turnover is due to an underlying issue with the investment process, we would agree a remedial action with the manager to ensure that the investment process remains robust. Nevertheless, there may be good reasons why turnover in a particular period may exceed pre-agreed limits.
Our unit-linked funds are invested in line with our belief in a long term approach to investing. While we do not have contractual long term liabilities arising from our unit-linked funds, we do have open-ended unit-linked business, with customers investing for the long term. We believe that our customers select those funds because they believe in our investment approach. Investment into equities is a core part of our customer proposition, as we believe that equities are good assets to invest in to capture medium and long term returns, as they allow us to both capture the equity risk premium over the long term, and retain flexibility to make meaningful tactical decisions over a shorter time horizon.
Our unit-linked funds may be invested in another collective investment scheme, or into a segregated mandate. Here we seek to optimise the trade-offs between cost, risk and investment performance. Our unit-linked funds invest in equities managed by MAGIM and external managers. As part of our customer proposition, we offer a number of different equity strategies, both active and passive, across several geographic jurisdictions. We also seek to ensure that our unit-linked customers would have access to similar strategies as our With Profits customers.
We monitor our unit-linked funds to ensure that they are invested in line with their stated investment objectives and mandates, against various criteria. Our Watch List process flags individual funds for further investigation, where we will carry out in-depth due diligence to identify the root cause of any investment performance issues. Where appropriate, we will agree remedial actions with the asset manager, or where we believe remedial actions are unlikely to be effective, we would close the fund or the fund link.
For our unit-linked funds, we use a base fee arrangement, expressed in basis points of assets under management. We do not use performance fee arrangements for our unit-linked funds because we do not believe a performance fee arrangement, which is most effective when measured over a three year time horizon, should be applied to daily priced funds. However, our manager and strategy selection and oversight is the same for our unit-linked funds as for our With Profits funds. We select investment strategies appropriate for the medium to long term, underpinned by robust investment processes, where active engagement with investee companies is a key element. We expect to receive all elements of the investment process we pay for via the base fee.
We seek to review these fee arrangements when required. In the future, the timing of these reviews will be aligned with those for our With Profits funds. Our unit-purchase agreements and investment management agreements with our asset managers have no fixed term, but may be terminated with notice, and are also reviewed when required.
We employ an approach consistent with that taken with our With Profits funds, in that we review each manager regularly, in order to verify that any investment performance was achieved using the agreed investment process, subject to all relevant restrictions. We may agree remedial actions with our asset managers to ensure that we continue to achieve investment performance that meets our customers’ needs.
As with our With Profits funds, we expect the managers of our unit-linked funds to engage in trading activity consistent with their investment mandate and investment strategy. There are no turnover limits for our unit-linked mandates, but we monitor turnover data and would require the manager to explain any anomalies.
The 2021 review is the second annual review process through which PAC With Profits funds plus PAC, PPL and (for the first time) PIA Unit Linked funds were reviewed. The review included 135 funds with direct equity holdings that are managed by 31 different fund managers, including segregated mandates and collectives managed by M&G Investments plus PIMSA alongside a number of collectives managed by external companies.
A questionnaire was sent to all of the managers which covered both company- and fund-specific disclosures required under Shareholder Rights Directive II. The questionnaires looked to assess the following key areas:
Company Specific Disclosures - Policies, Voting Record, Engagement, Incentivisation
Fund Specific Disclosures – Investment Strategy of the fund, Key Risks, Fund Composition, Portfolio Turnover, Transaction Costs
In general the responses were aligned with our expectations of the managers. The following points cover the key areas assessed as part of this annual review.
1. Policies – there was a large variance in the level of detail provided regarding the ESG and Shareholder Engagement Policies of the in scope firms, although the variance was less as compared to 2020 responses.
2. Voting Record – Voting engagement tended to be very high, with few managers falling below a threshold of 85% participation of eligible votes. As a result most managers scored very highly in this area, although we note two exceptions.
One manager voted on all UK holdings and International active holdings. Since the manager did not vote on International passive holdings unless those stocks are also held actively, the majority of the eligible votes that were not cast fell in this category. The manager has advised that it has been voting on these International holdings during 2021 and informed us about the improvement in voter engagement (almost 98%) which shall reflect in next year’s numbers.
One manger has been rated as Negative due to the low engagement ratio, although we note a slight improvement in engagement compared to the 2020 review. The manager vote on all UK holdings plus overseas holdings where they hold a sufficiently material amount of the company stock to impact the overall vote outcome. Whilst this approach is not considered to be best practice, the only M&G asset owner exposure is to their UK equity funds and for these funds the manger voted on 100% of the eligible votes. As a result there is no impact upon M&G and so no further action is required.
3. Engagement – We note that active ownership through voting tended to focus on Governance issues. Non-voting engagement was often broader in its scope, mainly encompassing Governance and Environmental issues (mostly climate change/ carbon emissions); we note that Social issues tended to feature less frequently on managers’ engagement agendas.
4. Incentivisation – In general the remuneration of managers was in line with expectations, with incentives linked to performance and therefore aligned with the best interests of policyholders.
1. Investment Strategy of the Fund – We note that all strategies were appropriately implemented in line with the objectives as outlined in the relevant documents, with consideration of the appropriate investment time horizon.
2. Key Risks – In general all managers demonstrated a strong awareness of the risks associated with the funds in question. In 2021, we focused specifically on ESG risks faced by the funds.
3. Fund Composition – Managers tended to have appropriate levels of diversification within their funds, which were aligned with the objectives of their investment strategies. We are satisfied that all funds in scope were adequately diversified by region, sector, market cap, largest holdings and top over- and underweights.
4. Portfolio Turnover – Turnover was compared against the prior return and peer funds. Whilst some data issues came to light, most funds that disclosed turnover (not all funds are required to do so) had a comparable turnover to the previous return and long term averages or any changes were understandable given the volatile market conditions.
5. Transaction Costs – Transaction costs were compared against the prior return, peer funds and also changes in turnover. Most funds had comparable transaction costs and costs were generally low and impacted by the level of stock turnover.
For more information, visit the voting record of MAGIM, the largest in scope manager.