MARSHALL WACE LLP – STEWARDSHIP CODE STATEMENT INTRODUCTION
The UK Stewardship Code (the “Code”) was first published by the Financial Reporting Council (“FRC”) in July 2010 with an aim of enhancing the quality of engagement between asset managers and companies to help improve long-term risk-adjusted returns to shareholders. The Code was revised in September 2012. The Code sets out a number of areas of good practice to which the FRC believes institutional investors should aspire. It also describes steps asset owners can take to protect and enhance the value that accrues to the ultimate beneficiary.
The Code is based on a “comply or explain” approach and we consider that it is important to provide an overview of our business model to provide context to our adoption of the provisions of the Code.
THE CODE AND THE BUSINESS MODEL OF MARSHALL WACE LLP (“MW”)
MW is supportive of the Code and we seek to comply with its provisions and the seven principles contained in it within the context of our business model and further relevant details of the latter are provided below:
MW offers a broad range of absolute return, long-only, long-extension and bespoke investment strategies. The majority of the assets we manage continue to be invested in equity long/short strategies which are characterised by two distinct approaches.
First, more traditional investing grounded in fundamental stock research. We have assembled experienced portfolio management teams comprising portfolio managers supported by teams of analysts who develop a deep understanding of the businesses of companies and the drivers of stock valuation. Responsibility for coverage within each team’s investment universe is clearly delineated and split geographically or by sector.
The investment process for each of these strategies is driven by thorough fundamental analysis that aims to identify companies that appear mispriced on an absolute or relative basis and attempt to exploit inefficiencies in global equity markets. This research effort is supported by disciplined screening processes that highlight and quantify valuation anomalies in portfolio manager-targeted securities.
Secondly, MW offers systematic strategies. These originated from the belief that there is alpha residing in the expertise, information, and analytical edge of the sell-side community. Our principal systematic strategy is designed to measure, extract, and monetise this alpha from a network of individuals worldwide in real time.
These selected individuals – comprising salespeople, specialists, and strategists – are asked to submit their highest-conviction investment ideas through a proprietary web interface, in the form of virtual portfolios. This approach enables us to analyse the performance of these ideas so that we can focus our attention and capital on the most promising investment opportunities, while providing such individuals with a transparent and clear performance-based assessment.
This investment process optimises the raw input of fundamentally based ideas using quantitative analysis, which then drives portfolio construction, risk management, and execution.
The algorithmic optimisation engine:
More recently, a variety of publicly available additional signals have been incorporated into this process (and we also manage strategies that employ these sorts of signal alone as their principal inputs).
The efficiency of our trading activities is of great importance to us and investors in the funds we manage. We undertake extensive analysis of all costs, both explicit and implicit, in our trading activities in order to deliver the optimal result for our clients. Particularly taking into account the relatively high turnover of securities in certain of the strategies that we manage we have determined that the best interests of our clients are served by holding positions in shares of UK companies through contracts for difference as this significantly reduce certain of the frictional costs that arise when trading in such shares.
While contracts for difference provide many of the benefits of holding shares, including the economic exposure to movements in share prices, they do not provide the holder with access to the voting rights associated with those shares.
Institutional investors should publicly disclose their policy on how they will discharge their stewardship responsibilities.
We have been a signatory of the Code since 2012 and we are supportive of it and its principles within the constraints imposed by the business model that we operate.
We discharge our stewardship responsibilities principally through company engagement undertaken by our fundamental investment teams. Whilst we do not in general have access to the voting rights associated with the UK equity securities in which the funds we manage have positions it is our experience that we are nonetheless able to influence companies in most matters, including those related to stewardship.
Whilst it is our general practice, for the reasons set out earlier, to hold positions in the shares of UK companies on the funds we manage through contracts for difference we may, where we feel it is in the best interest of our clients, on occasion take holdings in the shares of those companies. This may well be in the context of matters on which our fundamental investment teams feel it is important to be able to exercise further influence in order to deliver the best result for our clients .
Our fundamental investment teams routinely monitor the activities of the companies in which the funds they manage have positions. Third party research can be a helpful source of information and analysis however we view carrying out our own research on such companies as being of significantly greater value. Our teams also enjoy regular engagement with the executive, and on occasion non-executive, directors of these companies along with other members of their management. During these meetings the teams extend their knowledge and understanding of the overall strategy that the companies are executing.
They also familiarise themselves with the governance structure through which the company is managed and controlled and assess its effectiveness in addressing key issues. This engagement also enables the teams to form a view of the company’s ability to manage the various risk factors to which the company is exposed. We fully recognise that a management team is appointed by a company’s shareholders to manage that company’s business. Our activities in relation to governance and stewardship are consequently focussed on the issues that we consider are the most significant to generating shareholder value – typically these could include corporate strategy, board issues (such as its leadership, composition and incentivisation), financing, corporate actions such as major acquisitions or disposals, management of risks and overall corporate performance.
The provisions of the UK Corporate Governance Code are implicitly taken into account by our investment teams when performing this monitoring role, with a particular focus on those aspects of the provisions that our investment teams assess as being most relevant to the maintenance and creation of shareholder value in any particular case. This could, for example, involve identifying concerns related to board structure or executive remuneration where these depart from our expectations and/or the provisions of the UK Corporate Governance Code.
We view this as a long-term process and it is the intention of our fundamental investment teams to foster a constructive and collaborative relationship with the companies in which the funds we manage have positions. Engagement (which may take the form of a meeting in person, by video conference, by telephone or in writing) similarly takes place over the long-term and it is generally only through a series of such meetings (in conjunction with our investment teams’ own research) that we make an assessment upon which we are prepared to rely of a company’s approach to stewardship matters and any actual or potential shortcomings in that approach that we have identified.
The personnel who will be most significantly involved in these deliberations will be the analyst (or analysts) responsible for a particular company and the relevant portfolio manager(s). It is likely that discussions will take place with our Chief Investment Officer and/or Chief Executive Officer where significant stewardship concerns have been identified and the latter individual(s) may be involved in subsequent discussions and decision-making.
Where such concerns are identified we will inform representatives of the company’s management. This will normally be on a private basis and will be with those representatives of the company (including its non-executive directors) who we believe are best placed to address these perceived concerns (further detail is provided in Principle 4). We will seek to gain those representatives’ support for actions that we consider to be appropriate to be taken or strategies to be adopted to resolve these concerns. Only when these discussions have been unsuccessful will we consider alternative courses of actions, which include a disposal of the funds’ positions in that company where our teams’ views are so markedly at variance from the stance of the relevant company’s management (and, potentially, other shareholders) that we conclude that to be the course of action that is in the best interests of our clients.
Collective engagement with other shareholders is possible and is discussed in more detail later in this statement under Principle 5.
Stewardship matters are less relevant to the systematic strategies that we manage because of the third party nature of the inputs into the investment decision-making processes of those strategies and the substantial element of quantitative analysis employed by them. As a consequence these strategies are generally managed in a manner that is agnostic of stewardship considerations. As the manager of these investments we may elect to include the positions held by these strategies when discussing stewardship matters and disclose the value of the positions in its shares that we hold with companies in order to gain greater influence (in these circumstances the systematic strategies nonetheless remain able to trade in the shares of these companies independently of any stewardship discussions that may be taking place).
Institutional investors should have a robust policy on managing conflicts of interest in relationship to stewardship and this policy should be publicly disclosed.
We aim to conduct our business according to the principle that we must manage conflicts of interest fairly, both between ourselves and our clients and between one client and another.
As a provider of financial services, we frequently face actual and potential conflicts of interest. Our policy is to take all reasonable steps to maintain and operate effective organisational and administrative arrangements to identify and manage relevant conflicts, including those that may arise in the exercise of our governance responsibilities when acting in a stewardship capacity.
Our senior management is responsible for ensuring that our systems, controls and procedures are adequate to identify and manage conflicts of interest. As such, they have established a Conflicts of Interest Committee to oversee the fulfilment of this responsibility. MW’s Compliance function assists in the identification and monitoring of actual and potential conflicts of interest.
MW is an independent investment manager and no external party is involved with, or otherwise influences, the investment and stewardship decisions that we make. KKR & Co LP is a minority owner of MW and there are formal and documented information barriers in place between the two organisations the effectiveness of which is audited periodically.
We have implemented specific procedures that address the identification and management of actual and potential conflicts of interest that may arise in the course of our business.
We are required to take all reasonable steps to identify and adequately manage conflicts of interest entailing a material risk of damage to a client’s interest. This policy specifies the requirement for MW to have in place appropriate procedures and measures in order to identify and manage any such material conflicts of interest.
This policy applies to those conflicts of interest that may give rise to a material risk of damage to the interests of a client. Conflicts of interest may arise between MW (either MW or its partners or staff personally or collectively) and a client or between two or more clients of MW in the context of the provision of services by MW to those clients.
Identifying conflicts of interest
In identifying conflicts of interest, MW considers all of the circumstances and takes into account, inter alia, whether it:
Managing conflicts of interest
Should a conflict of interest arise, it is MW’s policy that it should be managed promptly and fairly. The main categories of conflicts of interest it faces are:
Rather than seeking to prohibit all activities that might give rise to a conflict of interest, this policy provides for the following approach:
The key goals of the policy are to ensure that there is adequate management of the conflicts that may arise when the interests of MW and its employees and those of its clients and investors differ or the interests of particular clients differ.
MW maintains and regularly updates a record of the types of services it carries out in which conflicts of interest entailing a material risk of damage to the interests of one or more clients have arisen or may arise. The register also records the means by which the conflict of interest has been managed (including through disclosure or prohibition as appropriate).
Institutional investors should monitor their investee companies.
As was described earlier, our fundamental investment teams regularly meet the representatives of companies as well as undertaking their own investment analysis using a variety of resources. These meetings can cover a wide range of matters including those that are relevant to stewardship (examples of such topics include corporate strategy, board issues (such as its leadership, composition and incentivisation), financing, corporate actions such as major acquisitions or disposals, management of risks and overall corporate performance.These meetings are very useful to us not only to understand better the companies’ perceptions of these matters but also to allow us to provide constructive feedback to them.
It is our policy to restrict trading on all of the funds that we manage in the securities of any issuer when we are in possession of inside information in relation to such issuer, and we generally seek not to deliberately come into possession of inside information through our monitoring of investee companies as we do not feel that this trading restriction will necessarily best serve the interests of our clients (particularly where those securities are also held by funds that are managed by investment teams that have not participated in the interaction with the company that led to the inside information being obtained). There may be exceptions from this approach which will be decided on a case-by-case basis where the perceived eventual benefits to our clients arising from our possession of inside information, such as the ability to converse with or advise the management of the company, are assessed by the investment team as outweighing the adverse impact of the trading restriction and any other relevant factors.
In all cases a clear record of any discussions with the management of a company is made and an audit trail maintained.
Institutional investors should establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value.
We consider the meetings that we have with the executive management of investee companies to be a highly effective mechanism for raising matters that are of concern to us, whether these be related to stewardship issues (including departures from the provisions of the UK Corporate Governance Code) or matters of a more operational nature. Nonetheless, there are occasions when we feel that that stewardship considerations are of such gravity or of such a nature that they are best dealt with by approaching the company’s non-executive directors. Portfolio managers have the discretion to escalate such matters where they believe this to be the appropriate action, and the CIO, and possibly the CEO, will normally be a participant in any discussions, as is described in more detail in Principle 1.
To illustrate this process it is likely that remuneration-related concerns would be escalated to a company’s Remuneration Committee; matters concerning strategy would be raised with the Chief Executive Officer and the company’s board (initially its executive members and possibly the non-executive directors); and, similarly, more general corporate governance matters would be highlighted to the non-executive directors of the company.
It may also be appropriate for us to raise concerns with a company’s advisers and/or corporate brokers.
While normally we will raise these issues on a bilateral basis with a company there could be occasions when we decide that engagement of a collective nature with other shareholders in a company is an appropriate approach. This could be either prompted by us or by other shareholders (although we are mindful of the potential for MW to come into possession of inside information and consequently be restricted in trading in that company’s shares which we may assess as not being overall in the best interest of our clients as we describe later).
An issue could also be publicly aired.
The prioritisation of these (and possibly other) actions will very much depend on the individual case and its circumstances and will be dependent on our judgement of the optimal means to achieve the objective of enhancing shareholder value.
Institutional investors should be willing to act collectively with other investors where appropriate.
As described earlier, we will consider acting with other investors (including overseas investors), particularly on those occasions where we feel that bilateral discussions with a company are not achieving adequate progress or the matters are of such gravity that a collective approach seems the best means to focus the attention of a company’s directors on those concerns.
As a result of participation in collective action MW could come into possession of inside information in relation to a company and consequently be restricted in trading in that company’s shares -In these circumstances the investment management teams, along with senior management, will assess prior to such participation whether they believe the overall benefit to our clients arising from participation in that action outweighs any adverse consequences arising from such involvement.
We consider that the occasions when we participate in collective action are likely to be infrequent as our experience has been that one-to-one meetings are an effective means of drawing the attention of companies to such concerns and addressing them.We can be contacted for the purpose of discussing our interest in such engagement at firstname.lastname@example.org.
Institutional investors should have a clear policy on voting and the disclosure of voting activity
Marshall Wace LLP has a proxy voting policy.
Pursuant to the terms of the investment management and investment advisory agreements entered into with each of the funds and accounts that we manage or advise, we are authorised, in our absolute discretion, to exercise or refrain from exercising any voting or other rights attaching to the investments comprised in the relevant fund’s portfolio.
The primary objective of our stewardship activities is the protection and enhancement of the value the funds’ investments in public companies. Thus, we focus on practices and structures that we consider to be supportive of such long-term value creation.
It is our normal practice to hold positions in UK companies through contracts for difference and in most cases the funds we manage do not own shares, and consequently do not have voting rights, in relation to those companies. Notwithstanding these arrangements, we may, where we believe it to be overall in the best interest of our clients, arrange for the funds we manage to hold those shares physically in order to be able to exercise those voting rights. This is most likely to occur where the result of a vote is likely to have a particularly significant impact on the valuation of that company’s shares. It is likely that on such occasions we would inform the company of our intentions where we proposed not to support a board recommendation.
We aim, where applicable, to exercise the proxy voting rights of the funds we manage at all shareholder meetings. In doing so we consider the range of factors which would affect the value of those investments and will act solely in the interest of, and for the exclusive purpose of providing benefits to, the funds. In doing so, we will have regard to the individual facts and circumstances of each case and will act in accordance with our Conflicts of Interest Policy.
Our policy is to follow the advice provided by an independent specialist proxy voting adviser (Glass, Lewis & Co., LLC). However, we may, on a case-by-case basis, decide not to vote in accordance with this advice where in our commercial judgement such action will better achieve the desired outcomes for clients.
Our policy is not to borrow securities solely in order to acquire the voting rights of those securities.
We do not lend securities on behalf of our clients.
Upon the request of a client, we will provide reports of our proxy voting activity as it relates to the securities held by the relevant fund. We consider this information to belong to the client and not to the general public and so do not disclose proxy voting information publicly.
Institutional investors should report periodically on their stewardship and reporting activities
Details of all of our engagement with companies is recorded as is our proxy voting activity
We will respond to any specific requests from our clients for information on our stewardship activities. We will consider providing this information on either a periodic or an ad hoc basis (as requested by the client), and in either a standard format or will seek to accommodate any bespoke request that is made to us.
There may however be occasions where we feel that disclosure of our engagement with companies (whether current or historic) could be prejudicial to the success of that, or future, engagement and would not be in the best interest of our clients. Any such instances will be considered on a case-by-case basis.
A copy of this Stewardship Code statement is displayed on our publicly available website.
We have introduced an annual survey of our stewardship activities which is provided to the governing body of Marshall Wace LLP and which provides details of the principal occasions where we have felt it appropriate to intervene on stewardship matters, along with data related to our more routine involvement with company management. Proxy voting records form a part of this survey.
In view of this level of involvement of our senior management we have not felt it appropriate to obtain independent assurance of our adherence to the Stewardship Code. However, we will keep the possibility of such independent assurance under review.