The UK Stewardship Code (the “Code”)
The UK Stewardship Code (the “Code”), published by The Financial Reporting Council (FRC), sets out good practice for institutional investors when engaging with the UK listed companies in which they invest. The Code applies primarily to firms that manage assets for institutional shareholders such as pension funds, insurance companies, investment trusts and other collective investment vehicles.
The Code includes principles on:
- the monitoring of investee companies;
- active intervention to protect or enhance shareholder value;
- collective engagement;
- voting policy;
- managing conflicts of interest;
- and public reporting and reporting to clients.
Please click here for a copy of the Code in pdf format.
AVI Ltd’s UK Stewardship Policy
Asset Value Investors Limited (the “Firm”) is a London-based investment manager currently authorised and regulated by the UK Financial Conduct Authority (“FCA”). The Firm is also a registered investment adviser with the U.S. Securities and Exchange Commission (“SEC”). The Firm currently manages approximately US$1bn across several comingled investment funds.
The Firm is predominantly an owner-managed business and employs a total of 13 staff, including 1 non-executive director.
We have prepared a Stewardship Policy in accordance with the provisions of The UK Stewardship Code (the “Code”), the main provisions of which are summarised below.
Stewardship Responsibilities (Principle 1)
Our primary stewardship objective is to maximise shareholder value by securing good corporate performance. We aim to protect this value by ensuring that our investee companies operate within principles of good corporate governance. The social and environmental consequences of corporate activity are increasingly important to some of our clients and are in any event important factors in determining the creation and maximisation of shareholder value over the long term.
Our stewardship objectives are met by:
- ensuring that, for all investee companies, all proxies are received, considered and voted on;
- preparing detailed research notes on investee companies prior to investing,
- making appropriate due diligence enquiries of investee companies prior to investing,
- having an active dialogue with management of investee companies where we have a material and long term interest and where we are able to influence management; and
- assessing the quality of investee company management, including their governance arrangements e.g. board and committee composition.
Management Of Conflicts Of Interest (Principle 2)
As the Firm is predominantly owner-managed, the interests of senior management are firmly aligned with those of the Firm as a whole. This helps to ensure that senior management act in the best interest of the Firm’s clients at all times to safeguard the longevity of the business.
We may have a conflict of interest that affects how we vote on behalf of a client. Irrespective of the specific issue, votes are only cast in the best interest of the client that ‘owns’ the vote. For this reason, we will not vote shares in one client’s account in a manner designed to benefit or accommodate any other client or ourselves.
If a material conflict exists, we will determine whether voting in accordance with our standard policies is in the best interests of each client. We will also determine whether it is appropriate to disclose the conflict to the affected clients and give them the opportunity to vote their proxies themselves.
We maintain a Conflicts of Interest Policy which includes a Register of Conflicts. A copy of our policy can be found here.
Monitoring Of Investee Companies (Principle 3)
We aim to have an active dialogue with management of all investee companies where we have a material and long term interest and where we are able to influence management. This dialogue ensures that we are as fully informed of any developments concerning the company as possible.
As part of this on-going dialogue we:
- seek to satisfy ourselves that the investee company’s board and committee structures are effective and that independent directors provide adequate oversight;
- maintain records of meetings held with companies and record proxy votes cast including the reasons for voting in contentious situations; and
- continually monitor the activities of investee companies and update research notes and due diligence records accordingly for discussion at regular investment team meetings
We endeavour to identify problems at an early stage to minimise any loss of shareholder value. If we have concerns we may raise them with the investee company’s board unless we consider it to be in our clients’ best interests to sell the position.
We do not wish to be made insiders and therefore expect investee companies and their advisers to ensure that any information that may affect our ability to deal in the shares of the company concerned is not conveyed to us without our prior agreement.
Active Intervention In Investee Companies (Principle 4)
We aim to have an active dialogue with management of all investee companies where we have a material and long term interest. This dialogue enables us to influence the decisions of management, either on a passive basis (engaging with management on the decisions they wish to pass at general meetings) or on an active basis (encouraging management to take action which we believe to be in the best interests of shareholders).
We are always prepared to discuss company affairs with management and, as a responsible shareholder, actively pursue any matters of concern. We seek urgent dialogue with a company’s management in cases where concerns over strategy, performance or governance might threaten shareholder value.
In cases where a board is not responsive, we will consider further active involvement, including, where appropriate:
- meeting directors, including non-executives;
- making joint representations with other institutions to effect board change;
- using our voting power to oppose the board; and
- selling the shares
Collective Action With Other Investors (Principle 5)
We may consider that collaboration with other investors is the most effective manner in which to actively engage with management of an investee company (for example, if we have concerns over management’s current strategy or their ability to improve performance or address governance issues, especially if management is resistant to change). We will join shareholder groups where we consider it appropriate to do so having due regard to applicable regulations and codes including the Market Abuse Directive and the Takeover Code. The Firm’s Chief Investment Officer, Mr Joseph Bauernfreund, is the best point of contact for any related enquiries.
Proxy Voting Policy And Disclosure
Proxy Voting Policy
We have established Corporate Governance Guidelines setting out our general approach to certain issues and these are applied consistently for all clients where proxy voting authority has been granted to us. Our approach is deliberately flexible in order to permit divergence from these guidelines where we believe it is in our clients’ best interests to do so.
As part of our active dialogue with management, it is our general policy to inform investee companies where we have a material percentage interest in advance of all instances when we intend to vote against or abstain on any resolution proposed by the directors at a general meeting. We do not automatically support the boards of our investee companies.
Proxy Voting Disclosure
On client request, we provide the following information to our clients of the proxy votes cast:
- the name of the issuer;
- the proposal voted upon, and
- how we voted the client’s proxy.
Following concerns raised by some of our clients, we have determined not to disclose proxy voting information to the general public on the grounds of data protection and privacy.
We do utilise proxy voting solutions as provided by Institutional Shareholder Services Inc. (“ISS”). As part of this service, ISS provide details of all upcoming votes affecting our investee companies, including a recommendation of how to vote. We do consider this recommendation however we vote all proxies based on our own opinion of what is in the best interests of our clients.
We do not engage in stock lending activities.
Periodic Reporting Of Stewardship And Voting Activities (Principle 7)
As part of our regular performance review meetings with our clients, which are held annually at least, we advise them on how we have discharged our stewardship responsibilities during the period under review. The format of the reporting and the information provided is dependent on each client’s requirements, however it is usual to include details of:
- any conflicts that may have arisen together with any mitigation;
- instances in which we have collaborated with other investors to engage with management of investee companies; and
- proxy voting records.
We have engaged with Robert Quinn Consulting Limited (“RQC”), an independent external compliance consultancy, to conduct detailed quarterly monitoring visits that cover all aspects of our regulatory environment, including our stewardship and proxy voting activities. The monitoring framework is tailored to our business and is primarily designed to ensure that we continue to comply with the rules and regulations of the FCA. RQC produce a comprehensive quarterly report which highlights the areas covered and any issues or concerns identified. This report is presented to senior management at our regular quarterly board meetings, or sooner should a material issue or concern be identified.
AVI Ltd’s Japan Stewardship Policy
Pillar 3 Disclosure
Asset Value Investors Limited (the “Firm”) is authorised and regulated by the Financial Conduct Authority (the “FCA”). The Firm is a London-based discretionary investment manager to professional clients and unregulated collective investment schemes. The Firm is a full scope Alternative Investment Fund Manager (“AIFM”) and categorised as a collective portfolio management investment firm by the FCA for capital purposes. The Firm reports on a solo basis. The Firm’s Pillar 3 disclosure fulfils the Firm’s obligation to disclose to market participants’ key pieces of information on a firm’s capital, risk exposures and risk assessment processes.
We are permitted to omit required disclosures if we believe that the information is immaterial such that omission would be likely to change or influence the decision of a reader relying on that information. In addition, we may omit required disclosures where we believe that the information is regarded as proprietary or confidential. In our view, proprietary information is that which, if it were shared, would undermine our competitive position. Information is considered to be confidential where there are obligations binding us to confidentiality with our customers, suppliers and counterparties.
We have made no omissions on the grounds that it is immaterial, proprietary or confidential.
The Firm’s Directors determine its business strategy and the level of risk acceptable to the Firm. In conjunction with the Chief Financial Officer and Risk Officer, they have designed and implemented a risk management framework that recognises the risks that the business faces and how those risks may be monitored, mitigated and assessed on an ongoing basis. The Firm has in place controls and procedures necessary to manage those risks.
The Firm considers the following as key risks to its business:
Business risk – This risk represents a fall in assets under management in the Funds or the loss of key staff which may reduce the fee income earned by the Firm and hinder its ability to finance its operations and reimburse its expenses. Business risks are assessed and mitigated as part of the Internal Capital Adequacy Process (“ICAAP”).
Market risk – The risk is the exposure to foreign exchange fluctuations due to investment management and performance fees being denominated in currencies other than sterling. The Firm operates currency bank accounts permitting it to receive/pay currency directly.
Operational risk – This risk covers a range of operational exposures from the risk of the loss of key personnel to the risk of the provision of investment advice. Legal and reputational risks are also included within the category of operational risk. Operational risks and how they can be mitigated are assessed as part of the ICAAP.
Credit risk – This risk relates to the exposure to the Funds for non-payment of management and performance fees and counterparty exposure relating to the Firm’s bank balances and any other debtors. This is monitored by the Firm’s Chief Financial Officer.
The Firm was incorporated with limited liability in England & Wales on 28 January 1985 and its capital arrangements are established as share capital.
The Firm has a simple operational infrastructure. Its market risk is limited to foreign exchange risk on its accounts receivable in foreign currency, and credit risk from management fees receivable from the funds under its management.
Pillar 1 capital is the higher of:
- a base capital requirement of €50,000;
- the sum of market and credit risk requirements; and
- the Fixed Overhead Requirement (“FOR”).
In addition, the Firm, on account of its classification as a full-scope AIFM, is subject to an “own funds” requirement as follows:
The higher of:
- the funds under management requirement; and
- the own funds based on fixed overheads requirement;
Plus whichever is applicable of:
- the professional negligence capital requirement; or
- the PII capital requirement.
Pillar 2 capital is calculated by the Firm as representing any additional capital to be maintained against any risks not adequately covered under the requirement in Pillar 1 as part of its ICAAP. When making this calculation, the Firm also takes into account the own funds requirement detailed above, in particular where the own funds requirement exceeds Pillar 1 capital (and the extent to which the Firm is able to use capital instruments to fulfill both requirements).
It is the Firm’s experience that its Pillar 1 capital requirement normally consists of the FOR, although market and credit risks are reviewed monthly. The Firm applies a standardised approach to credit risk, applying 8% to risk-weighted exposure amounts, consisting mainly of investment management fees due but not paid, and bank balances. Having performed the ICAAP, the Firm has concluded that no additional capital is required in excess of its Pillar 1 capital requirement.
As at the date of this disclosure the Firm’s regulatory capital position is:
Capital item: £’000
Pillar 1 capital: 931
Total Capital Resources net of deductions: 931
Own funds (full-scope AIFM): 764
The Firm’s ICAAP assesses the adequacy of its internal capital to support current and future activities. This process includes an assessment of the specific risks to the Firm, the internal controls in place to mitigate those risks and an assessment of whether additional capital mitigates those risks. The Firm also considers a wind down scenario to assess the capital required to cease regulated activities.
We have not identified credit risk exposure classes or the minimum capital requirements for market risk as we believe that they are immaterial. Concerning Pillar 1, it is the Firm’s experience that the Fixed Overhead Requirement establishes its capital requirements and hence market and credit risks are considered not to be material. Our capital requirements are currently £764,000 (the higher of the minimum capital calculated in accordance with either ‘Pillar 1’ or ‘own funds’) which is well within the level of regulatory capital held.
We consider this amount to be sufficient regulatory capital to support the business and we have not identified any areas which give rise to a requirement to hold additional risk-based capital.
The Firm’s ICAAP is formally reviewed by the Directors annually, but will be revised sooner should there be any material changes to the Firm’s business or risk profile.
Given the nature and small size of our business, remuneration for all employees is set by the Directors of the Firm by way of a Remuneration Committee. The Firm formally reviews the performance of all employees and based thereon determines each employees overall level of remuneration and the split of that between base salary and bonus etc. in compliance with FCA Rules on remuneration.
Given that the Firm has only one business area, discretionary investment management, all remuneration disclosed in our audited financial statements is from this business area.
The Firm has defined “Code Staff” to be the Firm’s current FCA approved persons. The aggregate level of remuneration earned by staff is disclosed in our audited annual financial statements.
There is also a requirement for a remuneration statement to form part of the annual report of any Alternative Investment Fund (“AIF”) to which the Firm acts as AIFM and which is either domiciled in the European Economic Area (“EEA”) or marketed in the EEA.
The Firm is subject to the AIFMD Remuneration Code (the “Code”), has applied proportionality and, pursuant to this application and where relevant, has disapplied various provisions of the Code.
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