Sustainable, Responsible &/or ESG Policy:

While the team’s process is a rigorous and detailed one, the investment philosophy is based on an incredibly simple premise: if a company is capable of contributing solutions towards the underserved needs of people and our planet, that company will be rewarded with a growing market. The term “underserved needs” is simply another way of phrasing an equation many would have learned in Economics, i.e. Demand > Supply.

Never before has this gap between demand and supply been wider, as consumers, companies and governments start to wake up to the imperative of changing our systems of growth, to be able to allow our children and their children to continue to enjoy the fruits of productivity.

The team’s investment philosophy is built on the belief that innovative companies on a mission to solve the challenges increasingly faced by our environment and society are well-positioned for growth in the future, particularly where this need for a solution remains largely unmet; ultimately, these underserved societal and environmental needs represent demand for a product or service that is scarcely available. Companies that are able to fulfil these needs should therefore be rewarded with revenue growth, as the size of the market into which they sell their core products grows, and this is particularly true if their solution uses a degree of technological ingenuity or a differentiated approach. The team’s belief, based on practical experience, is that innovation follows a repeatable pattern that can be identified early with a process designed to capture it.

As the underlying products and services sold by the portfolio’s investee companies are at the early stages of their adoption, their potential for growth tends to be scarcely understood by the market. Companies focused on selling these solutions are typically inefficiently valued, with their underlying growth forecasts anchored in the past. The team’s rigorous research-based approach attempts to exploit this market inefficiency. In essence, to capture the compounding benefits of innovation and growth, at the shareholder level, investors need a long term investment perspective.

What makes this strategy so original and authentic is its razor-sharp focus on the innovative impactful solution driving the investment case, as summarised by the phrase, the impact case is the investment case. What this means is that the team focus only on those companies where the potential growth in demand of this particular impactful solution can be transformative to the company in question’s future revenues and earnings, such that the investment case hinges on the success of the adoption of this particular solution in gaining adoption.

The solutions to such underserved environmental and societal needs are identified using their innovative Regnan SDG Taxonomy, which draws on the 169 targets that underlie the 17 SDGs. The SDG Taxonomy identifies potential products or services that can contribute towards the achievement of these targets, helping them identify listed companies that sell such products and services, understand the market growth opportunity for these solutions and therefore understand to what extent these companies can drive a positive impact and how large they can grow as a result.

Ultimately, the team believes that global equity benchmarks are a representation of what worked in the past, and not what will lead to success in the future. As systems change, the team’s philosophy and the process in place to execute on this philosophy are expected to provide returns that are significantly ahead of the market and conventional global equity strategies, as the companies in their clients’ portfolio mature from industry leaders in nascent industries to mainstream players that have displaced the incumbents that were unable to adjust to the new, sustainable reality we are transitioning towards.

Integration of ESG analysis into the investment process

The Fund focuses on both performance and impact concurrently, so that one is dependent on the other. The financial returns of the companies we invest in are ultimately dependent on how their products and services are solving major environmental or social challenges. Demand for these products and services drives up their revenues and profits. The team’s approach is unique in that we make performance and impact entirely interdependent, and we invest in companies that are leading their industry in providing the best, or one of the best, solutions to a particular environmental or social challenge. Ultimately, the team’s goal is to provide above market returns by investing in those companies driving broader and long-term system change for the better.

ESG analysis is integrated throughout the process in the following ways:

The team’s idea generation leverages insights from the Regnan SDG Taxonomy, which identifies impact solutions contributing to the 169 specific SDG targets, and is based on in-depth research on the environmental and social impact of each product and service area.

The balance stage of the impact assessment scrutinises any negative environmental or social externalities that may occur alongside the positive impacts generated by the company. This may include, for instance, scrutinising ecosystem impacts of renewable energy projects, the affordability challenges related to drug pricing, or the carbon and energy footprint of the manufacturing of a new battery chemistry.

Once the team have all agreed that the company passes the Impact Assessment, they will shift their focus onto valuation. The Value Analysis stage includes three sub-stages: 1) Value Creation analysis, 2) Value Distribution analysis and 3) Value Gap analysis.

The Value Creation stage integrates a review of corporate governance, including a proprietary governance score and qualitative analysis of the company's disclosures which incorporates the use of external data sources. Future Value Creation will be dependent on the extent to which this impactful solution is adopted further in the future, as demand is driven by market growth.

Value Distribution concentrates the bulk of the traditional ESG analysis, through a framework which is aligned with the Future-Fit Breakeven Goals. This includes a review of the company’s carbon, water and waste footprints, ecosystem impacts, employee health and safety, diversity, supply chain management and business ethics. This stage takes a wider perspective to understand how value is created and distributed between environmental and social stakeholders and to assess how a company is governed. This analysis also extends to a company’s supply chain management and may inform engagement activities. By way of example, the team have been engaging wind energy companies on the environmental issues within their supply chains, in particular the need to expand decarbonisation efforts to raw materials such as steel used in wind turbines, as well as the recyclability of composite materials used within wind blades.

The team’s approach examines ESG performance by combining the analysis of ESG data reported by companies, together with a qualitative analysis of the company’s performance. This analysis enables the team to develop an informed view of the intrinsic ESG quality of the company. The underlying conviction is that, while it may be difficult to directly attribute specific ESG elements to specific financial metrics, the ESG quality is an indicator of the company’s overall operating quality and helps identify key risks and opportunities.

Value Gap includes a review of external ESG ratings, in order to understand the gap between the team's view of a company's intrinsic ESG performance, and the market's consensus view of ESG performance embodied by ESG ratings.

The team’s own ESG quality assessment is compared to the market’s ESG consensus view. This is done by analysing external ESG ratings and identifying inconsistencies where they exist. The underlying conviction is that ESG is increasingly integrated by investors, and thus informs valuation, but most investors rely on simple quantitative ESG screens which fail to fully encapsulate companies’ intrinsic ESG quality. This represents an additional source of potential upside for the team when identifying high quality ESG companies, or companies that are transforming into high quality ESG businesses.

There are occasions where the portfolio may include some companies with low ESG scores from external ESG ratings providers; which between them, can differ in their assessment of ESG quality and can be narrow in their focus. This happens when the team, through its own thorough ESG analysis using primary sources, believes that external ESG ratings misunderstand the intrinsic ESG quality of the company. The team are happy to provide examples on request.

Negative Screens

The Fund will avoid investing in companies directly involved in the following activities:

• Fossil Fuels - companies that directly undertake fossil fuel exploration or extraction (specifically, coal, oil and gas) or earn 10% or more of total revenue from fossil fuel-based power generation, or fossil fuel distribution or refinement (coal, oil and gas).
  
  Companies (or issuers) with a climate transition plan may be exempted from this exclusion, provided that they: have in place a credible Paris Agreement aligned transition plan and produce robust climate-related financial disclosures annually.

• Uranium - companies that earn 10% or more of total revenue from direct mining of uranium for the purpose of weapons manufacturing
• Tobacco - companies involved in tobacco production (including e-cigarettes and inhalers)
• Weapons and armaments - companies that directly manufacture controversial weapons (such as cluster munitions, landmines, biological or chemical weapons, depleted uranium weapons, blinding laser weapons, incendiary weapons, and/or non-detectable fragments) or earn 10% or more of total revenue from manufacture of non-controversial weapons or armaments.
• Gambling - companies that earn 10% or more of total revenue from manufacture, ownership, or operation of gaming services or other forms of wagering
• Pornography - companies that earn 10% or more of total revenue from manufacture or distribution of pornography
• Alcohol - companies that earn more than 10% of their total revenue from the production of alcoholic beverages

Current Themes

The Regnan SDG Taxonomy is an in-depth framework the team has developed to understand the complexities and investability of the UN SDGs and their underlying targets as the challenge to be met, which drives their edge. The team are able to draw on the Regnan Insight and Advisory Centre’s* (Regnan Centre) proprietary expertise and external network to help them understand which of the solutions they have identified represent the optimal way of driving change, that will culminate in them meeting an SDG target. The Regnan SDG Taxonomy has driven the creation of “impact solution groups”, and these impact solution groups will change and evolve over time, as the taxonomy helps the team – together with the help of Regnan Centre – to identify new solutions, some of which may replace previously identified solutions as the best option, and some of which may create new investment themes that the Fund invests in, and given that the taxonomy itself is continuously evolving and growing, so too is the investment universe.

Currently, the Fund addresses eight specific investment themes:

• Health & Wellbeing
• Energy Transition
• Circular Economy
• Future Mobility
• Food Security
• Education
• Financial Inclusion
• Water

As the team’s edge is in understanding the problems, within each of these eight areas that correspond to multiple UN SDG targets, they then draw on external knowledge and research which, combined with their own research, helps identify which of the solutions in their taxonomy is best suited to solving particular problems.

These themes may be further expanded in the future, if the investment team or Regnan Centre identifies a new solution to a specific SDG Target that is not covered by any of the above themes.

*Regnan serves as a Responsible Investment (RI) brand within the wider Group (including JOHCM), acting as a global centre of excellence for RI practices. It is also the brand for our sustainable and impact investment strategies. The Regnan Centre is a highly-qualified, multi-disciplinary team – with a deep understanding of material ESG and sustainability issues and stewardship services that affect long term value.

Process:

The team have built a unique and rigorous process, designed to ensure that only truly mission-driven companies, which are able to drive additional positive impacts through the sale of an ingenious solution to a particular UN SDG target, make it into clients’ portfolios. When a new company is identified using the Regnan SDG Taxonomy and it is decided that this company’s particular solution could create a scalable positive impact by contributing to the achievement of an SDG target using a differentiated and potentially ingenious solution, and is therefore expected to have a significantly larger addressable market in the future than the size of its market today, the entire team will then turn their attention to this particular company, and it is guided by the sponsor of the idea (one of the team) through the rest of the process until a buy decision is made.

The decision to add a new name to the portfolio has to be unanimous between the four team members, and this facilitates more informed measurement, engagement and monitoring after the company has been added to the portfolio and ensures that any team member can challenge the underlying investment thesis and be able to recognise when a change in circumstances may have invalidated this thesis.

It should also be emphasised that every stage of the investment process is conducted by the investment team, rather than being outsourced. The team feel strongly that all of the post-buy process, including impact measurement, engagement (with all portfolio holdings) and ongoing monitoring of the company’s development, must be carried out by the same people making the investment decisions, as these are an important contributor to a particular investment’s long-term returns. This is made possible by the diversity of experience that the team has, and if needed, the team are able to draw on the specialist knowledge of the Regnan Centre, or their network of external specialist contacts, at any stage of the process.

Investment universe

The investment universe is populated as an output from the Regnan SDG Taxonomy. The Regnan SDG Taxonomy is a proprietary framework, created by the team in 2017 to better understand sustainability challenges, as represented by the UN SDGs, and match them to commercially available solutions that seek to address these challenges and which are marketed by companies listed on global stock exchanges. As such, the the construction of the investible universe is built using positive inclusion rather than negative exclusion.

The 17 SDGs are broad goals underpinned by 169 actionable targets. Some of these targets can be matched to a product or service that helps to achieve this sustainability target, which is sold by a company whose equity is listed on a global stock exchange. The investment team, in conjunction with the Regnan Centre, undertake research to determine the universe of companies producing these products and services, and which are investable via listed equity on recognised exchanges.

The development of the taxonomy is an ongoing effort in order to improve the team’s understanding of existing solutions in which the portfolio is currently invested, monitor competition from potential competing solutions and seek to identify new solutions to enter into the taxonomy against particular SDG Target(s) when discovered.

While the taxonomy is a “living document” and will grow continuously as the team and their Regnan Centre colleagues learn about new solutions and monitor the evolution of those solutions already identified, the team has so far found that 50 of the 169 SDG targets are currently addressable through public equities and identified over 2,100 companies that have relevant products and services, which contribute towards achieving one or more of the 169 targets as part of their business (at least 30% of revenue). Those companies that meet these criteria and have a market capitalisation in excess of USD 200 million, comprise today’s investment universe.

Idea Generation

The Regnan SDG taxonomy is the starting point for thematic and solutions-based research. It not only provides the basis for the team’s investment universe, but also functions as a tool for identifying the most promising companies. The Regnan SDG taxonomy allows the team to understand the size, in revenue terms, of the total addressable market for these products and services today, the scope for potential growth of this market and where in the value chain companies have a chance to create lasting value. The team is especially interested in intellectual capital and where a substantial investment in research has been made. The companies that meet these criteria have the scope to drive the largest positive impact by contributing a unique solution to a sustainability problem and will thus be prioritised for further due diligence.

At this stage of the process, this does not mean that every product or service market has yet been studied in detail. Indeed, some technologies may be too conceptual and far-off from commercialisation and at this stage are simply monitored. For example, floating offshore wind, electricity generation from wave power, or solid-state batteries for passenger vehicles are all interesting technologies to monitor over the long-term but are yet to demonstrate their viability.

With other products, while they may clearly be commercially viable in a potentially large and fast-growing market, it may also be clear, without the need for further investigation, that there is little unique intellectual capital or operational differentiation within this particular sub-industry, and therefore it is unlikely that any single company is delivering a unique, additional impact. In these cases, where the competitive dynamics do not justify current work, this particular solution is retained in the taxonomy and is monitored for change.

For those products and services that the team believe have a forecastable and substantial potential for economic profit growth within the next five to ten years, the underlying companies will graduate to the next stage of the process, as detailed below.

A large part of the team’s time is spent in this stage, researching and learning about new products and services and the technologies that underlie them. The work carried out by the team is transparent and collaborative with the Regnan Centre and, where appropriate, may involve discussion with J O Hambro Capital Management’s investment teams. This has the added benefit of challenging the assumptions that underlie the forecasts of current holdings and monitoring potential substitute technologies and competing companies.

Impact Assessment

This stage assesses the companies that have passed through idea generation and involves the first round fundamental analysis of these companies. All companies that are considered for inclusion in the portfolio must meet the team’s impact assessment requirements; a five-step qualitative assessment which every potential investment has to unanimously pass before graduating to the next stage of the process. A single member of the team (the sponsor) takes ownership of a company and its peers through to this stage.

It ultimately represents a series of meetings, discussions and primary research that all members of the team contribute to analysing, which avoids information asymmetry in the team, and may include meetings and consultations with experts, academics and / or external research and non-governmental organisations, with the ability to tap into Regnan Centre’s network, if required. The investment team must agree unanimously that a company has “passed”, before it can be taken further through the process.

The five areas of assessment are:

• Nature - passing this test requires the team to prove that the product or service under review is directly responsible for driving or enabling a positive impact and therefore achieving a particular SDG target. This effectively seeks to validate the Theory of Change that is hypothesised at the SDG Taxonomy stage.
• Intentionality - this is an assessment of how central this particular product or service is to the company’s mission to drive a positive impact and involves understanding how core the impact solution is to the company’s strategy and its actual delivery.
• Additionality - this focusses the team’s understanding on the additional positive impact that is created by the existence of the company’s product or service, and involves answering the question of whether this positive impact would indeed have occurred to the same extent, had the company’s unique offering not existed.
• Balance – given that no company is ever a “perfect operator”, there will always be negative impacts that are generated by any business, even if a company’s mission is ultimately a positive one. This stage assesses what those negative impacts are, whether generated by the product or service itself, the company’s operations or by a supplier or customer of the company and how these negative externalities ultimately balance out or offset the positive impact driven by the sale of the product or service by the company. These negative impacts will form the basis of the team’s engagement objectives with the company.
• Directionality - this stage seeks to understand the direction of travel of all of the above, and assess whether the company’s net positive impact will be greater or lesser in the future.The end result is a clear understanding of the company’s impacts, both positive and negative, and its direction of travel. The team is highly selective and only graduates those companies where the net impact is assessed as overwhelmingly positive.

Value Analysis

Value Creation Analysis

Companies that have passed the Impact Assessment stage will then move on to the value creation analysis stage. It is important that this stage is not carried out earlier so as not to compromise the ideas and to ensure a good understanding of the issues and risks so that a thorough evaluation of the potential for long-term value creation is made.

The sponsor continues to take ownership of the idea through this stage to ensure the checklist is completed thoroughly, however once again, all members of the team will contribute in the analysis and challenge the ideas and assumptions proposed by the sponsor.

The first stage is to formulate a clear estimate of the total addressable market the company would derive its growth from. This is done over the long-term, typically ten years, so as to fully capture the power of compounding in these fast-growing areas, as well as potential cyclical elements to the market evolution.

The team then analyses the competitive dynamics within this addressable market. While the addressable market size and growth profile is an important driver of value creation, it is critical to understand the business model the company has developed to tap into that growth; how does the company earn revenue, and is this changing? This is compared to the position and strategies of competitors, which helps to understand the company’s market share and its likely evolution throughout the forecast period.

The track record of the company is analysed, reviewing its ability to generate strong cash flows while using capital efficiently. This enables the team to understand operating leverage, and the scalability of the business, as it grows into its addressable market.

The result of this stage is to understand what success would look like, in terms of future cash flows delivered over the next ten years, and stress test this for both more optimistic and less optimistic market growth/revenue scenarios, in order to understand how different growth outcomes may affect the company’s net cash flows. Critical to this is the team’s work on the ability of the company to ‘beat the fade’ and sustain its edge over this long period.

1. At the Value Creation stage, the team typically observe the following metrics, amongst others:

• Total Addressable Market for key impact solution (current and forecast)
• Cash Flow Return on Investment (CFROI)
• Sales growth
• Asset growth
• Gross and operating margins
• Asset turnover
• R&D as a percentage of sales
• OCF/net income
• Accruals ratios

Value Distribution Analysis

The next stage is to assess whether the value created by the company will be shared equitably among all stakeholders that helped generate that value and ensure that the business is operated in such a way that gives the team confidence it can sustain its growth trajectory over the long-term.

The Value Creation Analysis stage looks at how value is created, as a numerical exercise. Whereas this stage is a test of sustainability of corporate culture and mission, with a view to understanding who this company exists to serve, and whether this business model and the growth it generates can have true longevity. This analysis is looking at efficiency through the use of all types of capital; physical and financial capital, but also human, societal and environmental capital.

To do this, the team looks at how the company has historically allocated the cash it has generated between the different uses of this cash. The team seeks to understand, among other things, how cash flows have been allocated between reinvestment for maintenance of the operating base, reinvestment for growth and acquisitions versus how much has been paid out to shareholders via dividends or buybacks. The team also looks at the tax paid by the company, and how this compares to revenue and profits, and whether the company has behaved in such a way as to artificially deflate its tax liability (for example, “tax base inversion” acquisitions).

The team investigates how staff are treated and the trend of investment in human capital. It is the team’s belief that companies with engaged management, flat structures without excessive rewards relative to other employees, ideally with staff ownership of the company, are most likely to be successful.

Finally, the team reviews the customer value proposition. Pricing trends help understand how the value proposition to customers is changing - and whether the company has had a history of continuously increasing price without increasing value for money for the end customer.

This stage also incorporates data and analysis from external ESG providers, which feed into the team’s report. The team also integrate the Future-Fit break-even goals, which provide a holistic framework to consider the social and environmental issues facing companies which goes beyond traditional ESG data and ratings. Further details of ESG integration are provided below.

2. At the Value Distribution stage, the team typically observe the following metrics, amongst others:

• $ Sales per tonne of GHG (scope 1 & 2)
• % electricity from renewables
• $ Sales per m3 water used
• $ sales per tonnes of waste
• Employee turnover
• Total recordable incident rate
• % women in workforce
• % women in management
• CEO comp to avg employee

At the measurement stage of the investment process, specific metrics for each holding are monitored, based on what is reported by the company. Where relevant impact metrics are not available, the team engage with the company to improve disclosure of impact metrics.

Value Gap Analysis

The Value Gap analysis is the main area where consensus data is utilised, in order to understand to what extent the team’s estimates and the assumptions on which they are based, differ from those in consensus forecasts (“the value gap”).

Once the team has built conviction in the assumptions that underlie their cash flow forecasts and assessed the sustainability of the business’ growth trajectory and that value generated will be distributed sustainably, their financial forecasts are then compared to consensus in a ‘gap analysis’. Importantly, the team looks at forecasts available in the market as well as the ‘embedded market forecast’ by reverse engineering the company’s current market value to understand the cash flow growth rate that is implied by the current market valuation, beyond what is being forecast by consensus, or terminal growth rate.

This allows the team to form a view on the extent of upgrades that will be required to reach their estimates, within the forecasting period, and the extent to which there is further potential for upside to consensus estimates beyond this.

The team is careful about anchoring on target prices and, instead, has a focus on the key drivers of success for the company and continually monitors and challenges those assumptions, as part of the process of maintaining the Regnan SDG Taxonomy discussed above. This means that the team’s expectations will also evolve over the course of the holding period and are continuously compared against the market-implied forecasts on an ongoing basis, in order to determine when the value gap has closed and whether the time has come to exit the investment.

Risk Analysis

The final part of the analysis is to “stress-test” assumptions by identifying and estimating the key risks that could potentially derail the company on its track to long-term success. Key to this analysis is understanding what kinds and levels of risks are acceptable, how they can be monitored, and whether the company could be encouraged to address these through the team’s engagement.

The team documents main risks to thesis / assumptions, differentiating between risks that would cause them to sell (thesis impaired) versus risks that would not cause them to sell, but which may warrant reducing the position size temporarily (thesis delayed by exogenous factors, such as the business cycle turning down).

These include traditional risks such as macroeconomic exposure or currency risks, as well as sustainability factors, such as climate-related physical asset risk or cybersecurity risks, depending on the relevance to the company.

Ultimately, the team buys cultures alongside stocks and answers the question ‘do you want to own this company run by these people?’

Final Decision

Ultimately, the decision as to whether the shares are undervalued by the market will rest upon the analysis of the valuation gap – the difference between the team’s estimates/financial assumptions and those of the broader market, as represented by the sell-side consensus. If the team’s estimates are substantially ahead of those in the market and the team have confidence in these estimates, there is a high probability that future earnings expectations will need to rise in order to reflect the company’s financial potential, which will also drive up the valuation of the company.

The extent of the gap between the key assumptions that drive the company's net cashflows will also be considered alongside current market multiples for the company, and their level relative to its historical range. The team will typically require a larger value gap and/or less cyclicality of cash flows for businesses that trade on higher-than-market multiples, whereas the team may accept a lower value gap for companies that are on lower market multiple and / or be willing to accept that there is a greater cyclical component to this company's revenues and earnings through the course of the expected holding period.

The team will also impute their financial assumptions into a reverse DCF model, in order to understand whether the current market price already accounts for the upside that the team have to the sell-side consensus earnings expectations. If this is not the case, and there is a substantial value gap between the team’s long-term estimates and those of the market, the team will look to invest.Once the team have unanimously agreed that the investment is a buy, it is placed onto a buy list, where the discretion is left to the portfolio managers as to when the investment is added and how the position is built and sized.

Buy/Sell Discipline

Buy Discipline:

The portfolio takes a high conviction, high active share approach and only invests in listed entities that sell a product or service which offers a unique solution to either an environmental or societal issue, as defined by the 17 UN SDGs, and where that product is at the core of the listed entity’s business and expected to grow to generate the majority of its future revenues. This is the main constraint for investment, and the team has an established and proven process that seeks to extensively verify both positive and negative impacts created by the entity and the value chain in which it operates, along with the financial prospects and value creation and distribution, for any potential investment. As such, the portfolio will be constructed with companies of all market capitalisations, however it is expected that the majority of names will be in the USD 1 billion – USD 20 billion range, at the time of initial purchase.

Decisions to add a security to the portfolio need to be unanimously agreed by the team. As described above, this involves the complex matter of building an investment case by breaking it down into a series of questions that need to be answered for the team to build conviction. The research process is structured into sub-processes and consistent checklists at each individual stage, which ensures that the same rigour, depth and quality are applied to every single investment that makes it into the portfolio. Under no circumstances will any element of the process be bypassed. Key considerations are highlighted below.

Why do we add a company to the Watchlist from the SDG Taxonomy?

At least one team member believes that:

• There is evidence that the market for the solution the company sells will multiply over the coming 5 years AND
• There is strong reason to believe that the company will meet the INTENTIONALITY test in the team’s Impact Assessment (and therefore market growth will result in material revenue growth for the company)

Why do we add a company to the Buy List from the Watchlist?

All four team members agree that the company has:

• Passed the Impact Assessment AND
• There is a value gap such that on the team’s forecasts the company’s shares can appreciate by 50% over the next two years and then double within 3-5yrs

Why do we add a company into the portfolio from the Buy List?

The portfolio managers agree that the timing to add the company to the portfolio is right because:

• The company has positive earnings momentum AND
• The stock has factor exposure that is additive to the portfolio in the current market environment

Sell Discipline:

The team will exit a holding in a company if one of the following conditions has been met:

• A change/development invalidates the investment case or the Impact Assessment
• The team discovers a company that offers a better impact solution or one whose valuation offers better risk-reward
• The equity is no longer undervalued
• The trust in the company is damaged and/or the company is no longer willing to engage

Turnover is expected to remain low for the Fund, as the target holding period will continue to be 5-10 years, and potentially longer than this for less mature names.

For core holdings that drop in-excess of 10% relative to the market in a single day, a review is triggered to assess any new information and how it might change the team’s assumptions in the stock research report.

In the event that the stock price has reacted to news which the team had factored into its assumptions, or that the team believes represents a temporary set-back to the investment thesis, this could represent an opportunity to add to the position, either immediately or after the initial volatility has settled down. The decision to do so will be taken by the portfolio managers, after consulting and discussing the issue with the team.

If the team discovers that the move is the result of a change or new information which may invalidate the investment thesis or impacts assessment, the company will typically undergo a detailed 360-degree review – unless they are able to determine that the thesis is broken without further investigation. As described in the section above, this involves running the investment through the process to determine whether it would still be a buy.

At the end of the 360-degree review, if it is determined the thesis is impaired (one or more of the exit conditions discussed above is found to be in place), the holding will be exited. The team have typically come to a unanimous consensus when this has been the case in the past, however in the event that there is a lack of agreement, the lead portfolio manager has discretion on whether to sell the holding.

Portfolio Construction

All new buy decisions must be reached unanimously by all members of the team, and the same holds true for a company to be graduated from each stage of the process. Once the team has agreed to buy a particular company, the shares are put onto a Buy List, leaving the portfolio managers to decide when and how the shares are acquired.

This will be when the company is showing positive earnings momentum and when the characteristics of the particular stock are additive to the overall portfolio. Typically, the new holding will be initiated at a position size that reflects the median-weight in the portfolio, however price action and/or the prevailing short-term news flow may warrant a more gradual approach in some circumstances.

For the purposes of ongoing portfolio management, the portfolio managers will review the portfolio weekly and systematically rebalance the holdings after consultation with the full team. The lead portfolio manager retains the ultimate discretion over the holdings, and may unilaterally decide to sell a holding, should extraordinary circumstances dictate the need for a quick exit decision in order to preserve client capital.

Over the holding period, all names in the portfolio are expected to contribute significantly to the long-term returns of the portfolio, albeit at different stages of time, therefore the team endeavours to keep core holdings in the portfolio broadly equal-weighted over the long-term, while individual position sizes may be varied within a range of 1%-6% of the portfolio’s NAV, to take advantage of short-term momentum and protect clients’ capital by ongoing systematic rebalancing. The weightings are determined by the portfolio managers, with a view to managing both the shorter-term idiosyncratic risks, as well as considerations of the macroeconomic cycle, and how these are likely to affect specific factors within the portfolio. In practice, this means that the portfolio is regularly re-balanced, in order to ensure that portfolio risk/reward are not dominated by a single or small cluster of holdings.

Within the 25 - 50 holdings that the portfolio may consist of at any one time is included a Risk-Adjusted bucket, differentiated from the Core portfolio.

Core portfolio

The Core portfolio holdings will range from 1% - 6% of the total portfolio NAV and will be rebalanced systematically, considering idiosyncratic and macroeconomic drivers.

Risk-Adjusted portfolio

At the point when these positions are initiated, the value of the equity is largely considered to be an option, as the team have assessed that the solution sold by the company in question is likely to achieve success, however they cannot forecast with conviction the timing and cadence of the inflection of cash flows for this company from negative to positive.

This bucket will include holdings whose market cap is between USD 200 million and USD 1 billion, where the value of the company is reflective of the earlier stage of the opportunity, and in which typically business risk and liquidity risk are both elevated.

Such positions will not exceed 1% of NAV at their initiation, and will not be scaled up with assets, as the assets under management of the Fund grow. The number of Risk-Adjusted positions will typically range from three to five, and successful investments will all be expected to graduate into Core portfolio positions once their market cap has expanded such that liquidity risk is reduced, as a result of more visibility in their operations.

The positions are established so that the team can begin to engage with the company’s management and are often the result of participation in an equity raise by the company.

Impact Measurement

The team endeavours to gather data on pre-selected Key Performance Indicators (KPIs) on an ongoing basis, that are used to measure the positive impact that the company’s products or services have had over the course of the year, for the purpose of tracking the net impact and communicating it to clients within the annual impact report.

After investment, the team will seek to measure both the company's negative and positive impacts on an annual basis. The team’s proprietary impact measurement framework consists of several elements, both quantitative and qualitative, and has been constructed to account for the complexity of impact measurement.

Part 1 of the impact measurement framework focuses on measuring the positive impact of the company’s products and services, not its operations. This first part consists of three steps.

• Formulation of a Theory of Change (ToC). The ToC is a qualitative, narrative description of the impact hypothesis/case for the investment.
• Formulation of the Pathway of Change (PoC). The PoC breaks the ToC down into a sequence of cause-and-effects, notably from input to output to outcome to impact. It also aids identification of metrics which can be measured over time. 
• Measurement and tracking of one portfolio-level metric (impact materiality, measured as percentage of revenue linked to positive impact products and services) and several, idiosyncratic company-level metrics (which will vary on a company-by-company basis).

Part 2 of the impact measurement framework focuses on the measurement of negative impacts which are also engaged-upon by the team are targeted for mitigation through engagement. These negative impact metrics, or KPIs, are thus used to quantitatively complement engagement checkpoints. For example, an engagement objective focused on improving health and safety might, in addition to checkpoints, periodically track the company’s Lost Time Injury Rate (LTIR) to monitor and evaluate engagement progress.

Engagement

The team’s engagement programme is an integral part of the investment process and directly linked to the output generated by other stages of the process. The objective of engagement with portfolio companies is to contribute towards the improvement of these companies’ overall net impact. Engagement activities thus aim to both reduce negative impacts, as well as amplifying positive impacts of portfolio companies.

The team engages with every portfolio company, albeit to varying intensity, depending on the materiality of the engaged-upon issue. Furthermore, the team will seek to determine willingness to engage prior to investment and divest if a company is no longer willing to engage. Most engagement meetings are one-on-ones, however the team do at times raise engagement topics at group meetings with management.

Engagement is long-term and outcomes-focused, and thus guided by engagement objectives, which are formulated on a company-by-company basis. Engagement objectives focus on reducing materially negative impacts that the company is generating, identified during the Balance stage of the Impact Assessment, and further refined during the “Value Distribution stage of the process.

As long-term investors, the team’s mindset and engagement perspective is welcomed by most companies because the team invest in businesses that largely want to improve. The approach to engagement is to view it a constructive process, which also acts as a positive feedback loop. These companies are generally interested in mitigating any negative impacts they have on people and the planet as it not only makes them better corporate citizens but it can also make good financial sense.

Any engagement work is led by the team but also supported and enhanced by the research capabilities of the Regnan Centre, which provides long-standing and in-depth experience in analysing sustainability factors and driving change through engagement, with a solid research foundation rooted in the heritage from Monash University.

Once a portfolio company’s range of material, negative impacts has been identified and analysed, the team conducts a proprietary, four-step engage-ability assessment (detailed below) to determine engagement priorities with each of their portfolio companies. The aim of this engage-ability assessment is to focus their engagement strategy on the most value-additive areas, as well as to increase the likelihood of engagement success. The engage-ability assessment also recognises that not all negative impacts are not necessarily engageable, and that engagement on some objectives is likely to generate more positive impact than engaging on others. The engage-ability assessment consists of four stages:

• Opportunity cost: Given that the team has finite time and resources, an engagement objective needs to be set in the context of all portfolio companies.
• Know-how: Linked to opportunity cost, this assesses the degree of the team’s knowledge pertaining to the negative impact.
• Access: Assesses whether the team’s relationship with the company and its governance structure lend itself to engagement.
• Additionality: Assesses how many investors are already engaging with this company, and how many are specifically engaging on the negative impact.

One of the four criteria used to identify these value-additive areas is ‘additionality’. The ‘additionality’ criterion is asking the question: How many other stakeholders (not only investors, but also NGOs) already engage on this issue today? In other words, “is their additional engagement on the issue likely to significantly, or only marginally, mitigate this negative impact?” The team try to assess their additionality by drawing on a variety of sources: the company itself, other investors, non-profits and brokers.

Whenever possible, the team engage on issues that have high additionality; i.e. issues that other stakeholders currently do not engage on. Often high-additionality areas are more identifiable for smaller companies than for larger companies, as well as for companies listed in the Eastern hemisphere, where engagement is less pronounced amongst investors.

Engagement progress is tracked via SMART (specific, measurable, attainable, realistic and, time-bound) engagement objectives. Engagement objectives are set on a company-by-company basis. Progress towards completion of the engagement objective is tracked via three ‘checkpoints’ or milestones. Engagement checkpoints are typically structured in the following way:

• Checkpoint 1: Company commits to change.
• Checkpoint 2: Performance suggests that company is on track.
• Checkpoint 3: Engagement objective is met.

Whenever possible, engagement checkpoints are complemented by tracking relevant Key Performance Indicators (KPIs). For example, an engagement objective focused on improving health and safety might, in addition to checkpoints, periodically track the company’s Lost Time Injury Rate (LTIR) to monitor and evaluate engagement progress.

The confidential results of engagement meetings, progress and outcomes will be summarised and made available to clients.

Voting Practices

As active stewards, the team makes voting decisions internally. The team will either vote in favour of or against a resolution rather than abstain, unless in exceptional circumstances, in order to most effectively leverage its shareholding for positive change. The team keeps a record of their voting rationales in case of voting against management recommendation. Voting decisions are made in the context of the engagement strategy, objectives and progress that is being pursued with the individual company. The overriding consideration in forming a voting decision is whether it increases the likelihood of achieving positive change.

Regnan adheres to J O Hambro Capital Management’s voting policy which is operational and consistent with the FCA Rulebook requirements. It addresses responsibilities, processes, governance and enforcement.

Monitoring

The team aims to conduct a formal 360-degree review for each company at least once a year, which seeks to re-run each of their holdings through the investment process. This helps mitigate the endowment effect by challenging the team to show they would still buy the investment today, at the current market price, given the prevailing conditions and developments since the original initiation of the investment in the portfolio.

The 360-degree review may also be triggered by the team if new information or developments have occurred which the team have discussed and believe that they could affect the investment case. The review helps determine the extent to which the valuation expectations may change or whether the investment should be exited.

Resources, Affiliations & Corporate Strategies:

Consistent with our multi-boutique structure, we do not subscribe to a ‘house’ approach to ESG integration or stewardship. Each of our investment teams continues to evolve its own approach to integrating ESG and sustainability considerations into its investment process and stewardship practices as it sees most relevant to its respective strategies.

The Fund is managed by the Regnan Equity Impact Solutions team. The team consists of Tim Crockford - Head of Equity Impact Solutions and Senior Fund Manager, Mohsin Ahmad – Fund Manager, Maxime Le Floch – Senior Analyst and Laura Sheehan - Senior Analyst. The Fund uses the same investment philosophy, style and process that the team used to great effect at their previous employer, Federated Hermes (Hermes). The team previously managed the Hermes Impact Opportunities Equity Fund, which they launched in December 2017.

One of the distinguishing features of the Strategy is the team's flat structure with regards to how they make investment decisions. Each person brings their unique background and skill set to the team; everyone is seen as equal with respect to their view and contribution to the investment process.

All new buy decisions must be reached unanimously by all members of the team. However, for the purposes of ongoing portfolio management, the fund managers retain discretion over when a new position is added from the buy list, how that position is built over time, topping-up and trimming holdings within the portfolios. Tim Crockford, as lead fund manager, retains the ultimate discretion over the sale of portfolio holdings, should extraordinary circumstances dictate the need for swift action, although past sale decisions have typically been reached unanimously across the team.

Additionally, if needed, the investment team is able to draw on the specialist knowledge of the Regnan Centre or their network of external specialist contacts at any stage of the process, both in terms of in-depth research into particular solutions and broader themes.

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Affinity

JOHCM has built the Sustainability Platform, Affinity. Affinity brings together in one place a wide variety of structured and unstructured sustainability metrics, many of which are required under diverging global regulations. The platform allows teams to record how sustainability characteristics are considered, adverse impacts assessed (and recorded), and sustainability assessments achieved. Voting and engagement activities are recorded directly on the platform.
We have also now deployed a proprietary data science tool called "Horizon" that goes beyond traditional methods. Horizon projects a company's future emissions trajectory based on their carbon reduction pledges, not just a single point estimate. This creates a range of possible outcomes, giving a more nuanced picture of climate risk. This helps us assess the credibility of their pledges and identify potential risks or opportunities. Horizon incorporates new data as it becomes available, automatically recalculating the emissions trajectory and target alignment score. This ensures our analysis stays up-to-date with a company's progress. The model factors in external forces like government regulations, industry initiatives, and consumer pressure, providing a more comprehensive view of the factors influencing a company's emissions. This expertise in quantifying externalities comes from our partnership with University of Exeter.

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Governance

We have a clear governance structure underpinned by technology to support effective oversight and accountability. Our chosen governance framework reflects our commitment to responsible investing, aligning investment practices with evolving regulatory requirements and broader sustainability goals, and, most importantly, helping clients meet their long-term savings and retirement goals. Our approach aims to maintain integrity, meet evolving client expectations, and effectively navigate the expanding regulatory landscape, and is consistent with our culture and values.

We have robust decision-making processes and lines of responsibility to respond to evolving stewardship, sustainable investing practices, and regulatory developments. In summary, we continue to ensure our governance structures and processes enable effective stewardship through means such as:

• Executive Committee – Has overall responsibility for implementing the company's strategy, including stewardship principles. Regular monitoring of responsible investing risk and attending meetings by the Head of Investments and co-heads of the Sustainable Investments team to provide insights on sustainability risks.
• Investment Oversight Committee – Conducts frontline oversight of sustainable investment practices of each investment team, including stewardship matters such as proxy voting. Subject matter experts review and monitor key sustainability indicators generated through the proprietary Affinity platform.
• Feedback Integration – Actively seeking and integrating feedback from Internal Audit and the Funds’ Depositories on sustainability management into governance structures.
• Quarterly Portfolio Reviews – Sustainability factors are included in quarterly portfolio reviews by the Risk, Trading and Sustainable Investments teams in conjunction with the Head of Investments and portfolio management teams.

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Signatory/membership of sustainable investment initiatives

JOHCM is a member / signatory of the following organisations / industry initiatives:

• Principles for Responsible Investment (PRI)
• Financial Reporting Council’s (FRC) UK Stewardship Code
• Investment Association
• Investor Forum (UK)
• The Investing and Savings Alliance (TISA)
• Share Action's Healthy Markets Initiative

Dialshifter

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

...generating a positive impact by investing in companies that have the potential to address the world’s major social and environmental challenges, using the UN SDGs as an investment lens. The investment team will measure and monitor the positive and negative social and environmental impacts of potential investment opportunities. Additionally, they will seek to understand a potential investee company’s culture and attitude with respect to governance, and therefore how open the company would be to engage with the team, so it may seek to reduce negative environmental or social impacts the company may have.

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

JOHCM is dedicated to offering a variety of actively managed funds and strategies aimed at supporting clients' savings and retirement objectives. Our long-standing role as trusted stewards involves managing, growing, and safeguarding client wealth, a commitment honed through historical challenges including wars, recessions, and financial crises. Recognising the significance of climate change and its economic implications is integral to our mission. Addressing the risks associated with an unsuccessful transition to a low-carbon world is essential for safeguarding the financial returns critical to our clients’ future wealth.

SDR Labelling:

Sustainability Impact label

SDR Literature:

• Consumer Facing Disclosure