ENVIRONMENTAL, SOCIAL & GOVERNANCE POLICY
Our Approach
We believe that consideration of material environmental, social and governance (“ESG”) factors can have an impact on longterm investment performance.
The consideration of ESG factors is a natural and important component of disciplined investment research. Proprietary research is at the core of MacKay Shield’s actively managed strategies. As part of their proprietary research, each of MacKay Shields’ actively managed strategies considers ESG risk and opportunities alongside traditional factors, consistent with our fiduciary duty to act in the best interest of our clients as we strive to meet their investment objectives.
Each investment team utilizes it’s own distinct philosophy, processes and expertise to add value across capital markets. As such, each investment team integrates material ESG considerations in its own manner which reflects the character of its respective asset class and investment style. Further, each investment team has developed a team-specific ESG policy, which serves as the cornerstone of the team’s ESG integration process. Investment team ESG policies can be found on the Responsible Investment section of our website at www.mackayshields.com
Oversight
MacKay Shields has established a Responsible Investment Advisory Committee (“RI Committee”), which is charged with overseeing our commitment to the Principles for Responsible Investment and firmwide ESG initiatives. The RI Committee is led by our General Counsel and the Director of ESG & Sustainability Initiatives, and is comprised of senior level representation from each of our portfolio management teams, as well as members of our risk and other key constituents within MacKay Shields. The RI Committee meets regularly with the following objectives:
- Discussing current and new ways to approach and enhance ESG integration within investment teams and across the firm
- Sharing information and ideas on ESG research, trends and developments
- Discussing the application and viability of new and existing third party ESG products and tools to support internal efforts
- Conducting and promoting ongoing ESG training and education
Climate Considerations
MacKay Shields recognizes that certain climate-related risks can have an impact on the outcome of a possible investment. We acknowledge that climate risks and opportunities may be more material for certain asset classes, sectors and/or issuers, and may present themselves over the short-, medium- and longer-term. As a fiduciary for our clients, our climate related analysis is based upon materiality of perceived risks and opportunities. Our investment teams aim to consider financially material risks, as well as ways to capture opportunities, associated with climate change in assessing investments for client portfolios.
Where feasible, we are actively taking steps to implement the recommendations of the Task Force for Climate-Related Financial Disclosures (TCFD), which includes monitoring and reporting carbon intensity within client portfolios.1
Engagement
MacKay Shields believes engagement is an integral part of managing ESG risks. Our bottom-up research focused fixed income and equity investment teams may engage with companies, trading partners, experts and industry peers on ESG-related matters. Each team has developed its own approach consistent with its investment process and philosophy, which is outlined in the team’s investment policy.
Sharing Ideas and Perspectives
MacKay Shields’ is active in collaborating with clients and other organizations throughout the asset management industry in order to promote a broader understanding and acceptance of ESG-related issues. Our professionals have contributed to PRI’s seminal fixed income paper titled “ESG Engagement for Fixed Income Investors: Managing Risks, Enhancing Returns, are actively involved in industry working groups and webinars, and participate in ESG-focused investment panels.
ESG Training
In recognition that best practices in ESG integration are continuously developing, MacKay Shields’ investment professionals regularly participate in ESG-related training programs and education is continuously encouraged. Annual ESG training is mandatory for all employees. Additionally, MacKay Shields’ General Counsel, Young Lee, designed and has co-authored papers that are currently part of the CFA Level 1 and Level 2 program, and which represent the full ESG curriculum of the CFA Institute.
Reporting
As part of our commitment as a PRI signatory, the firm reports 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 and participating in ESG training. Regular meetings of the RI Committee are held to augment our ESG-related reporting and research processes and to document existing activities.
1The Task Force on Climate-related Financial Disclosure (TCFD) acknowledges the challenges and limitations of current carbon footprint metrics, including that such metrics should not necessarily be interpreted as risk metrics. The TCFD recognizes that some asset owners may be able to report weighted average carbon intensity for only a portion of their investments given data availability and methodological issues. Source: Implementing the Recommendations of the Task Force on Climate related Financial Disclosures, June 2017.
MacKay Shields Global Fixed Income Team
Environmental, Social and Corporate Governance Policy
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 Corporate 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 climate/transition related risks, carbon intensity and environmentally focused policies/programs, and “social” considerations may include workplace and/or human resource policies and sustainable business practices. The goal of this screening process is to systematically identify potential outliers of uncompensated risk, including applicable ESG risks. However, the process does not end with the initial credit screen as issuers are subject to further scrutiny by our analysts.
As a fiduciary for our clients we do not blindly screen out sectors or industries from our investment universe. 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 apply an industry-relative ESG screen through which we carefully weigh the risk and reward profile of each potential investment we consider. Our proprietary 1-5 ESG scoring system is designed to assess ESG outperformers and underperformers. Each issuer is assigned a separate “E”, “S” and “G” score for sector and company specific material ESG considerations. The SASB (Sustainable Accounting Standards Board) Materiality Map is used as a guide which helps us identify “sustainability issues that are likely to affect the financial condition or operating performance of companies within an industry.” For issuers with considerable ESG risks, we will eliminate these positions from consideration. If ESG trends are improving, the team will further evaluate to determine whether an investment is warranted. For investments that have low ESG risks, the decision to invest is predicated on relative value considerations. A stylized representation of the ESG evaluation process is shown below.
Engagement and Monitoring
As investors in bonds and loans, we recognize that we do not have the voting right that accompanies an active ownership stake. However, we will actively engage with issuers, through meetings with the management, to understand the issuer’s perspective on ESG issues, and to influence them if we find their response inadequate. Portfolio managers and analysts engage with issuers on a regular basis and are expected to present the findings of their engagements during the team’s credit review meetings. For issuers with lower ESG standards, we will prioritize key engagements with larger issuers, or where we feel the risks are reflected in the price of the bonds.
We also actively engage with our trading partners, including sell-side and syndicate desks, experts and industry peers in this evolving field to enhance knowledge and share experiences. We believe that as more investors use this approach, issuers will respond favorably over time. In addition, we will monitor the progress we make with engagement and track it via our engagement database.
External Supplemental Tools
In addition to our proprietary ESG related research, we use third-party data and rating systems to help identify ESG risk factors which will help round out our knowledge base.
Team members have access to and are encouraged to participate in seminars and presentations focused on ESG and Sustainability issues by organizations like the PRI, CFA Institute, etc. All team analysts have taken ESG investing training.
We continue to seek sources of ESG information through conferences, external research providers, NGO’s, universities, and general news services.
Reporting
We are able to produce customized ESG-related reports in response to client requests, which may include:
- A report which compares the ESG score of a portfolio to its index,
- Ad-hoc ESG commentaries on specific issuers, or
- A report which explains factors reviewed as part of our issuer ESG evaluation process, which may include such factors as carbon metrics and product-line exposure to certain ESG risks.
MacKay Shields High Yield Team
Environmental, Social and Corporate Governance Policy
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.
High Yield Group Investment Process
MacKay Shields’ High Yield Group’s strategy is a bottom-up, value-oriented approach to investing in the high yield market. Our objective is to outperform the high yield market over the long term through superior credit selection, while mitigating downside risks. Our approach to this objective involves maximizing the default adjusted yield and spread of a diversified portfolio. The key feature of our strategy is our disciplined investment process that we have employed since 1991.
Given the asymmetric risk/return profile of investing in high yield bonds, we believe superior credit selection, appropriate risk compensation, and a focus on downside protection are required to invest successfully in the high yield market. As a result, the most important part of our investment process is "margin-of-safety" analysis. Every high yield security we invest in must have a large margin-of-safety through asset coverage and free cash flow. We define asset coverage as the ratio of our estimate of a company’s value to the amount of its debt (the inverse of asset coverage is loan-to-value). Every high yield security we invest in must have a minimum of 1.5x asset coverage. We believe this builds in a significant margin-of-safety and downside protection. Every credit must also have free cash flow, which we define as cash that a company is able to generate to pay down its debt.
We ultimately focus on approximately 300 issuers that pass our margin-of-safety analysis and also have a catalyst for total return.
We then categorize every security in our portfolios into one of four Risk Groups that are delineated by the strength of the asset coverage and the potential for default as described in the table below:
Our goal is to maximize the default-adjusted spread of a diversified portfolio, which depends on the market environment. During periods in which we view default-adjusted yields and spreads as unattractive for credit risk, our portfolios will be more heavily weighted toward higher quality Group 1 credits and we will have less exposure to riskier Group 3 credits. During periods in which we view default-adjusted yields and spreads for riskier credits as attractive, our portfolios will increase exposure to Group 3 credits while reducing exposure to Group 1 credits.
Our default-adjusted approach keeps us disciplined regardless of the market environment. It prevents us from purchasing riskier credits in frothy markets where spreads are unattractive and keeps us focused on the long-term value of a bond in periods of market weakness.
ESG Risk Groups
In addition to these risk groups, we will also formally categorize the securities that meet our investment process into four groups based on the assessed ESG risks associated with each security. Typical characteristics of ESG risk group classifications are as follows:
The assignment of individual ESG ratings will predominantly be the responsibility of the sector portfolio manager assigned to covering the security. To provide further focus on the ESG factors each portfolio manager will also address and document answers to the following questions prior to recommending the inclusion of any security into portfolios:
- What are the material ESG related risk factors associated with this investment?
- What is management’s response to these factors?
- How, if at all, is the company addressing or managing these specific risk factors?
- What is the probability and extent of downside risk associated with this investment owing to these ESG specific factors?
Engagement
We recognize as fixed income investors, that we do not have the voting rights that accompanies an active ownership stake in a company’s equity. As part of our Investment Process, we actively engage with issuers, through meetings with company management, investment roadshows, and onsite visits. When we meet with the management of companies in which we rate their ESG factors to be poor, we endeavor to discuss with them how they are addressing these risks.
External Supplementary Tools
In addition to our proprietary research into ESG related risks, we will all also use as needed screening tools and rating systems to identify ESG risk factors that may not have been captured through our own research. Such supplementary tools will be used to augment our research rather than serve as the key or sole ESG research engine.
Expected Impact of ESG Factors On Research Conclusions And Portfolio Construction
The determination of whether specific securities warrant inclusion in the portfolio is always an assessment of the risk adjusted return potential versus other investment alternatives as well as the impact on the return and risk profile of the portfolio in aggregate. The manner in which ESG related factors will impact security selection is qualitative. All else being equal, in the most straight forward of cases involving two securities that have the same return profile, but where one security has a superior ESG rating, the security with the superior ESG rating will be the one that is purchased.
As is the case with most investment decisions, considerable judgement will be required in weighing our clients’ interest in strong returns against the risk factors associated with the portfolio. As it relates to ESG related risk factors, our commitment is to ensure that such factors are properly assessed and taken into consideration when constructing and managing client portfolios. The elimination of ESG related risk factors in totality in our view is not possible. What is possible is that such factors are identified and vetted through the research function and brought into consideration in the portfolio construction process. We will work with clients on a case-by-case basis to determine whether additional ESG specific considerations should be taken into account in the construction of their respective portfolios (e.g., restricted security or industry list, prohibition of investments with an ESG Risk Group rating below 3).
Reporting
The following reports on ESG related research and risk factors can be provided to ESG sensitive clients:
- Breakdown of portfolio holdings by ESG risk rating 1 through 4
- Purchases and sales by ESG risk rating
- ESG related commentaries on portfolio holdings upon request
- Conference calls with a portfolio manager(s) to address specific questions related to ESG issues or specific holdings.
Summary and Conclusions
The identification and analysis of risk factors are important factors in the portfolio management process. The MacKay Shields High Yield team believes that ESG related factors, like any risk factor, can have a material impact on the long term return and risk profile of both individual securities and portfolios in aggregate. The team has always been committed to thoroughly researching all risk factors, ESG factors included, in the construction of client portfolios. The purpose of this policy will be to provide asset owners with greater visibility into how the ESG factors are integrated into our decision making process.
MacKay Shields MacKay Municipal Managers
Environmental, Social and Corporate Governance Policy
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. Typical characteristics of ESG risk group classifications are as follows.
In making risk assessments, the analysts may consider use of bond proceeds, transparency in reporting practices, relations between the issuer and the general public, media perception regarding the company or business, risk of increased regulatory scrutiny, compliance with local standards, as well as other considerations. Certain factors may be not be relevant for certain issuers, sectors or regions, while quite material for others. When making investment decisions, considerable judgement is required in weighing our clients’ interest in return generation against the risk factors associated with any possible portfolio investment. As it relates to ESG related risk factors, our commitment is to ensure that such factors are properly assessed and taken into consideration when constructing and managing client portfolios.
Engagement
As investors in bonds, we recognize that we do not have the voting right that accompanies an active ownership stake, such as in the equity market. However, through our bond ownership, we will actively engage with issuers, through meetings with the management to promote transparency and best practices, if we find lack of disclosure or questionable management practices. We believe that as more investors use this approach, management teams and the market, in general, will respond favorably over time.
Team Commitment
Senior members of the municipal team are responsible for the implementation of the ESG integration process including Brian Stewart, COO, and Frances Lewis, Head of Municipal Research.
Team members participate in seminars and presentations focused on ESG and Sustainability issues by organizations like the PRI, CFA Institute, etc. All team analysts have taken ESG investing training. In addition, the MMM team is a participant in a working group with PRI to promote ESG integration in the municipal market.
We continue to seek sources of ESG information through conferences, external research providers, NGO’s, universities, and general news services.
Reporting
With the application of our ESG screening, the matrix ranking is a component of our internal credit reports. In addition, the following reports on ESG related research and risk factors can be provided to ESG sensitive clients:
- Breakdown of portfolio holdings by ESG risk rating 1 through 3
- Purchases and sales by ESG risk rating
- ESG related summaries on portfolio holdings upon request
- Conference calls with a portfolio manager(s) to address specific questions related to ESG issues or specific holdings.
For the full version of this policy, please click here or use download function on the upper right of this page.
MacKay Shields Convertibles Team
Environmental, Social and Corporate Governance Policy
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.
MacKay Shields European Leveraged Loan Team
Environmental, Social and Corporate Governance Policy
Introduction
MacKay Shields European Leveraged Loan team’s core investment philosophy is to seek attractive absolute and risk-adjusted returns while actively managing downside risk. We focus on identifying senior secured loan opportunities in businesses, markets and jurisdictions which we understand, have extensive prior experience and where we believe we are fairly compensated for the given margin of safety. It is clear to us that the process of identifying and integrating material ESG factors directly into our credit analysis is integral in managing downside risk, as ESG risks can directly impact the credit worthiness of borrowers and loan/bond issuers. As such, ESG risk is assessed throughout the deal cycle and is the direct responsibility of each portfolio manager and analyst on the investment team.
Our framework for integrating ESG considerations contemplates that some ESG issues may be more material to certain sectors than others, depending on whether they are focused on services, manufacturing, natural resources, etc. This is also true at the individual company level and is dependent on a variety of factors. We note that certain material ESG factors may be more acute, while others may play out over a longer time horizon. As such, we regularly assess ESG factors throughout both our due diligence process and the ongoing monitoring of our investments.
Our integrated approach to assessing material ESG risk factors within potential investments is aligned with our fiduciary obligation to act in the best financial interests of our investors
ESG Approach
The team’s investment philosophy focuses on applying a clear and consistent investment process and avoiding mistakes. Our comprehensive analysis of top-down macro factors along with bottom-up company specific measures has been the backbone of our investment selection process as well as essential to our ongoing risk management practice. Intensive due diligence is conducted prior to investment in any company. From a top-down perspective we focus on investing in companies with enduring products and services and strong market shares, and avoid companies whose industries may be in secular decline with a risk of product/market obsolescence.
We initially take into consideration the factors that impact the company and its industry from a macro perspective. Macro ESG considerations are particularly pertinent to assessing the future sustainability of a business or product and may include broad themes such as climate change/transition risk, regulatory risk, demographics, disruption trends and shifting investor preferences. These factors will be considered in combination with more traditional factors such as GDP growth, interest and currency rates, end-market demographics, supply and demand trends and the competitive landscape to evaluate which industries are experiencing secular versus cyclical dynamics.
In conjunction with the initial top-down macro analysis, we utilize a proprietary research template to ensure we consider all material aspects and risks of any potential investment, including ESG opportunities and risks. We aim to identify key material risks early on in our process. If any risk is deemed to be too significant, including ESG risks, we would eliminate the investment from consideration prior to spending further time on due diligence.
Each company under review is assigned proprietary E, S and G rankings from 1 (Low Risk) to 4 (Significant Risk). The ESG risk score is imbedded in the team’s credit review template and has a direct impact on the proprietary internal credit score. Examples of ESG factors we may review include, but are not limited to, the following1:
We recognize that certain ESG risks may be more applicable to specific industries or companies than others, and similarly more acute in the short vs. longer term and this is taken into consideration within our analysis and assessment.
Engagement is a key component in the assessment of ESG risk and opportunities. During the due diligence process we generally seek to engage with arranging investment banks and deal sponsors, and when possible, directly with companies.
Certain CLO sponsors may do an ESG assessment of the issuer and we will generally seek to inquire as to the results. If anything raises a red flag we will discuss it further and evaluate based on our findings. Additionally, we will frequently employ the assistance of industry consultants to develop a more detailed understanding of industry specific challenges, trends and nuances, including those associated with E, S and G factors. Consultants typically include former managers, competitors and/or clients of a target investment company. We will generally endeavor to speak directly with company management. Our experience has generally been that companies which offer increased disclosure tend to perform better. As such, we will encourage increased disclosure where we can.
Once key ESG and traditional financial risk factors have been assessed, we conduct a detailed business and market analysis. This exercise, along with our final investment checklist, serves as a means to ensure we have assessed and quantified all perceived material risks, both ESG and non-ESG related risks.
Once our upfront analysis is completed, analysts summarize it in the form of “key risks and mitigants” facing both the company and industry. The Investment Committee carefully reviews and considers these issues before making an investment
Post-Investment Monitoring
Throughout the life of an investment, the European Leveraged Loan team endeavors to maintain an active and regular dialog with the company’s management, including the CEO and CFO, in order to detect any problems or issues as early as possible. The company and the key risks are monitored closely and formally reviewed at least once a quarter. We seek to identify any deterioration from our initial evaluation, assess materiality of any changes, and the cost associated with those risks. We consider taking action if negative developments warrant a reduction in exposure or further considerations among team members.
As with the initial due diligence process, the team utilizes industry networks across corporate, financial, legal and restructuring advisors, who may assist in providing color on industry trends, restructuring watch lists or regional issues. ESG trends and issues are often a part of these conversations.
The team conducts a thorough ongoing review of each investment at least once per year. We will actively engage with issuers to understand their perspective on ESG issues, and to influence them if we find their response inadequate. We believe that as more investors use this approach, management teams will respond favorably over time. In addition, we will monitor the progress we make with engagement and share information via internal memos.
Reporting
We are able to produce customized ESG-related reports in response to client requests, which may include:
- Ad-hoc ESG commentaries on specific issuers, or
- Explanation of factors reviewed as part of our issuer ESG evaluation process, which may include such factors as product-line exposure to certain ESG risks.
MacKay Shields Systematic Equity Team
Environmental, Social and Corporate Governance Policy
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.
MacKay Shields Fundamental Equity Team
Environmental, Social and Corporate Governance Policy
Introduction and Summary
MacKay Shields LLC is a proud signatory of the Principles for Responsible Investment (“PRI”). In recognition of the impact that we believe environmental, social and governance (“ESG”) issues can have on long-term investment performance, we are commited to integrating an ESG framework into our investment research process.
The MacKay Shields Fundamental Equity team views ESG as a set of risk factors that can influence the potential range of financial outcomes that a company may achieve over time. An analysis of ESG factors provides a measure of quality not otherwise captured by, or correlated with, traditional financial metrics. We believe incorporating insights from an analysis of ESG factors into our Sustainable Growth investment philosophy provides a more holistic understanding of both the risks and opportunities a company may encounter over our investment horizon. As such, we believe that integrating ESG factors into our fundamental investment process, where consistent with our fiduciary responsibility, is aligned with and further enhances our investment objectives of delivering excess relative returns over a market cycle.
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 or the MSCI EAFE Index 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.
Companies that meet our primary inclusion factors and are considered as potential investment opportunities are scored using the following qualitative factors: management and corporate governance, competitive advantages, risk of obsolescence, concentration issues, event risks, and volatility of earnings. Given our strategies’ long-term investment horizons 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, inclusive of ESG-related risks, are integrated throughout our rigorous company research and analysis of the qualitative factors that drive a company’s fundamentals. ESG factors are considered in the analysis of these qualitative factors and will impact a company’s score according to our assessment of relevance and magnitude of potential risk. Companies that are considered to meet all of our investment criteria and are deemed to be attractively valued are recommended for inclusion in the portfolios.
ESG INTEGRATION: A Closer Look
INTEGRATION INTO OUR RESEARCH PROCESS
By integrating ESG factors into our analysis, we believe we are able to enhance our research insights into the qualitative factors that are likely to impact a company’s fundamentals and financial performance. As with all other qualitative and quantitative factors that are analyzed during our due diligence process, we rely on our team’s expertise to evaluate the relevance and materiality of any company-specific ESG-related risks. Analysts utilize a combination of company published materials, interactions with management, industry data, sell-side analysts, company-specific ESG reports, Sustainalytics ESG scores, and any other relevant information to assess ESG risks as they relate to a company’s ability to deliver sustainable and consistent earnings growth over a long-term horizon.
Importantly, as a fiduciary to our clients, the intention of integrating ESG into our research process is not to wholly eliminate ESG risks as this would impede our ability to construct diversified portfolios that meet our investment objectives. Alternatively, we focus on identifying meaningful company-specific ESG factors and incorporating such risks into our analysis of a company’s qualitative rating. We seek to capture the ESG factors that will impact a company’s underlying fundamentals and include that assesment in our approach to managing risk.
In our view, the absence of ESG-related risks does not necessarily ensure a company’s financial success, but companies with significant ESG-related risks are, however, less likely to deliver long-term value creation for shareholders. Moreover, the sole presence of ESG risk factors may be insufficient to eliminate a company from investment consideration, but those factors will be reflected in the qualitative scoring process, along with all our other non-ESG related qualitative factors, used to rank our investment recommendations.
We consider a variety of factors and characteristics when capturing ESG-related risks in our qualitative rankings. Certain factors may not be relevant for certain companies, sectors, or regions, while quite material for others
QUALITATIVE FACTOR SCORING
As with our other qualitative factors, we score ESG factors for all companies considered as potential investment opportunities. In our scoring system, companies that demonstrate strong evidence of meeting our criteria receive a score of 1, companies where there is sufficient evdience of meeting our criteria receive a score of 0.5, and a company that demonstrate no evidence of meeting our criteria receives a score of 0. A company must achieve a cumuliative score of at least 4.5 to be considered as an investment opporutnity and any company which recieves a score of 0 on any of our qualitative factors is eliminated from consideration for our portfolios. In addition to determining which stocks are included in the portfolios, our qualitative factor scoring is used as a risk management and position sizing tool.
The below illustrates the factors we consider when scoring a company on its corporate governance.
Engagement
Our objective for undertaking engagement activities is to inform and support the investment decision-making process. We engage with management, investor relations, competitors, suppliers, and customers of the companies we are invested in and those under investment consideration. Means of engagement can include written communication, meetings and calls, site visits, and participation in roadshows. To encourage transparency for our investors, we maintain a log of all of our meetings and interactions.
We identify cases for engagement both proactively and reactively, specific to the company under analysis. Triggers for engagement may include an earnings announcement, broker-initiated meetings with management, routine due diligence, or participation in a roadshow. Engagements may include ESG factors as part of evaluating the financial health and future growth potential of a company.
An example of a management engagement driven by ESG considerations involves a Japanese online retailer, which experienced disappointing results on a new initiative the founder CEO had been actively involved in. During multiple engagements with executive management regarding the cause of the failure, it was our determination that the board lacked sufficient independence to balance the views of the founder and CEO who had a significant stake in the company. As a result, our rating for management and corporate governance was lowered which factored into our view of the stock. The company has subsequently made significant changes to its corporate governance.
Proxy votes and overwrites as provided by our proxy advisor may also trigger a company engagement, in which we initiate further dialogue with a company in regards to transparency, ESG factors, or other concerns as we deem necessary and material. For example, in 2018 our proxy advisor initiated a proxy overwrite procedure for a French customer relationship management services firm, a holding in our portfolios at the time. This prompted us to initiate additional conversations with the company to further assess their senior management and the potential governance-related concerns regarding compensation and organizational structure. After thorough research and review, we ultimately chose to side against our proxy advisor and voted in favor of company management.
Importantly, as a part of our bottom-up fundamental approach, we continue to monitor companies in our portfolios or on our watch list even after engagement is completed and a decision made, including in cases in which our favored proxy vote was not the realized outcome.
Climate Change & Climate-Related Indicators
As with other ESG factors, the Fundamental Equity team recognizes that climate-related risks can have a significant impact on the risk and return profile of our companies in our investable universe. The economic and environmental shifts created by climate-related changes can create unique risks and opportunities as a result of long-term trends. These trends can materialize over different time periods and be sources of vulnerability to a company’s financial performance and therefore considered as relevant risk factors in our investment process. Carbon metrics that measure carbon intensity and footprint of individual companies and the portfolio as a whole are monitored by the team to better assess potential climate related risks. Importantly, these risks are considered where analysts deem material as some sensitivities may be more applicable to certain sectors or companies than to others. The climate-related indicators we consider may evolve over time as part of our ongoing and rigorous research process.
External Supplementary Tools
While our proprietary research process drives our analysis of ESG-related risks, those efforts are supplemented by various tools available to our analysts. The team utilizes Sustainalytics’ suite of products which includes company specific ESG ratings, access to ESG dedicated analysts, and portfolio level analytics. A copy of Sustainalytics’ ESG rating on every stock recommended for inclusion in the portfolios is maintained in a shared folder for all members of the team to review. Access to ESG focused sell-side research and dedicated sell-side ESG analysts provide additional resources for developing an understanding of ESG related risks for companies being considered for investment. Members of our team may also attend ESG focused events and conferences to further our understanding of ESG related topics. These supplementary tools are considered secondary sources and are not used as the primary factor in determining our assessment of ESG related risks on a company specific basis.
Reporting Capabilities
We have the capabilities to produce ESG-related reports for individual portfolios, including a breakdown of portfolio holdings by ESG ratings, as well as information on the individual securities reviewed in our fundamental research process. Additionally, portfolio-level reports from Sustainalytics are available to share with our clients.
Client-Specific Factors
Separate from our integration approach, we adhere to client-specific restrictions. We are also committed to building customized solutions, as we understand the broad array of ESG-related perspectives that investors may have. In managing our portfolios, we can consider the individual views of our clients in prioritizing ESG factors.
