RIL: AMP Capital's RIL range has a long-term investment strategy recognising that broader environmental, social and ethical considerations, labour standards and corporate governance factors can impact long-term business success. The RIL range will invest through managers or in funds which have a demonstrable process for taking these matters into account.
The manager selection process used for identifying prospective managers involves three key elements:
1. Assess managers based on investment and environmental/social/governance factors
2. Exclude investments in areas of high negative social impact, and
3. Select the optimal combination of managers.
Managers are primarily selected based on their investment credentials, process and performance. As we aim to construct a style-neutral blend, we also consider the style and risk diversification impact each manager will have on the overall portfolio. However, there is growing evidence that environmental, social and governance factors can give insights into a company's intangible assets, sustainability and long-term market valuation. Accordingly, the RIL range seeks out managers who meet the responsible investment criteria of the RIL Charter, and who are identifying companies that are leaders across industries on the ESG factors.
At a minimum, a manager must be able to meet the fund's ESG screening criteria. Managers are also well-regarded if they apply sustainable and responsible investment criteria above and beyond these requirements, and if they actively participate in corporate engagement and corporate governance initiatives.
The range of relevant ESG areas include:
• Ethical considerations - including upholding fundamental human rights, and articulating and implementing a code of conduct
• Labour standards - including implementing occupational health and safety regulations, adhering to the standards of the International Labour Organisation (ILO), providing safe and stable working conditions, and excluding child labour
• Social considerations - including promoting indigenous relations and community involvement;
• Environmental considerations - including efficient energy and resource use, and product stewardship, and
• Governance considerations, including meeting corporate governance guidelines on board structures and remuneration.
FDF and ipac: For the FDF and ipac Funds, AMP Capital selects and appoints external managers based on its own due diligence supplemented by the advice (where sought) and ESG ratings (where available) of our investment consultant Willis Towers Watson. As part of the due diligence process, we may typically ask the managers how they use ESG in their investment thinking to develop a more comprehensive view of an investee company's key business risks, how they approach corporate governance issues, and how both are related to overall management quality.
Research and identification
The team’s starting point when screening managers for inclusion in a specialist asset sector portfolio is to consider those managers recommended by our adviser partners – Willis Towers Watson, StepStone Group or KKR Prisma and from the investment team’s own research. The team scrutinises and tests the research produced by its advisers, including comparison with internal views and research. Any inconsistencies or divergences of opinion are examined and discussed within members of the team to allow a cross-section of views and analysis to be explored and debated.
Extensive analysis of consultant-recommended managers, and other managers identified and ideas developed through the discovery research process, is undertaken to isolate those which demonstrate what the team believes to be talented fund managers, with robust investment processes and strong alignment with AMP Capital’s philosophy. From here, an initial shortlist of potential candidates is formed. In evaluating these shortlisted managers, the investment team makes an assessment on the following criteria:
> Clearly defined and consistently applied investment philosophy
> Talented, experienced and sufficiently resourced investment teams
> Sound and disciplined investment process
> Proper governance and alignment structures and the quality of the parent organisation
> Consistency between investment style/approach and investment philosophy
> Scale/funds under management
In the case of RIL managers, demonstrated ability to manage ESG exclusions and systematically incorporate ESG research into the investment process
Those candidates who meet the investment team’s stringent criteria described above are then subjected to a formal due diligence process. This is performed by the relevant asset class portfolio manager and analyst within the investment team. The formal due diligence process can involve multiple meetings with the manager’s investment team in order to establish a more detailed understanding of the above-listed factors.
The quantitative component of the due diligence incorporates examination of each manager’s portfolio composition, investment performance and the consistency of these with the stated investment philosophy and approach. Typically, by the time the fund manager is appointed, the investment team’s portfolio managers would have spent 20+ hours in face-to-face contact with its investment team, and would have put at least as much time into dissecting its portfolios and track record. Once the portfolio manager has determined his/her investment recommendation, it must be taken through the single sector governance framework, as described below.
Governance of manager appointment process
Ahead of finalising the recommendation to the Single Sector Investment Committee (Sector IC), the portfolio manager presents it in the draft form at the Investment Review Group. This group comprises all members of the Market Solutions team. Each team member is encouraged to critically examine every aspect of the recommendation through the lens of their own respective asset classes, to eliminate any residual blind spots that may still be present. This recognises the inter-connectedness between different asset classes, and enables more holistic examination of the investment thesis. The respective portfolio managers retain full ownership over their recommendation, including investment strategy, manager selection and portfolio construction and is free to take on or disregard any comments from the group.
Responsibilities of the Single Sector Investment Committee (‘Sector IC’)
This committee is responsible for approving all decisions regarding investment strategy, manager selection and portfolio construction. Sector IC approval is required in respect of adoption and changes in:
(1) investment objectives,
(2) investment strategy,
(3) manager line up,
(4) portfolio construction/manager allocations, and
(5) for deviations of manager weights away from their target weight by more than the approved threshold.
Sector IC noting is required for:
(1) performance of funds and of their underlying managers,
(2) summary of risk reports produced by the Risk Review Group, and
(3) comments regarding any material issues that may exist at the manager level.
There are numerous reasons as to why a manager may be terminated. In most cases, this happens in response to new developments which, in our view, point to a deterioration in the respective manager’s prospects of delivering on its investment objectives:
> Departure of key investment talent who, in our best judgement, were the key contributors to delivery of solid investment outcomes
> Excessive growth in funds under management, which in our view, can be expected to impede execution of manager’s investment strategy/trading
> Amendments to the investment process which in our view, may weaken the manager’s investment proposition
> Significant ‘drift’ of the manager’s portfolio characteristics from what we expect those to be, given our understanding of the manager’s investment philosophy, its key areas of expertise, its key sources of value add and its investment process.
Severe divergence in performance versus expectations and significant organisational changes prompt an immediate review, but in our experience, these rarely lead to a termination - unless their nature suggests that the manager is no longer likely to meet return objectives going forward.
Managers may also be terminated following a revision of the investment strategy for the corresponding Fund. Investment strategy reviews tend to take place in response to significant shifts in characteristics of the underlying market and/or to changes in the Fund’s investment objectives. For example, pre-GFC our equities funds were focusing predominantly on strong stock selection. During the GFC and thereafter, we have been seeking out managers with elements of macro (at the currency/country/sector and bottom up levels) and general thematics in their investment philosophy and process – with track records to match.
* AMP Capital Funds Management Limited (AMP Capital) ABN 15159557721, AFSL 426455 is the responsible entity of the Responsible Investment Leaders (RIL) range of funds and the Future Directions Funds (FDF) and issuer of the Product Disclosure Statements (PDS) for these Funds and ipac asset management limited, ABN 22 003 257 225, AFSL 234655 is the responsible entity of the ipac funds (ipac) and issuer of the Product Disclosure Statement (PDS) for these Funds. To invest, investors will need to obtain the current PDS from AMP Capital before making a decision to acquire, continue to hold or dispose of units in the relevant Fund.