Fund Size: £147.24m

Total screened & themed / SRI assets: £426025.69

Total Responsible Ownership assets: £426025.69

Total assets under management: £702579.79

As at: 30/06/23

Contact: UKClientService@axa-im.com

Overview

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Fund information

Policy

The AXA Ethical Distribution fund invests in UK equities, in accordance with AXA IM RI sectorial policies and ESG standards as well as its ethical screening criteria in order to remove less or unethical securities from the investable universe. It additionally invests in UK government bonds (gilts), including index linked gilts, and cash.

We automatically apply AXA IM RI sectoral policies to address ESG tail-risks, which include:

• Exclusion of controversial weapons,
• Exclusion of climate risks (i.e. food commodities)
• Exclusion of deforestation and ecosystem degradation
• Exclusion of soft commodity derivatives

In addition, we also apply the AXA IM ESG standards which are focused on:

• Tobacco - to avoid financing the tobacco industry and thus contribute to protecting public health;
• Defense - to avoid financing companies producing or distributing incendiary weapons with white phosphorus;
• UNGC principles - to avoid financing companies in violation of the United Nations Global Compact;
• ESG quality - to carefully monitor companies with the worst ESG practices;
• Countries with severe human right violations.

The AXA IM sector specific investment guidelines and the AXA IM ESG Standards policy are subject to change and the latest copies are available from the Manager on request.

We also closely monitor the ESG scores of invested companies. A portfolio manager must submit a written justification of any decision to hold stocks with an ESG score below the agreed minimum level. A review of these submissions is carried out twice a year.

Specifically, the fund has in addition strict ethical screening criteria on the equity portion defined by the investment team and implemented by a 3rd party specialist provider.

The fund invests in shares of UK companies whose products, services or method of operation do not involve, conduct or carry out:

• testing on animals
• gambling;
• violations of human rights;
• intensive farming;
• significant sales to the international military;
• unacceptable levels of water pollution;
• the use of unsustainable timber; or
• activities deemed detrimental to the developing countries,
• or which do not derive a significant proportion of their annual turnover from fossil fuels, energy intensive industries, mining, nuclear power, ozone-depleting chemicals, pornography and adult entertainment services or tobacco.

Eligible shares in companies are then selected based upon their prospects for future growth in dividend payments following an in depth analysis of their financial status, quality of business model and corporate governance arrangements.

Collaboration with AXA IM’s Responsible Investment team and the Quant Lab, provides valuable extra-financial analysis and the ability to identify both ESG risks and opportunities within the portfolio. Besides, granular ESG and voting reporting is published on our Fund Centre, and detailed information on the broad ESG approach at company and fund level is provided.

The resulting fund incorporates environmental, social and governance factors.

Process

The investment process is driven by both top-down macro analysis and bottom-up stock selection, and benefits from the specialist skill and collective knowledge of the investment team. The portfolio managers are ultimately responsible for all investment decisions.

The AXA Ethical Distribution fund offers a long-term perspective on investing in financial markets. Please see below the three steps of the process:

Step 1: Top-down research and strategic asset allocation

The investment process begins with the top-down macro research and analysis on the likely influences at play in relation to the sector or business area of which a stock is part. With key inputs from the in-house Macroeconomic Research team of 13 experienced economists, our macroeconomic analysis considers factors that may influence performance, such as:

• Industry trends
• Economic cycles
• Interest rates
• Currency considerations
• Political influences

The Macroeconomic Research team uses a range of internally developed, proprietary models to produce its views on fixed income and equity markets. The team’s approach combines both quantitative and judgmental elements. Through their original perspectives, analysis and recommendations, they bring valuable inputs to our investment process. Investment managers regularly share knowledge and ideas with the Research & Investment Strategy team to attain the most optimal investment decisions. Their inputs are fundamental in the fund managers’ asset allocation decision and their work is fully independent.

Once the forward-looking macro outlook is determined, the portfolio managers review the strategic asset allocation for the fund. Asset allocation between equities and bonds is a dynamic process, although we have remained reasonably steady and consistent in our approach over the years.

Step 2: Security selection

Once the decision on the asset allocation has been made, the team delegates the fixed income carve-out to our Sterling Fixed Income team (Mark Healy & Nick Hayes), whilst the equity portion of the portfolio follows our equity investment philosophy.

Top-down Thematic/Business Drivers & Bottom-up stock analysis

We consider top-down secular growth themes and business drivers in order to identify trends that are likely to drive market growth over the medium-term, and thereby provide an economic ‘tailwind’ for the companies we choose to invest in. We try to identify and focus on those companies that are likely to be beneficiaries of this positive backdrop. How well-positioned companies are to benefit from these trends is a key consideration in assessing their potential.

Current thematic drivers identified include:

• Technological disruption
• UK survivorship
• Self-help/Management change
• Beneficiaries of Covid/Lockdown
• Increasing capital efficiency
• Total shareholder returns
• Pricing Power

The investment process focuses primarily on bottom-up fundamental analysis, combining in-house analysis, company meetings and external research. Fundamental analysis is undertaken by the dedicated AXA IM Equity team and drives stock selection, with valuation central to the decision-making process. Some of the key attributes that the team is looking for include:

• Company and management strength
• Management track record of delivering earnings growth
• Appropriate funding structure
• Low capital intensity
• Diverse customer base
• Organic Growth
• Market Position
• Pricing power
• Market leadership
• High barriers to entry

A critical aspect of the manager’s fundamental research is meeting with company management. This first-hand information and insight is very important in the analysis process as it allows the manager to effectively test the quality of the company’s leadership, scrutinise the quality of the business franchise and evaluate management’s strategy for growth. Meetings with management must fully validate the Fund manager’s initial views and investment reasoning.

Valuation is key

 Ultimately, every investment decision taken by the fund manager is considered in the context of the potential for growing income with some prospects for capital growth, relative to the price paid. To ensure we do not overpay, each prospective company is subjected to a full evaluation of its financial and operational structure in conjunction with its prevailing market value. Using quantitative analysis, the manager focuses principally on absolute valuation, supplemented by relative valuation – a multitude of valuation methods including earnings yield and growth, dividend growth, free cash flow yield, return on capital and price/earnings ratio.

Ethical Screening

Holdings in the equity sleeve of the AXA Ethical Distribution Fund are screened by a third party, currently Sustainalytics. Stocks will only be held where companies’ products, services or method of operation do not involve, conduct or carry out:

• testing on animals or use of animal tested product
• gambling
• violations of human rights
• intensive farming
• significant sales to the international military
• unacceptable levels of water pollution
• the use of unsustainable timber
• activities deemed detrimental to developing countries, or
• derive a significant proportion of their annual turnover from fossil fuels, energy intensive industries, mining, nuclear power, ozone depleting chemicals, pornography and adult entertainment or tobacco.

2.2 Bond selection

Initially, the Fixed Income investment committee (the Forecasting Group) comprising AXA IM’s Fixed Income team, the Macroeconomic Research team, the Credit Research team and Portfolio Engineering Group meet regularly and make recommendations formalised in the Active Strategy Sheet. Factors such as the health of the UK and global economy, inflation and interest rate expectations, as well as market specifics such as bond issuance, are carefully considered to determine short-term tactical over, or underweight positions.

Our fixed income managers also take duration, curve, break-even curve, inflation arbitrage etc. into account to determine the choice of securities and instruments, best suited to the fund’s active strategy. Valuation is a key focus, with analysis of historical and forward-looking index-linked yields, relative to the real growth rate of the economy, forming an important element of gauging value in the index-linked bond market.

As far as issues selection is concerned, the funds have exposure to UK gilts, mainly index-linked bonds in particular. With both the income and capital value at redemption directly linked to the change in the RPI or CPI – and guaranteed by the British Government – index-linked gilts continue to offer stable, real returns, regardless of the prevailing economic conditions. Furthermore, index-linked gilts also serve as an effective risk diversifier to the overall portfolios, due to their long-term low correlation with other major asset classes, particularly during times of market uncertainty and high volatility.

Step 3: Portfolio construction

 The aim of the portfolio construction is to create a diversified portfolio reflecting the bottom-up security selection approach within a strong risk framework.

The AXA Ethical Distribution Fund has a 60% hard limit to UK equities.

Within the equity sleeve, every investment decision taken by the manager is considered not only in the context of the potential return of an individual holding, but also the effect that it will have on the diversification and risk exposures of the overall portfolio. The portfolio typically holds between 50 and 70 stocks from across the UK market capitalisation spectrum, depending on market conditions.

With regards to our “sell discipline”, if the original reason for a stock purchase no longer applies, the stock is then considered as a potential sell. This can be based upon a variety of factors, including, but not limited to, there being a threat to the balance sheet, a risk in the business, a change to management, a product failure, etc. Whilst a company may still be retained if there is scope for corporate activity, the opportunity cost of continuing to hold a disappointing investment is constantly borne in mind to ensure the best opportunities are being pursued at all times.

The bond allocation is constructed with the objective of dampening the volatility of the overall mandate whilst generating positive incremental income and returns. It is based on the following investment principles:

• Income generation and lowering volatility
• Maximising risk-adjusted performance
• Protecting against downside risk through diversification

The equity investment team meets regularly with the fixed income team to share ideas and debate on the different views on bond markets. The duration of the bond portfolio will depend on the analysis of the economic cycle and the likely trend for interest rate movements. Risk diversification is a key aspect of the overall portfolio in order to efficiently protect the downside and limit risk, therefore the bond component will aim to have a low correlation with equities.

For the portfolio construction and risk oversight, the portfolio managers benefit from the active support of the Core Investment Analytics (CIA) team.

Continuous risk management

The investment process is an interactive one that continually tests whether the original thesis for including a stock in the portfolio still holds. Companies are continuously monitored, with valuations, growth outlook and risk profiles reviewed in accordance with current market/sector themes and news flow.

Portfolio reviews and disciplined risk management are core to our investment approach and fully embedded within our investment process. The monitoring of portfolio exposure is continuously operated by the portfolio managers with the support of the CIA team:

• For the overall portfolio: the fund managers continuously review of the shape/balance of the portfolio and associated risks. The manager also undertakes a constant, rolling review of companies invested in, both on a quantitative and qualitative level. The CIA team monitor risk exposures, providing a formal monthly report detailing stock and sector risks, as well as the style biases that the portfolio contains.
• For the fixed income sleeve: the risk positions are reviewed weekly by the portfolio engineers and the portfolio managers. These meetings compare current portfolio risks against the current strategies of the portfolio management team, examining amongst other elements, portfolio tracking error, a versatile portfolio risk analysis system designed by the Portfolio Engineering and Solutions team. Risk factors considered include: nominal curves, issuer and agency spread, expected inflation and realised inflation; together with exposure on these risks factors, volatility and correlation are calculated to provide an overall portfolio tracking error decomposition.

Resources, Affiliations & Corporate Strategies

External Qualitative Research: We use the research of ESG specialists like MSCI, Sustainalytics, ISS (proxy voting and UN SDG alignment) to complement the contribution of quantitative ratings. Investment professionals also have access to external qualitative research through brokers, etc.

Internal Qualitative Research: The RI research capabilities are organised as follows:

• A central ESG Research Team focusing on thematic research, corporate governance, and shareholders engagement as well as on developing quantitative solutions. Climate, human capital/ diversity, and health have been identified as the key thematic priorities for this team.
• ESG specialists within the investment platforms conduct ESG analysis at the company level.

We have 34 dedicated RI experts, embedded within investment and research teams, who are responsible for our RI related activities and cover Research, Data/Scoring, Analytics, Stock/Credit Analysis and Active Ownership/Engagement.

We can also rely on 100 professionals whose RI is an essential in their day-to-day routine; this category of staff is composed of portfolio managers, credit analysts, sales, investment analytic people and Investments specialists.

More specifically, the RI research capabilities are organised as follows, within AXA IM Core:

• A RI Research team responsible for thematic research with a focus on climate, biodiversity, human capital & diversity as well as health, nutrition, and data privacy, ensuring it translates into implementable investment decisions across platforms. This team also leads shareholders engagement on those themes. Within this team, dedicated RI Analysts are in charge of defining the eligible Green, Social and Sustainability bonds universe. They rely on our proprietary framework notably inspired by the Green and Social Bond Principle (GSBP) and the Climate Bonds Initiative (CBI) Standards.
• A RI Coordination and Governance team responsible for transversal RI projects and corporate governance including voting policy on key themes mentioned above. The Active Ownership strategy is built and led jointly with the RI Research team.
• A RI Solutions, Tools and Models team dedicated to the development of ESG quantitative solutions. As such, the team has developed a proprietary ESG framework and RI Search platform, providing portfolio managers and analysts with ESG raw quantitative data, KPIs, internal and external research and ESG scores.
• ESG specialists within the investment platforms oversee product development, the operational implementation of ESG processes, building portfolio RI eligible universes and support the integration of ESG criteria and RI approaches within portfolio construction and decision-making processes.
• ESG analysts integrated within investment teams: ESG specialists are embedded the investment teams to conduct ESG analysis at the company level, working closely with fund managers. They integrate ESG criteria in their assessment of an investment, our conviction being that ESG provides a complementary analysis to traditional financial research; these issues may have financial impacts for companies in the short and/or long-term time horizon.
• Impact analysts integrated within investment teams: they perform qualitative impact analysis on companies based on five key pillars, reviewing their products or services and operational activities to demonstrates whether a company contributes to the Sustainable Development Goals or to a specific impact.

ESG related business development activities are led by specialized investment specialists, who work hand in hand with investment teams. Ultimate accountability for responsible investing lies with Hans Stoter, Head of AXA IM Core.

We play a proactive role in several industry initiatives and groups and take a leadership role as often as possible, including those listed below:

• 30% French Club Investor Group,
• 30% UK Club Investor Group,
• 30% Japan Club Investor Group,
• Advance,
• Access to Medicine Index,
• Access to Nutrition Initiative,
• ALIGN Project under EU Business@Biodiversity programme,
• Asset Management and Investors Council (AMIC) - Sustainable Finance Working Group,
• Association Française de Gestion (AFG) - Responsible Investment and Corporate Governance Committees,
• CDP (Carbon Disclosure Project),
• CERES,
• ChemSec,
• Climate Action 100+,
• Climate Bonds Initiative,
• Coalition Transition Juste,
• CRREM,
• EC B@B (European Commission Business@Biodiversity),
• ESG Open Data Platform,
• European Commission Platform on Sustainable Finance,
• European Fund and Asset Management Association (EFAMA) Stewardship and ESG Standing Committee,
• European Public Real Estate Association (EPRA),
• Eurosif (European Sustainable Investment Forum),
• European Sustainable Real Estate Initiative (ESREI),
• FAIRR,
• Finance for Biodiversity Foundation,
• Forum per la Finanza Sostenibile (ItaSIF),
• FIR (Forum pour l’Investissement Responsible - France),
• GIIN (Global Impact Investing Network),
• Global Canopy,
• Green Building Council Italie,
• GRESB (Global Real Estate Sustainability Benchmark),
• International Corporate Governance Network (ICGN),
• ICMA – Green and Social Bond Principles,
• ICMA - Sustainable Finance Committee,
• IIGCC (Institutional Investors Group on Climate Change),
• Impact Management Project,
• INREV (European Association for Investors in Non-Listed Real Estate Vehicles),
• International Sustainability Standard Board (ISSB),
• Investment Association (IA) - Sustainability and Responsible Investment Committee,
• Investor Alliance for Human Rights,
• Institut de la Finance Durable – Investors for a Just Transition,
• Nature Action 100,
• Net Zero Asset Managers,
• Observatoire de l'Immobilier Durable (OID),
• One Planet Asset Management WG,
• Operating principles for Impact Management,
• UN PRI (Principles for Responsible Investment),
• Responsible Investment Association Australasia, SASB –
• Sustainable Trading,
• Sustainability Accounting Standards Board,
• Taskforce on Scaling Voluntary Carbon Markets,
• ULI (Urban Land Institute),
• UN PRI - Deforestation Commodities Practitioners Group,
• UNEP FI (United Nations Environmental Program Finance Initiative),
• VBDO (Dutch Association of Investors for Sustainable Development),
• World Benchmarking Alliance,
• World Economic Forum (WEF) – Net Zero Carbon Cities

Dialshifter

This fund is helping to ‘shift the dial from brown to green’ by..

The fund aims to remove the worst offenders in terms of their unethical practices from the equity sleeve of the portfolio, ensuring that only companies that meet strict ethical guidelines are invested in. Directing money to these more ethical companies supports progress and investment for the greater good.

Our organisation is helping to support the Paris Climate Agreement and the Race to Net Zero by...

The road to net zero is challenging to navigate and requires a collective effort. We want to be one of the leaders on this journey: in our investment choices, the products we offer, the way we engage and vote, and manage our business.

This includes our commitment to manage 65% of our total 2022 AUM in line with net zero by 2050 and to aim to exit all coal investments in OECD countries by 2030. Furthermore, we use of a carbon transition framework to track the progress of companies towards net zero targets and helping us to engage accordingly.

Literature

• Fund overview & literature (including factsheet)
• Engagement Report
• TCFD Report
• Responsible Investing
• Policies & Reports

Disclaimer

This document has been prepared by AXA Investment Managers for the sole use of the company to whom it is addressed. It may not be copied or circulated, in whole or in part, outside that company, without the prior written consent of AXA Investment Managers. Whilst reasonable care has been taken by AXA Investment Managers to ensure that this document is current at the date of issue, no warranty of accuracy is given, and any information contained within it may be subject to change without notice. Furthermore, the data including but not limited to scenarios and investment guidelines set forth in these materials are presented for indicative and/or illustrative purpose and such data including but not limited to scenarios and investment guidelines could vary significantly from the final investment policy and/or actual results. The figures provided relate to previous months or years and past performance is not a reliable indicator as to future performance. The value of investments may fall as well as rise and investors may get back less than they put in. Nothing contained within this document shall constitute an offer to enter into, or a term or condition of, any contract with the recipient or any other party. This document shall not be deemed to constitute investment advice, or an offer for sale or solicitation to invest in any particular fund. Subscriptions to funds are accepted only from eligible investors on the basis of the relevant current prospectus or Information Memorandum.

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In September 2023 AXA streghthened their RI policies:

• Climate Risk
• Controversial Weapons
• EcoSystem Protection & Deforestation
• Soft Commodities

Please see the text under “Exclusion” in each section for changes.

No major changes have been made to the AXA IM ESG Standards Policy, however this document was also updated and strengthened as at September 2023.

The policies can be found on the AXA IM website (Our Policies and Reports | AXA IM UK (axa-im.co.uk)).

Last amended: 01/11/23 10:59