Oct 23, 2010 - Revenues: Existing or future products to meet E challenges. Presence ... For each RI fund: Rigourous inve
How ESG adds value to the investment process Human Capital management & Axa WF Framlington Human Capital
Pierre Stiennon Finance Avenue - AXA IM on Responsible Investment Brussels – Saturday 23rd October 2010
Agenda Part 1 – Introduction Part 2 - Core beliefs
ESG indicators
Part 3 - Process of AXA WF Framlington Human Capital
Performance
Contact:
[email protected] Tel + 33 1 44 45 74 56
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AXA Framlington: Strength of an equity culture
Fundamental equity specialist, based in London and Paris Paris, managing over €20.1bn €20 1bn of assets Focus on delivery – range of products focused on performance performance, derived from fundamental bottom-up stock selection Well resources, experienced team – 54 man fund management team: senior fund managers have on average over 15 years’ investment experience Accountability – Experienced investors given freedom to invest with full accountability Risk controls – Management oversight and integrated risk management team together with oversight from independent internal group
Source: AXA IM as at 31/07/2010. 3 13711
AUM by geographical region GEMS 3%
Japan 1% US 2%
France 9% Europe 45% Global 19%
UK 21%
Belief 1: ESG is often subtle & complements financial analysis
E: Companies that offer solutions to environmental problems via products & services that limit the ecological impact & also add economic value to their users = outperformers S: Companies that take care of their employees by valuing them as human capital rather than just an operating expense will increase their productivity and return on HC employed = outperformers G: Companies that have a set of well functioning rules whereby management is sufficiently controlled by the board & able to deliver value to all shareholders = outperformers ESG is a leading g indicator of p performance & risks over the LT. Reflects on q quality y of management. g Not necessarily immediately financial but can quickly become so Underestimated byy most brokers & fund managers g
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Belief 2: Corporate communication on ESG rarely gives the full picture
What a matters a e s is s what a co companies pa es do rather a e than a what a they ey say. say For o eac each company, co pa y, we e look oo a at the e market position & value chain incl. clients & suppliers
Good ESG analysis is based on what matters (= criteria) & track record (= achievements)
Company that integrates ESG in strategy, operations, & communication reflects on its strength. “Silo” approach suboptimal
Need to carry in depth ESG analysis in order to add value to investment process
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Corporate governance: Need for specifc analysis ?
“Half of the directors I’ve met on corporate boards don’t know anything y g about business. They y are not going to do anything that not only gets them kicked off that board but that reduces their chances of getting on another one.”
Source: Warren Buffett, CEO & chairman of Berkshire Hathaway Inc, AGM May 2009
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Governance indicators: Beyond the rules, look at track record on the ground 1. Separation of function between Chairman & CEO (If no, why?) 2. Personal & professional links between Chairman & CEO 3. Number of executive managers on the board 4. Number & proportion of independent board members 5. Competence, age, diversity, nber of external mandates, years on the board – Quality of the board 6. Number of bankers & ex bankers on the board – Link with external growth 7 Examples of independance of the board vis a vis management 7. 8. Remuneration structure of management – Look at KPIs, incentives, and time horizon 9. Organisation of risk control within the board - Loot at board committees 10. Controversies & quality of shareholders relations
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Human capital indicators: Importance of progress over time & peer comparison
1. Voluntary turnover ratio, esp. among managers (resignations) 2. Level of absenteeism per unit or site 3. Frequency & severity of work related accidents including mortality 4. Investments made to reach specific security levels per unit, site, or business 5 Career development, 5. development succession plan plan, & internal promotion rate - Look at growth strategy 6. Investments made to reach certain skills levels among employees 7. Employees shareholding level & company policy 8. Results of employees survey & level of engagement 9. Ability to hire new talents (“employer of choice”) - HR planning needs 10. Quality of social dialogue & ability to restructure smoothly - Look at position of HR director
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Environmental indicators: Some sectors clearly more exposed than others 1. Costs: - Internalised risks: Carbon emissions, credits received & price of carbon. CDP reporting useful. Look at energy mix & sourcing Access to water & natural resources. - Externalised risks: Pollution, contamination, deforestation… – Including suppliers & clients in the chain – Look at maintenance capex & public breaches of applicable standards - Risks insurable (or not) - Risks prevention: Look at ISO 9001: Quality mgt, ISO 14001: Environment, OHSAS 18001: H&S (also ISO 22000 for food safety) 2. Revenues: Existing or future products to meet E challenges Presence & sustainability of subsidies (solar…) Look at R&D strategy 3. Control & management: E knowledge at mgt & board levels – Risk committee at board level Non financial criteria in compensation structure
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ESG: Compensation structure is a key driver of behaviour
Social ------------------------------------------- Environment
Governance
Remuneration
Strategy & Finance
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What are our main sources of information?
Annual reports (20F, document de référence…..) – A mine of information Brokers research – Trading oriented (direct analyst’s contacts most useful) Industry reports (Carbon disclosure project….) – Selectively useful Direct contacts with companies (at all levels – incl. board) – Critical ESG rating agencies – Good on recent company progress Voting advisors reports’ ahead of AGMs – Very detailed on G
External & internal input is stored in RI SEARCH internal database
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For each RI fund: Rigourous investment process from the given investment universe
1. Funds investment universe 2. Fundamental analysis & company meetings
RI T Team = ESG criteria
PMs + RI team = Financial & ESG analysis
3. Portfolio construction
Managementt M = Sector weighting & stock picking
4.Follow up on portfolio
Management + RI M = Regular meetings
Discussions / Adjustments j
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Process, Holdings & Performance of AWF Framlington Human Capital
“Human Capital is crucial for all companies, but is critical for small and mid capitalisations during their rapid development phases”
Human Capital Investment Universe
Human Capital Investment Universe
Initial Investment Universe Pan-European mid and small capitalisations DJ Stoxx Small 200 + DJ Stoxx Mid 200 Market cap. than the sector average Excluded company: HC score < than the sector average
Exclusion (negative screen) for tobacco & defence companies
* If E or G score < 3, required approval from the RI team
Approx 260 valeurs
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Portfolio construction
Sector & Thematic Active Exposure
Investment guidelines
Macro economic trends
Ex Ex-post post tracking error monitoring
Country specific
Max. 4% position in 1 security
Regulation
Max. 3% of a company’s market
Consolidation
cap.
ESG alerts Social alerts:
Max. M cash h position iti 10% Exclusion of worst in class securities on social criteria
Company visits, succession planning, dismissal of key managers managers…
Specific analysis by RI team on
Other extra financial alerts:
securities having a RI score < 3/10
Corporate Governance, Environment
on one of 2 criteria E or G
Approx 70-80 stocks
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Depending on the investment strategy used the information contained herein may be more detailed than the information disclosed in the prospectus. Any such information (i) does not constitute a representation or undertaking on the part of the investment manager; (ii) is subjective and (iii) may be modified at any time within the limits provided in the fund prospectus
Follow up of portfolio: Sell discipline
Systematic reviews:
Financial criteria
When Wh a mid-cap id stock t k becomes b a large-cap l stock t k Advice change of the small-cap team When the stock reached its target price After each publication of results As a result of contacts with the company or its competitors Changing in the economic environment which requires a revision of forecasts
Extra financial criteria
Social alerts and other extra-financial alerts If RI score on Environment or Governance criteria < 3/10
S ll disciplines: Sell di i li (financial (fi i l and d extra-financial t fi i l criteria) it i )
If security > 3% of a company’s market-cap If security > 4% of the portfolio Negative change of the company (strategy / management) Negative change of the economy or the market environment If RI Score – based on Human Capital criteria < sector average If recommendation of sale by RI team for the securities with E or G score lower than 3/10 If a company is out of the eligible investment universe (market cap. > € 10 Bn ex-index)
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AXA AWF Framlington Human Capital F Eur adds value: 4.92% outperformance p since launch Net performance since inception (29/10/07) 110
50% DJStoxxMid200 + 50% DJStoxxSmall200
100
AXA WF Framlington Human Capital 90
-15.52%
80
-20.44%
70 60 50 40 30 Oct-07
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Dec-07
Feb-08
Apr-08
Jun-08
Aug-08
Oct-08
Dec-08
Feb-09
Apr-09
Jun-09
Aug-09
Oct-09
Dec-09
Feb-10
Apr-10
Jun-10
Aug-10
YTD
1Y
SL (29/10/2007)
Net performances
11,39%
16,64%
-15,52%
Relative net performance
-0,44%
0,69%
4,92%
50% DJStoxxMid200 + 50% DJStoxxSmall200
11,83%
15,95%
-20,44%
Funds volatility
20,77%
20,12%
22,08%
Benchmark Volatility
21,12%
20,33%
25,35%
Source: AXA Investment Managers (Part F) as at 30/09/2010. Performance are net of fees. The figures provided relate to previous months or years and past performance is not a reliable indicator as to future performance. 50% DJStoxxMid200 + 50% DJStoxxSmall200 index is not the benchmark of the fund and is only used for illustrative purposes.
AXA WF Framlington Human Capital: Top 10 bets
Fund
Benchmark
Relative weight
ESG Score*
Human Capital Score of the sector*
UMICORE
1,69%
0,28%
1,41%
7.8
7.3
SCANIA
1 71% 1,71%
0 39% 0,39%
1 32% 1,32%
62 6.2
57 5.7
GEBERIT
1,28%
0,00%
1,28%
8.2
6.4
KINGFISHER
1,25%
0,00%
1,25%
6.0
4.8
SWEDBANK AB
1,23%
0,00%
1,23%
8.8
5.7
MARKS & SPENCER GROUP
1,22%
0,00%
1,22%
5.8
4.8
TECHNIP
1,21%
0,00%
1,21%
9.2
6.1
JOHNSON MATTHEY
1,54%
0,35%
1,19%
7.8
7.3
HENKEL AG & CO
1,18%
0,00%
1,18%
8.2
6.1
CASTELLUM
1,46%
0,29%
1,17%
6.9
5.5
Company
Source: AXA IM as at 30/09/2010. ESG score and average Human Capital score of the sector are as at August 2010 18
AXA WF Framlington Human Capital: Sector breakdown I nd us t r i a l s M at er ials F i na nc i a l s C o ns ume r D i s c r e t i o na r y E ne r g y C o ns ume r S t a p l e s I nf o r ma t i o n T e c hno l o g y He a l t h C a r e U t ilit ies T e l e c o mmuni c a t i o n S e r v i c e s 0 ,0 0 %
5,0 0 %
10 , 0 0 %
15 , 0 0 %
A XA WF Framlington Human Capital
2 0 ,0 0 %
2 5,0 0 %
3 0 ,0 0 %
3 5,0 0 %
4 0 ,0 0 %
50% DJ Stoxx Mid 200 + 50% DJ Stoxx Small 200
Source: AXA IM as at 30/09/2010. 50% DJStoxxMid200 + 50% DJStoxxSmall200 index is not the benchmark of the fund and is only used for illustrative purposes. 19
4 5,0 0 %
QUESTIONS & ANSWERS
THANK YOU
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AXA WF Framlington Human Capital Legal form Legal Rules Inception date
Luxembourg SICAV Sub-Fund UCITS III 30/10/2007
Currency
Euro
Exit Fees
0%
Maximum Management Fees (A / E / F / I / M) Maximum Subscription fees (A / E / F / I / M) Initial minimum subscription amount (A / E / F / I / M) Subsequent minimum subscription amount (A / E / F / I / M) Share classes
ISIN Code (A / E / F / I ) Management company Investment manager C t di and Custodian dT Transfer f A Agentt Valuation Risk Recommended Investment Horizon
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2.50% / 2.50% / 1.50% / 1.50% / 0% 5.50% / 0% / 2.00% / 0% / 0% 0 / 0 / 500,000 / 5 000 000 / 0 0 / 0 / 10,000 / 1 000 000 / 0 Capitalisation and Distribution LU0316218527 (A Cap Cap.)) / LU0316218873 (E Cap Cap.)) / LU0316219095 (F Cap.) / LU0372523448 (I Dis.) AXA Funds Management AXA Investment Management Paris St t Street State St t Bank B k Luxembourg L b Daily C: risk of capital loss but limited to the capital invested Up to 8 years
Disclaimer The information contained herein is confidential information supplied at the sole request of the recipient By accepting this information recipient. information, the recipient agrees that it will not divulge any such information to any other party. Any reproduction of this information, in whole or in part, is prohibited. This document is for informational purposes only and does not constitute, on AXA Investment Managers Paris part, an offer to buy or sell or a solicitation or investment advice. AXA Investment Managers Paris disclaims any and all liability relating to a decision based on or for reliance on this information. AXA INVESTMENT MANAGERS PARIS, a company incorporated under the laws of France, having its registered office located at Cœur Défense Tour B La Défense 4, 100, Esplanade du Général de Gaulle 92400 Courbevoie, registered with the Nanterre Trade and Companies Register under number 353 534 506, a Portfolio Management Company, holder of AMF approval no. GP 9208 issued on 7 April 1992 08, 1992.
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