1. Investment philosophy and process
The following are the key elements underpinning our investment philosophy across all our portfolios.
- Our products are aligned with the investment needs of our clients. This is what drives a long-term target return mindset, with a high awareness of the risk associated with achieving those returns.
- We make investment decisions with a long-term time horizon which means that we think like business owners as opposed to short term traders.
- All our investments are driven by a fundamental understanding of the quality and valuation of a particular investment.
- We are active fund managers. This means that investment decisions are driven by what we believe is the right thing to do as opposed to managing relative to a benchmark. This results in high conviction positioning across our portfolios. An avoidance of risk is a major driver of our conviction calls.
- We regard risk as the permanent loss of capital and believe that over the long run this focus will result in better investment decisions and superior performing portfolios.
A disciplined investment process complements our strong Investment philosophy. The following are the key elements of that process.
- Asset allocation decisions in our multi-asset funds are based on an analysis of where we see the risk and opportunity profile of different asset classes. Our asset allocation decisions are conducted within ranges which are clearly communicated to clients.
- Individual security selection is based on a bottom-up analysis focusing on the fundamentals of individual securities. The fundamentals we focus on across all asset classes are based on three quality drivers: cash flow generation, solid balance sheets and an ability to generate profitable growth.
- The result of this bottom-up selection process is particularly evident in our equity portfolios, which consistently exhibit strong cash flow returns on capital, low leverage, as well as higher than market dividend yields, coupled with price earnings ratios lower than the market.
- Avoiding risk is at the core of our investment philosophy and is integrated into our investment process. There are three risks that we focus on – valuation, quality of underlying investment and the risk associated with ESG factors. When initial securities are purchased they are accessed through these lenses and if either risk is considered too high the securities are not included in the portfolios. Once portfolios are constructed there is continuous monitoring of these risks and positions are exited if any of the risks has risen to a level where we deem that the risk of a resulting permanent loss of capital is high.
2. Approach to ESG
Gresham House Global Thematic Multi-Asset Fund (the Fund)
The Fund does not pursue a sustainability mandate but is actively managed in a socially responsible manner. The Manager has integrated sustainability risks as part of its investment decision-making process. Stocks are subject to an ethical screen and the Fund avoids stocks in conflict with global ESG norms. Accordingly, based on our current approach, the universe of investments available is more limited than others and this could result in performance that is better or worse than the performance of the other funds.
While not pursuing a sustainable mandate or focus, the Alternative Investment Fund Manager (AIFM) has integrated sustainability risks as part of its investment decision-making process. A sustainability risk is an ESG event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of an investment. The likely impacts of sustainability risks on the returns of the fund will depend on the fund’s exposure to investments that are vulnerable to sustainability risks and the materiality of the sustainability risks.
Sustainability Risk Integration
The integration of ESG/sustainability risk throughout the investment lifecycle is key to the overall success of the funds under management. The process of sustainability risk integration throughout the investment due diligence process by the Investment Team and requires the team to analyse how certain sustainability/ESG factors may impact the investment case and the fund Net Asset Value.
The Investment Team approach to integrating sustainability risk management is twofold:
- ISS – the portfolios are loaded to a third party ESG provider called ISS. In the case of the Gresham House Global Thematic Fund, the product is classified under SFDR as an Article 8 product ie a fund that “promotes environmental or social characteristics”. This fund is managed under strict guidelines which are inbuilt into the ISS solution.
ISS checks that:
1. The company adheres to global norms on environment protection, human rights, labor standards, and anti-corruption. These are:
- i. OECD Guidelines for Multinational Enterprises
- ii. ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy
- iii. UN Global Compact
- iv. Guiding Principles on Business and Human Rights
ISS will produce a red flag for companies of they are in breach of these Norms and companies in breach will not be added to the Ideas Watchlist.
2. The securities are not in breach of any of the fund’s exclusion criteria, listed below:
− Military Equipment Services and Production >10% revenue
− Gambling >10% revenue
− Pornography > 5% revenue
− Tobacco > 10% revenue
− Nuclear Power >10% revenue
− Abortifacients – any involvement in Production, Distribution, Services
− Abortion Services/Planned Parenthood – any involvement
− Contraceptives – any involvement in Production, Distribution, Services
− Stem Cell Research – any involvement
− Alcohol Production – > 10% Revenue
− Fossil Fuels Production and/or Exploration >10% Revenue
If any stock held breaches any of the above, the CIO and Head of Risk are alerted and the position will be exited.
- ESG Decision Tool Tree
The ESG (Environmental, Social & Governance) Decision Tool (‘the Tool’) is a key component of Gresham House’s approach to ESG integration and is applied to all investment divisions.
The purpose of the tool is to support the identification of a broad range of ESG risks which may materially impact on a proposed transaction. The findings from the tool can be used to agree topics to engage investment companies on, with the aim of increasing shareholder value over time and reduce downside risk.
The tool consists of two core parts:
1. Asset Overview – a series of high-level qualitative questions about the asset requiring the investment team to document the material ESG risks identified during initial research of the company.
2. Detailed Questionnaire – assesses ESG risks in more detail asking the investment team to determine if the issue is relevant to the company and how material the ESG risk is to the overall context of business operations, forming a Risk Assessment Score. This part of the tool is separated into a series of questions across the ten themes in the Gresham House Sustainable Investment Framework.
3. All funds – no consideration of sustainability adverse impacts
EU Sustainable Finance Disclosure Regulation (SFDR) requires the Manager to determine whether it considers the principal adverse impacts of its investment decisions on sustainability factors at Manager level. The Manager is supportive of the aim of this requirement which is to improve transparency to investors and the market generally as to how to integrate the consideration of the adverse impacts of investment decisions on sustainability factors. However, the Manager could not gather and/or measure all of the data on which it would be obliged by SFDR to report, or it could not do so systematically, consistently and at a reasonable cost to investors.