Statement on the UK Stewardship Code (the “Code”)
This statement outlines the Firm’s position with respect to the Code, which was published by the Financial Reporting Council (“FRC”) in July 2010 and amended in 2012 and 2020. Under Rule 2.2.3R of the FCA’s Conduct of Business Sourcebook, the Firm is required to make a public disclosure about the nature of its commitment and level of compliance to the Code or, where it does not commit to the Code, to explain its alternative investment strategy.
The Code is a voluntary code, which aims to enhance the quality of engagement between asset owners/asset managers and listed companies in the UK, to help improve long-term risk-adjusted returns to shareholders and the efficient exercise of governance responsibilities. It sets out good practice on engagement with investee companies an dis to be applied by firms on a “apply and explain” basis. It also describes steps that asset owners can take to protect and enhance the value that accrues to the ultimate beneficiary.
The FRC recognises that capital is invested in a range of asset classes over which investors have different terms and investment periods, rights and levels of influence. Hence the Code does not solely apply to equity investments.
The FRC also recognises that not all parts of the Code will be relevant to all institutional investors and that smaller institutions may judge some of the principles and guidance to be disproportionate. it is of course legitimate for some asset managers not to engage with companies, depending on their investment strategy.
The Code comprises twelve Principles that can be summarised as follows:
Purpose and governance
- purpose, strategy and governance;
- governance, resources and incentives;
- conflicts of interest;
- promoting well-functioning markets;
- review and assurance.
- client and beneficiary needs;
- stewardship, investment and ESG integration;
- monitoring managers and service providers.
Rights and responsibilities
- exercising rights and responsibilities.
The Firm’s Position on the Code
The Firm’s approach in relation to engagement with issuers and their management, is determined on a global basis. A consistent global approach is taken to engagement with issuers and their management in all of the jurisdictions in which the Firm invests and, consequently, the Firm does not consider it appropriate to commit to any particular voluntary code of practice relating to any individual jurisdiction and feels that the Code is not appropriate to the Firm’s business model.
However, whilst the Firm has not made a formal commitment of compliance with the Code, its alternative investment strategy a set out above, is generally supportive of the spirit and aims of good stewardship as contained within the Code. As such, in practice, the Firm would take into consideration the principles as set out in the Code.
This Statement is reviewed annually and updated where necessary to reflect changes in circumstances and actual practice. Should the Firm’s position change we will review our commitment to the Code and make appropriate disclosure at that time.
For further details on any of the above please contact the Firm’s Compliance Officer
Please click here for a copy of the Code in pdf format.
AVI Ltd’s Japan Stewardship Policy
AVI Shareholder Rights Directive II
The Second Shareholder Rights Directive (“SRD”), which took effect in the UK on 10 June 2019, aims to improve shareholder engagement and increase transparency around stewardship. The Firm invests in listed equities an das such we are required to disclose and make publicly available our policies on how we engage with other shareholders and the companies that we invest in, and how our strategies create long-term value.
SRD and the FRC Stewardship Code
The UK Stewardship Code (the “Code”) was established by the Financial Reporting Council in 2010. UK authorised asset managers have been required under the rules of the Financial Conduct Authority to produce a statement of commitment to the Code or to explain why it is not appropriate to its business model.
Unlike SRD, which applies to investments in listed equities globally, the Code focuses on investments in UK companies only.
The Firm’s response to the Code is detailed in a separate statement, which is available via its website www.assetvalueinvestors.com
The Firm’s Approach
The Firm’s value-oriented long only global entity investment strategy is aimed at investing into companies who themselves own good quality, undervalued businesses and whose net asset value exceeds the share price the company is currently trading on.
The Firm’s investment strategy aims to:
- Invest mainly into family controlled holding companies, closed-end funds and asset backed companies;
- Identify good quality, under-researched companies whose underlying assets are misunderstood or not recognised by the market;
- Buy companies with strong balance sheets and good quality underlying assets trading on discounts to their net asset value;
- Diversify risk by investing into companies who themselves offer diversification by having multi-faceted and dispersed undelying businesses; and
- Engage in constructive engagement with boards and management to increase shareholder value.
We are required to either:
- publicly disclose an Engagement Policy and a public statement on an annual basis on how the Engagement Policy has been implemented; or
- publicly disclose a clear and reasoned explanation of why the Firm has chosen not to make these disclosures.
The Firm has elected to publicly disclose its Engagement Policy and this is set out in Section 4 below.
This Statement is reviewed annually and updated where necessary to reflect changes in circumstances and actual practice. Should the Firm’s position change we will review our commitment to SRD and make appropriate disclosure at that time.
The Firm’s Engagement Policy is set out below:
- How the firm integrates shareholder engagement in its investment strategy
As a value-orientated long only global equity investment manager the Firm undertakes extensive research prior to investing in an investee company.
The Firm actively engages with the boards and senior management teams of its investee companies on a regular basis, preferring to work collaboratively and supportively wherever possible to help increase shareholder value.
- How the firm monitors investee companies on relevant matters, including:
* Financial and non-financial performance and risk
* Capital structure
* Social and environmental impact and corporate governance
Proprietary research is undertaken by the Firm’s investment analysts however outside research is also purchased at the Firm’s own expense. Investee companies are monitored by the investment analysts who each report directly to the Firm’s CIO/CEO. There is no set frequency for these reviews, with each investee company being assessed on a case by case basis. Engagement is common with senior management of investee companies however external third party investment analysts may also be used e.g. industry/company experts.
The Firm takes its environmental, social and governance (“ESG”) responsibilities very seriously. A copy of the Firm’s ESG policy can be found on its website: www.assetvalueinvestors.com
- How the firm conducts dialogues with investee companies
The Firm regularly and actively engages with the boards and senior management teams of its investee companies, preferring to work collaboratively and supportively whenever possible to help increase shareholder value. This engagement varies depending on the investee company and the situation but may include any number of the following:
* Face-to-face discussions
* Telephone calls
* Private letters
* Public presentations
* Shareholder proposals (at the AGM or at an EGM)
* Board representation
* Take-over bid
- How the firm exercises voting rights and other rights attached to shares
As a fiduciary, the Firm owes each of its clients a duty of care and loyalty with respect to services undertaken on the client’s behalf, including proxy voting. To this end, the Firm takes all reasonable steps to vote proxies in the best interest of its clients.
The Firm has a Proxy Voting Policy that – amongst other things – sets out the Firm’s general approach when voting on behalf of its clients.
The Firm generally votes proxy proposals, amendments, consents or resolutions relating to client securities, including interests in private investment funds, if any, (each a “proxy”) in accordance with the following guidelines:
* The Firm will generally support a current management initiative, if our view of the issuer’s
management is favourable;
* The Firm will generally vote to change the management structure of an issuer, if it would
lead to an increase in shareholder value;
* The Firm will generally vote against management, if there is a clear conflict between the
issuer’s management and shareholder interest; and
* In some cases, even if AVI supports an Issuer’s management, there may be some
corporate governance issues that AVI believes should be subject to shareholder approval.
The Firm’s Proxy Voting policy is available to clients upon request.
- How the firm cooperates with other shareholders, and communicates with relevant stakeholders of the investee companies
The level of engagement with other shareholders will differ depending on the situation but will typically take the form of a general discussion where different views are exchanged and different cases/points argued. To date the Firm has not formally collaborated with other shareholders of its investee companies (e.g. creating concert parties) and currently has no plans to do so in the future.
The Firm may however enter into formal agreements or signed undertakings with its investee companies to vote a certain way.
- How the firm manages actual and potential conflicts of interests in elation to the firm’s engagement
The Firm has a documented Conflicts of Interest Policy. The Firm is required to manage conflicts of interest fairly, both between the Firm and its clients as well as between one client and another client. As applicable, the Firm is also required to identify conflicts of interest between an investor in a fund managed by the Firm and other investors, funds managed by the Firm, other clients of the Firm or the Firm itself.
The Firm’s policy is to take all appropriate steps to maintain and operate effective organisational and administrative arrangements to identify and to prevent or manage potential and actual conflicts of interest in the Firm’s business.
With specific reference to the Firm’s engagement with listed companies, the Firm has identified that conflicts of interest may arise in the following situations:
* Aggregation and allocation of orders
* Investing (different strategies and mandates)
* Proxy voting (as detailed above)
* Use of research
The Firm’s interests and the interests of all its clients are aligned with regard to engagement with investee companies. The Firm’s Conflicts of Interest policy and Conflicts Register is available to clients upon request.
Implementation of the Engagement Policy – Annual Disclosure
The annual disclosure requirements are as follows:
* A general description of voting behaviour
* An explanation of the most significant votes
* The use of the services of proxy advisors
* How the firm has cast votes in the general meetings of companies in which it holds shares,
excluding votes that are insignificant due to the subject matter of the vote or the size of the
The Firm’s initial Annual Disclosure shall be with respect to the calendar year 2020 and shall be made available in 2021.
Pillar 3 and Remuneration
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 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 i.e. where that omission would be unlikely 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. 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 such omissions.
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 and mitigated and assess on an ongoing basis. The Firm has in place controls and procedures necessary to manage those risks.
The Firm considers the following as risks to the business:
Credit Risk – this risk relates to the exposure to the Funds for non-payment of management 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;
Operational Risk – this is defined by the FCA as ‘the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events, including legal risk’; and
Business Risk – the Firm considers this to be any risk arising from changes in the Firm’s business and includes risks to earnings posed by falling or volatile income, risks relating to the Firm’s business strategy and model and risks arising from the Firm’s remuneration policy.
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
The Firm was incorporated with limited liability in England & Wales on 28 January 1985 and its capital arrangements are established as share capital.
As at the date of this disclosure the Firm’s regulatory capital position is:
|Tier 1 capital||1,104|
|Total capital resources, net of deductionsTotal capital resources, net of deductions||1,104|
Pillar 1 Capital Requirement
The Firm is subject to quantitative rules-based capital adequacy calculations which set out the minimum capital requirements for the Firm. This is called the Pillar 1 capital requirement.
Pillar 1 capital is the higher of:
1. the base capital requirement of €125,000;
2. the sum of market and credit risk requirements; and
3. the Fixed Overhead Requirement (“FOR”).
In addition, the Firm, on account of its classification as a full-scope AIFM, is subject to a parallel “own funds” requirement as follows:
The higher of:
a. the funds under management requirement, subject to a minimum of €125,000; and
b. the own funds based on fixed overheads requirement;
Plus, whichever is applicable of:
1. the professional negligence capital requirement; or
2. the PII capital requirement.
Although the foregoing “own funds” requirement is not a component of the “Three Pillars” regime, it is likely that the Firm’s “own funds” requirement will exceed its Pillar 1 requirement.
It is the Firm’s experience that its Pillar 1 capital requirement normally consists of the FOR.
Pillar 2 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 Internal Capital Adequacy Assessment Process (“ICAAP”).
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.
When making this calculation, the Firm also takes into account the own funds requirement detailed above, in particular where the own funds exceeds Pillar 1 capital (and the extent to which the Firm is able to use capital instruments to fulfill both requirements).
Having performed the ICAAP, the Firm has concluded that no additional capital is required in excess of its own funds capital requirement.
Our capital requirements are currently £950,500 which is well within the level of regulatory capital held.
The Firm’s ICAAP is formally reviewed by the Directors annually, but is reviewed and revised more frequently 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.