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Engagement Policy


Statement on the JOHCM Engagement Policy
 

1. Introduction

This document sets out the approach of both J O Hambro Capital Management Limited and JOHCM Funds (UK) Limited (collectively in this document “JOHCM”) to the issue of how they engage with the companies in which they invest.  It serves to demonstrate their compliance with the Financial Reporting Council’s Stewardship Code (the “Code”).  References to each of the principles of the Code is set out at various points below. 

Additionally, this document also sets out the approach of JOHCM to the new obligations introduced by the implementation of the amended Shareholder Rights Directive (“SRD II”) into UK law.  

JOHCM notes that a revised version of the Code is due to be issued shortly.  As such, the issue of stewardship and engagement with the management of the companies in which it invests is an area of continuing focus for JOHCM and this policy will be developed further in due course once the updated Code is published.

The principles of the Code are as follows:

“So as to protect and enhance the value that accrues to the ultimate beneficiary, institutional investors should: 

1.    publicly disclose their policy on how they will discharge their stewardship responsibilities. 
2.    have a robust policy on managing conflicts of interest in relation to stewardship which should be publicly disclosed. 
3.    monitor their investee companies. 
4.    establish clear guidelines on when and how they will escalate their stewardship activities. 
5.    be willing to act collectively with other investors where appropriate. 
6.    have a clear policy on voting and disclosure of voting activity. 
7.    report periodically on their stewardship and voting activities.”


2. Approach to Engagement

Principle 1 – Investors should publicly disclose their policy on how they will discharge their stewardship responsibilities.

JOHCM runs over 20 investment strategies, principally investing in equities. Each of its investment teams is small and has investment autonomy; there is no central investment approach. JOHCM’s Investment Director and Risk team provide comprehensive oversight of the investment teams and their strategies.  On a quarterly basis, there is a formal review that incorporates an analysis of the performance, decision-making, risk profile, fund liquidity, compliance and the ESG characteristics of the holdings.    

The principles of the Code are integrated in our investment decision-making processes, rather than being devolved to a separate team.

JOHCM believes that this results in better quality investment decisions for clients. In some cases, it uncovers specific strategic and governance issues on which it engages with company management or directors. JOHCM’s fund managers believe in the value of meeting company management and see hundreds of companies each year.  Some recent examples of our engagement are outlined later in this document. 

JOHCM targets engagement activities specifically, in the belief that this approach yields the best results for its clients’ portfolios and makes the most efficient use of fund managers’ time.

JOHCM has also made a point of complimenting company management on good practices, in addition to raising concerns.  It is always easy to find fault, particularly with the benefit of hindsight. JOHCM believes that it has a better chance of maintaining an open and constructive relationship with companies if it does more to acknowledge when actions lead to good long-term results.


3. Conflicts of Interest

Principle 2 – Investors should have a robust policy on managing conflicts of interest.

JOHCM’s approach to conflicts management consists of the following stages:

•    Identification of conflicts of interest
•    Recording of conflicts of interest in the JOHCM Conflicts Register
•    Implementing appropriate procedures and measures to prevent or manage conflicts of interest which have been identified
•    Monitoring the effectiveness of JOHCM’s conflicts management arrangements, including this Conflicts Policy
•    Provision of information to clients, including disclosure of conflicts of interest where required, provided that disclosure may only be used as a last resort where the arrangements established by JOHCM to prevent or manage conflicts are not sufficient to ensure, with reasonable confidence, that risks of damage to client interests will be prevented
•    Reporting to senior management in relation to conflicts of interest. 

This approach is detailed in the JOHCM Conflicts of Interest Policy


4. Monitoring of and Engagement with Investee Companies


Principle 3 – Investors should monitor their investee companies.

JOHCM’s portfolios typically have a high active share. JOHCM fund managers always research investee companies in detail and frequently discuss a variety of issues with executive and non-executive officers. These include:

•    the performance of the business and the execution of the strategy;
•    capital allocation decisions; 
•    the risk within the business and the industry;
•    environmental and social impact and corporate governance (“ESG”) factors.

A lot of time is spent by the investment teams on studying the governance of the business and the appropriateness of the incentive schemes and behaviour of the management.  To complement our analysis, JOHCM uses MSCI’s ESG Ratings research to capture potential areas of concern on our holdings. This tool also allows us to analyse the profile of each investment strategy versus its investment benchmark. This is incorporated in the regular quarterly review of each strategy conducted by JOHCM’s Investment Director. 

Companies which fall into the lowest category on the ESG Ratings screen are reviewed for justification of holding by the fund manager and ratings downgrades are monitored.  On occasions, fund managers escalate key issues for discussion with a company’s advisers or directly with management. 

Principle 4 – Investors should establish clear guidelines on when and how they will escalate their stewardship activities.

JOHCM views ‘monitoring’ and ‘escalation’ as part of the same process.  Where a fund manager has particular concerns, they will engage in detailed discussion with a company's board, executive management and/or its advisers.  The fund managers often pursue specific issues directly with company management and will escalate governance and strategy concerns with the Senior Independent Director or company Chairman, using the UK Corporate Governance Code as their guide and applying the same principles to non-UK holdings. 

Principle 5 - Investors should be willing to act collectively with other investors where appropriate.

JOHCM fund managers act with other investors where appropriate. However, collective action is not an end in itself.  Fund managers will sometimes discuss their views on companies with other investors where acting together increases the chances of bringing about change.

During the course of 2018, JOHCM fund managers have been in close contact with boards of a range of companies, seeking to highlight and potentially improve management behaviour, strategic decisions and effectiveness of incentives.

The examples below refer to these companies in generic terms as some of the discussions are private and ongoing.

•    Kier:
the fund managers highlighted a number of governance, oversight, risk management issues which the firm consistently failed to address.
•    Diageo: the fund managers had a call with Remuneration Committee to feedback their concerns about absolute pay levels the multiples of base salary in LTIP.
•    Kao Corp, Aekyung: JOHCM questioned both firms about their plastics packaging policies (recycling, etc.).
•    Sainsbury’s: the fund managers addressed their concerns about the steady deterioration in distinctive corporate culture. 
•    Givaudan, Symrise: both firms confirmed the absence of phthalates in products produced.
•    McCarthy & Stone: feedback from the fund managers on the positive changes to the structure and incentives in the LTIP.
•    Smiths: JOHCM successfully engaged on the company’s stalling organic growth. Organic growth metrics were introduced into the LTIP structure alongside ROCE, cash flow and EPS growth.
•    Sage: the fund managers suggested broader metrics to include measures of customer satisfaction, new products and cash conversion. 
•    Unilever: JOHCM proposed measures such as product vitality, organic volume growth and ROIC instead of margin targets for future LTIPs.

The above examples give a flavour of the discussions that JOHCM fund managers have had with companies during 2018. In many cases, there is an ongoing exchange between JOHCM fund managers and the management of investee companies. JOHCM is happy to discuss specific situations in more detail wherever possible.

It is worth noting that JOHCM fund managers have for many years maintained a high level of contact with company management that facilitates these discussions. JOHCM has a long history of talking to companies about matters of strategy, remuneration and financial performance and welcome the recent increase in scrutiny of investors’ ‘stewardship’ and ‘engagement’.

 

5. Voting

Principle 6 - Investors should have a clear policy on voting and disclosure of voting activity

JOHCM’s approach on voting is outlined below. 

As a fund manager, JOHCM is required to adopt and implement robust, written policies and procedures designed to ensure that, when voting proxies in respect of the securities that it manages for its clients:

•    it does so in the best interest of its clients, addressing any conflicts that may arise between its interests and those of its clients;
•    it discloses to clients how they may obtain information from the firm about how the firm voted with respect to their securities; and
•    it describes to clients its proxy voting policies and procedures and, upon request, furnishes further details of these policies and procedures to clients upon request.

JOHCM has established procedures to ensure that all proxies that are received are properly distributed and voted on a timely basis in the best interest of the client. To support this, JOHCM has engaged Broadridge Proxy Edge and ISS Proxy Exchange to facilitate its voting and engagement activities. ISS is used for research and recommendations and Broadridge Proxy Edge is used to vote.

The JOHCM Operations team will gather details of all upcoming Annual General Meetings and Extraordinary General Meetings. Details of the agendas will be circulated to all relevant fund managers for consideration.

Where ISS research highlights issues which do not represent best practice the agendas are also shared with the Investment Director for consideration.  In these cases and others if appropriate, the fund managers may choose to discuss these issues directly with company management.  If necessary, they will escalate governance and strategy concerns with the Senior Independent Director or company Chairman when shareholder value and shareholders’ rights are being infringed, using the UK Corporate Governance Code as their guide for UK holdings, and applying the same principles to non-UK holdings.  Fund managers may engage in discussions with other investors where appropriate and in compliance with market conduct rules.

After careful analysis, the fund manager makes a voting decision. Where ISS research indicates that company proposals do not contravene international governance best practice, JOHCM will typically vote in favour of management’s proposals.  

The fund manager’s decision is communicated to the Operations team where an authorised individual will submit the proxy vote using Proxy Edge. 

JOHCM understands the importance of voting proxies and will cast its vote proxies in the best interest of its clients. Should a conflict of interest arise between JOHCM's interests and those of a client, JOHCM will arrange a discussion with such client to review the proxy voting materials and the conflict and will obtain the client's consent before voting. If JOHCM is not able to obtain the client's consent, JOHCM will take reasonable steps to ensure, and must be able to demonstrate, that those steps resulted in a decision to vote the proxies in the best interests of the client.

JOHCM's voting records are held on Broadridge’s ProxyEdge system; JOHCM Proxy Voting 2019 

JOHCM is happy to discuss its voting activity or discourse with company management should clients or potential clients have a particular interest.
 

7. Reporting

Principle 7 - Investors should report periodically on their stewardship and voting activities

A version of this document has been published annually to provide a review of JOHCM’s stewardship activities. JOHCM notes the additional requirements of SRD II and will during the course of the coming year decide on its approach to those additional requirements.

 

J O Hambro Capital Management Limited
JOHCM Funds (UK) Limited
10 June 2019

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