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.

For the full version of this policy, please click here or use download function on the upper right of this page.

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”), demonstrating our dedication to ESG integration, in recognition of the impact that we believe environmental, social and governance (“ESG”) issues can have on long-term investment performance.

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. As such, integrating ESG considerations into our investment process is a natural component of our disciplined fundamental research. The incorporation of these insights provides a more holistic understanding of both the risks and opportunities a company may encounter over our investment horizon. 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.

Sustainable Growth

We believe the search for sustainable growth requires a thorough analysis of ESG-related risks. As companies with significant ESG-related risks are less likely to deliver long-term value creation, we believe that integrating ESG factors into our fundamental stock selection further enhances our disciplined review process and strict investment criteria.

ESG Integration

An analysis of ESG factors is integrated into our qualitative ranking system, along with all other relevant risk factors or potential vulnerabilities. The impact that ESG factors have on a company’s score is determined according to the analyst’s assessment and magnitude of potential risk.

Engagement

As fundamental managers, we proactively engage with the management of companies within our investment universe. We incorporate ESG factors into these engagements where relevant in evaluating the sustainability of a company’s future growth potential. We maintain records of company engagements in a proprietary database and believe in full transparency for our clients.

MacKay Shields Fundamental Equity Investment Process

We manage international equity portfolios utilizing a bottom-up fundamental and research-driven approach. We invest with an emphasis on sustainable growth, ultimately building valuation-conscious growth portfolios. Moreover, we invest in companies that have diversified revenue streams and have the ability to sustain growth over a long-term investment horizon, regardless of the economic cycle. We take a flexible approach to research that expands outside of our benchmarks across all sectors, geographies (excluding the U.S.), and market capitalizations to identify the most attractive risk -reward opportunities. Stocks in our investable universe must demonstrate four important characteristics to meet our investment criteria: (1) superior earnings growth potential, (2) secular growth trends, (3) sustainable competitive advantages, and (4) low concentration risk.

For the full version of this policy, please click here or use download function on the upper right of this page.

ENVIRONMENTAL, SOCIAL & GOVERNANCE POLICY

MacKay Shields Global Fixed Income Team Environmental, Social and Corporate Governance Policy

MacKay Shields High Yield Team Environmental, Social and Corporate Governance Policy

MacKay Shields MacKay Municipal Managers Environmental, Social and Corporate Governance Policy

MacKay Shields Convertibles Team Environmental, Social and Corporate Governance Policy

MacKay Shields Systematic Equity Team Environmental, Social and Corporate Governance Policy

MacKay Shields Fundamental Equity Team Environmental, Social and Corporate Governance Policy

MacKay Shields Global Fixed Income Team
Environmental, Social and Corporate Governance Policy

MacKay Shields High Yield Team
Environmental, Social and Corporate Governance Policy

MacKay Shields MacKay Municipal Managers
Environmental, Social and Corporate Governance Policy

MacKay Shields Convertibles Team
Environmental, Social and Corporate Governance Policy

MacKay Shields Systematic Equity Team
Environmental, Social and Corporate Governance Policy

MacKay Shields Fundamental Equity Team
Environmental, Social and Corporate Governance Policy