SOCIALLY RESPONSIBLE INVESTING POLICY
Overview
MacKay Shields LLC and MacKay Shields UK LLP (collectively, “MacKay Shields”) are proud signatories of the Principles for Responsible Investment (“PRI” or “Principles”), in recognition of the impact that we believe environmental, social and governance (“ESG”) issues can have on long-term investment performance.
The Principles
The PRI provides a framework for incorporating ESG considerations into investment and ownership practices. In becoming a PRI signatory, each of MacKay Shields’ investment teams commits to the following six aspirational principles where consistent with our fiduciary duty to clients:
Principle 1: Incorporate ESG issues into investment analysis and decision-making processes.
Principle 2: Be active owners and incorporate ESG issues into ownership policies and practices.
Principle 3: Seek appropriate disclosure on ESG issues by the entities in which we invest.
Principle 4: Promote acceptance and implementation of the PRI within the investment industry.
Principle 5: Work together to enhance our effectiveness in implementing the PRI.
Principle 6: Report activities and progress toward implementing the PRI.
Socially Responsible Investing (“SRI”) Advistory Committee
MacKay Shields has established an advisory committee charged with
overseeing our commitment to the Principles. The committee includes senior level representation from each of our portfolio
management teams and non-investment groups. Members of the Committee meet regularly to:
- Discuss approaches to implementing ESG into the investment process;
- Share information on ESG developments;
- Discuss third party ESG products and tools; and
- Conduct and promote ongoing ESG training
Thought Leadership
Members of MacKay Shields’ Socially Responsible Investing Advisory Committee have been active in promoting thought leadership on ESG-related issues.
- Young Lee (Chair), Won Choi (High Yield Team), and Michael Kimble (retired Global Fixed Income Team member) contributed to a seminal report published by the PRI in April 2018 titled “ESG Guidance for Fixed Income Investors: Managing Risks, Enhancing Returns”.
- Young Lee is a co-author of “Corporate Governance and ESG: An Introduction” that is part of the CFA Level 1 curriculum.
- Young Lee, CFA has co-authored a companion piece on Corporate Governance and ESG that will soon be part of the CFA Level 2 curriculum.
ESG Training
In recognition that best practices in ESG integration are continuously developing, MacKay Shields’ investment professionals participate in ESG-related training programs.
Reporting
As part of our commitment as a signatory, the firm report on our ESG activities to the PRI on an annual basis.
An Ongoing Commitment
We are committed to strengthening and refining our ESG approach through continued dialogue with industry experts, assessing third party ESG-related analytical tools and resources, participating in ESG training, and conducting regular meetings of the Socially Responsible Investing Advisory Committee to augment our ESG-related reporting and research processes and to document existing activities.
Our Approach
Please refer to each investment team’s ESG Policy (available on our website) for additional information on each team’s approach to the incorporation of ESG into their investment process.
Environmental, Social and Governance Policy - Global Fixed Income
Introduction
The GFI team incorporates a process which includes a comprehensive evaluation of a list of risk factors, a number of which can be classified as Environmental, Social and Governance (ESG) factors. We are keenly aware of these ESG risks and their impact on the credit worthiness of borrowers and bond issuers.
It is clear to us that ESG factors have a greater impact on businesses around the world and that no credit analysis is complete without considering these factors. As such, ESG risk assessment is incorporated in the process and the responsibility of each member of the investment team.
ESG Approach
Our approach to ESG investing is consistent with our general philosophical approach - eliminate uncompensated risk by cutting off the tails of the return distribution. ESG considerations are particularly pertinent to left tail management, as ESG risks can be exceptionally high without commensurate compensation.
Through this process of elimination, we are guided by our 35 gross indicators of risk. A number of these 35 gross risk indicators are classified as ESG risks. As examples, our consideration of management (reputation, stability, risk appetite, debt policies among others) would be classified under “governance”, while “environmental” considerations may include carbon intensity and environmentally focused policies/programs, and “social” considerations may include workplace and/or human resource policies and sustainable business practices. In our efforts to avoid uncompensated risk, we tend to eliminate companies if they have serious breaches to our gross risk indicators, including applicable ESG risks.
Our approach to ESG investing includes a comprehensive evaluation of the ESG risks involved with an investment, in conjunction with the current pricing of the investment. We take price (total return potential) into consideration to evaluate whether ESG risks have been adequately incorporated into the price. We ask ourselves if we are being adequately compensated for the ESG risks that exist with this issuer. A stylized representation of the ESG evaluation process is shown in Figure 1 below.
As a fiduciary for our clients we do not blindly screen out sectors or industries from our investment universe. Our preference is to make all bonds within client guidelines available as potential investments, however we will gladly adhere to any client generated restricted list. We carefully weigh the risk and reward profile of each potential investment we consider. To the extent a security’s price handsomely rewards the investor for accepting the risk of a given situation, including ESG risks, we may invest in the issue, unless the client expressly prohibits such investment. We will maintain an ongoing dialogue with our clients to understand their motivations and discuss any boundaries which they will choose not to cross at any price.
For the full version of this policy, please click here or use download function on the upper right of this page.
Environmental, Social and Governance Policy - High Yield
Introduction
MacKay Shields High Yield team employs a research intensive, bottom-up, value oriented approach to investing
in the high yield market. Central to our approach is in depth security specific research to identify attractive
investment opportunities and associated risk factors unique to any particular investment or to the portfolio in
aggregate. Risk factors can come in a variety of ways and may take many forms. They could include, among
other things, technological change, demand/supply characteristics, company positioning, undue leverage,
regulatory issues as well as ESG related factors. Each of these and other risk factors, along with an analysis of
probabilities and margins-of-safety, are incorporated into the research and decision making processes to
understand the long term value of a company.
Our purpose in this policy is to outline the approach which will be used by the MacKay Shields High Yield Team to address ESG specific risk factors in the investment process.
(i) Bring greater transparency to the manner in which the team incorporates ESG specific factors into the research and investment processes used in the construction of high yield portfolios; and
(ii) Where requested by clients, place a greater weight on ESG factors in security selection and overall portfolio construction.
Below is a summary of the guiding principles that were used in the development of this ESG policy:
United Nations – Principles for Responsible Investment
The High Yield team is mindful of the six key principles, where applicable, that serve as the foundation of the UNPRI:
Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
Principle 6: We will each report on our activities and progress towards implementing the Principles.
For the full version of this policy, please click here or use download function on the upper right of this page.
Environmental, Social and Governance Policy - Municipal Managers
Introduction
MacKay Municipal Managers™ (MMM) is a fundamental relative-value bond portfolio manager applying both top-down analysis and bottom-up credit research in the construction of municipal portfolios. Our investment philosophy is centered on the belief that strong long-term performance can be achieved with a relative value, research-driven approach. As we focus on bottom-up security selection, we perform extensive security-specific risk analysis on the bonds we purchase.
MMM believes that Environmental, Social and Governance (ESG) investing can be material to the risk/reward profile of every municipal bond credit. As such, in line with our fiduciary duty to act in the best financial interest of our clients, these factors have always been a meaningful part of our credit analysis. Many municipal bond projects address or finance ESG considerations and are also aligned with the sustainable development goals, including conservation projects for water and wastewater systems, wind farms, non-profit hospitals, public education, infrastructure, public transport and affordable housing.
ESG concepts are complex and dynamic with little standardization in the investment market. MMM has developed an internal process to assign an ESG risk ranking to each municipal issuer under consideration. We believe the consideration of ESG factors in assessing both risk and return at the security and portfolio levels should be an integrated and dynamic part of the research, portfolio construction and risk management processes.
MacKay Municipal Managers ESG Approach
Integration:
Recently there has been a growing interest in the impact of ESG factors in the investment process yet little research focusing on the municipal market is available from outside sources. As MMM ardently incorporates extensive security specific analysis on credits we purchase, in 2018, the team initiated an internal process to articulate and expand upon how ESG criteria are integrated into our investment analysis. The process created a matrix to assign ESG scores and rankings to new potential investments. Each security ranking is subjective, based on a rubric of criteria and is assigned by each individual analyst as part of their security specific credit analysis The ranking process considers a variety of ESG risk such as those outlined in the table below.
Through the process, each analyst will assess the materiality of the impact that each Environmental, Social and/or Governance factor is expected to have on a potential investment and assign a separate E, S, G ranking score of 1 (Low Risk) to 3 (Significant Risk). Once a risk group is assigned, an average is calculated for the issuer as a whole.
For the full version of this policy, please click here or use download function on the upper right of this page.
Environmental, Social and Governance Policy - Convertibles
Introduction
The MacKay Shields Convertible Team is an equity-oriented convertible bond manager. Our products provide participation in the equity markets while emphasizing downside protection. We combine a disciplined investment process with the fundamental judgment of seasoned professionals. Our overall strategy is designed to provide competitive performance with below-average market risk while focusing on those convertible securities that offer the best risk/reward profile.
MacKay Shields’ Convertible Team believes that Environmental, Social and Governance (ESG) issues can be material to the risk/reward profile of every issuer under consideration. As such, in line with our fiduciary duty to act in the best financial interest of our clients, these factors have always been a meaningful part of our credit analysis.
Convertible Investment Process
The strategy utilizes full analysis of the capital structure to determine which security provides the best risk/reward trade-off for investment. We employ a bottom-up approach which looks to identify the merits of convertibles relative to the underlying common stock.
For the full version of this policy, please click here or use download function on the upper right of this page.
Environmental, Social and Governance Policy - Systematic Equity
Introduction and Summary
The Systematic Equity team at MacKay Shields recognizes the importance of responsible investing and believes that Environmental, Social, and Governance (ESG) factors directly or indirectly influence long-term portfolio risk. Integrating ESG factors provides a measure not otherwise captured by, or correlated with, the quantitative measures incorporated in our systematic stock selection model. Incorporating additional insights from the analysis of ESG factors helps advance our stock selection efficacy and mitigate uncompensated risks, consistent with our investment objectives.
- ESG Integration: We believe ESG indicators capture unique risks and are a natural complement to our risk management process. All of our strategies incorporate ESG indicators into the investment process.
- Team Commitment: MacKay Shields LLC is a signatory to the Principles for Responsible Investment (PRI), demonstrating our dedication to ESG integration. We are dedicated to working with clients and prioritizing ESG measures to manage in accordance with their perspectives.
- Research Initiatives: Alpha-generating and risk-mitigating ESG factors are active research agenda items. We continuously seek improvements to our understanding of ESG factors. We offer transparency as it relates to our ongoing ESG research and integration enhancements.
MacKay Shields Systematic Equity Investment Process
As a fiduciary duty to our clients, we seek to generate excess returns, over a full market cycle (typically 7 to 10 years), relative to respective indices, by utilizing a quantitative investment approach. The team manages a suite of strategies that span the risk-return spectrum and invest across various market capitalizations and geographic regions. Our proprietary, multi-factor models systematically analyze over 15,000 securities to identify positions based on company fundamentals and investor sentiment.
Our stock selection models score stocks in each investment universe across three composite measures (valuation, momentum, and sentiment) and combines these scores to derive a final expected return or alpha score for each individual security. We invest in the tail ends of this resulting forecast spectrum. We believe prudent risk management is paramount to consistently generating superior risk-adjusted returns. Our multi-dimensional risk management process embeds throughout portfolio management to mitigate potential uncompensated risks. The three pillars of our risk management process are core risk controls, tactical risk constraints, and blind spot analysis.
ESG Integration
Blind spot analysis is an integral component of the systematic investment process and it is within this phase we integrate ESG indicators. Blind spots are individual securities that require additional human review and investment oversight to enhance the systematic stock selection model’s output. This process typically affects a small sub-set of stocks within each investment universe, primarily driven by ESG indicators, anomalies (small or no peer group and suspect/abnormal data), or idiosyncratic events (related to corporate action activity, profit warnings, and news events).
Integrating ESG-related factors into the blind spot review phase of the investment process naturally compliments the other more traditional company fundamentals and industry insights we regularly analyze to oversee the model during this stage. ESG factors capture an otherwise unsourced and unrecognized set of company or industry risks.
For the full version of this policy, please click here or use download function on the upper right of this page.
Environmental, Social and Governance Policy - Fundamental Equity
Introduction
MacKay Shields LLC is a proud signatory of the Principles for Responsible Investment (“PRI” or “Principles”), in recognition of the impact that we believe environmental, social and governance (“ESG”) issues can have on long-term investment performance. Recognizing that ESG covers a broad range of topics and is used to satisfy different investment objectives, the purpose of this policy statement is to describe our investment process and discuss our approach to ESG integration.
The MacKay Shields Fundamental Equity team manages the Fundamental International Equity All Country and Fundamental International Equity Strategies (the “Strategies”). The Strategies seek to generate excess returns, over a full market cycle, relative to the MSCI All Country World ex-US Index and the MSCI EAFE Index. The investment philosophy, which we describe as sustainable growth investing, is based on research showing companies that can consistently deliver above-average earnings growth, over the long-term, have significantly outperformed the broader equity universe. The investment team employs a fundamental research-driven process to identify companies which have superior earnings growth potential, sustainable competitive advantages, low concentration risks, and benefit from well-defined secular trends. While the Strategy seeks opportunities across all international markets, sectors, and market capitalizations, only companies which meet all four of these investment criteria are considered for inclusion in the portfolios. The Strategies aim to invest over a long time horizon and our portfolios will typically hold between 40-70 stocks.
Risk management is considered a key component to achieving the strategies’ return objectives and is embedded within each stage of the investment process. Identifying and analyzing all relevant forms of company specific risk, including financial and non-financial factors, during the research process forms the foundation for managing risk at the portfolio level. Given the strategies’ long-term investment horizon and concentrated portfolios, low probability events, or tail risks, are considered as sources of vulnerability to a company’s financial performance and are therefore considered as relevant risk factors in our investment process. These risks, including ESG related risks, are included in our analysis of the qualitative factors which drive a company’s fundamentals. Our portfolios are constructed through a process which combines a proprietary scoring model of these qualitative factors with valuation metrics derived from internally generated forecasts to identify the most attractive investment opportunities on a risk-reward basis. Additional risk management tools are used to actively monitor and control for risk at the portfolio level.
Mackay Shields Fundamental Equity Investment Process
The MacKay Shields’ Fundamental Equity Strategies seek to generate excess returns, over a full market cycle, relative to the MSCI All Country World ex-US Index and the MSCI EAFE Index, respectively, by investing in sustainable growth companies that are attractively valued. Since 2011, the investment team has employed the same fundamental research-driven process to identify companies which have superior earnings growth potential, demonstrate sustainable competitive advantages, benefit from well-defined secular trends, and have low concentration risks.
For the full version of this policy, please click here or use download function on the upper right of this page.
