Sustainable, Responsible &/or ESG Policy:

Only funds that are awarded an RSMR Responsible rating can be included in the RSMR Responsible MPS Portfolios.  Funds that are rated as RSMR Responsible are applying more than just ESG into their process.  This can be considered as ESG plus with each Responsible rated fund also being categorised in one of the following four areas:

• Sustainable – Funds that select and include investments on the basis of responsibly contributing and benefiting the global sustainable economy. This may include referencing the portfolio to one or more of the UN Sustainable Development Goals (SDGs) or the application of a screen.
• Impact – Funds that can demonstrate that they are aligned to the Global Impact Investing Networks definition of Impact.
• Thematic – Funds that use macro themes to identify long term responsible structural growth trends.
• Ethical – Funds that apply a screen, either positive, negative or both, that may be based on ethics or on a ‘best in sector’ approach. Each fund will have its own defined screen and this may vary between providers.

Process:

The four portfolios are based on the proprietary RSMR asset allocation process that comprises a strategic asset allocation determined by the MPS Investment Management Committee, supported by the wider RSMR Asset Allocation Committee, which both meet quarterly.  A tactical asset allocation overlay is applied by the portfolio managers, who meet monthly.

Only funds that are awarded an RSMR Responsible rating can be included in the RSMR Responsible MPS Portfolios.  Funds that are rated as RSMR Responsible are applying more than just ESG into their process.  This can be considered as ESG plus with each Responsible rated fund also being categorised in one of the following four areas:

• Sustainable – Funds that select and include investments on the basis of responsibly contributing and benefiting the global sustainable economy. This may include referencing the portfolio to one or more of the UN Sustainable Development Goals (SDGs) or the application of a screen.
• Impact – Funds that can demonstrate that they are aligned to the Global Impact Investing Networks definition of Impact.
• Thematic – Funds that use macro themes to identify long term responsible structural growth trends.
• Ethical – Funds that apply a screen, either positive, negative or both, that may be based on ethics or on a ‘best in sector’ approach. Each fund will have its own defined screen and this may vary between providers.

The combination of these four core areas of Responsible Investment allows for a pragmatic investment solution for advisers.  Responsible rated funds are monitored as part of the RSMR monthly sector committee, which is central to the wider fund rating process, as well as monthly by the MPS Investment Management Committee to ensure that they are still suitable for inclusion within the Responsible MPS Portfolios.

RSMR Responsible Investment fund rating process

Research Process

The initial fund analysis takes each Investment Association (IA) sector and looks at a range of performance and risk measures that are appropriate to that sector.  Funds that display attractive performance and risk characteristics may then be taken forward for further analysis. 

Both quantitative and qualitative measures are used to ensure that a fund’s performance and risk statistics have been produced by a robust investment and risk management process and by a strong fund manager or team. These factors combine to give us some indication of how a fund may perform in the future.

For the quantitative analysis we primarily use Morningstar Direct and FE Analytics, which are combined with other external data sources. Our qualitative research includes the completion of a detailed fund questionnaire, which may then be followed up with a face-to-face meeting with the fund manager or management team, should a fund be deemed worthy of more in-depth analysis.

Initial Quantitative Analysis

Each IA sector is reviewed on a quarterly basis. At this review we analyse a range of performance and risk information for all the funds in the sector in order to identify those funds that may be taken forward for further analysis. We use a number of external data sources, including Morningstar Direct and FE Analytics, from which we obtain all our raw fund data.

In all the following areas funds are compared against appropriate benchmarks and their peer group.

• Performance

Fund performance is a good indicator of the ability of a fund manager or fund management team, particularly if you look over a range of different market conditions and different time periods.  By assessing performance on a discrete yearly basis we gain a better understanding of how a fund has performed and this helps to identify potential strengths and weaknesses of the fund manager or team in different economic and market conditions.

We measure performance over a range of time periods on both a discrete basis and a cumulative basis. Longer-term performance is relevant if we can identify that the current manager/team is responsible; otherwise we focus on the more recent data, as we believe this is more appropriate.  Performance is compared against the average for the sector, its own benchmark and other comparable funds, with those funds out of line with expectations being eliminated from the lists, subject to the qualitative overlay.

The discrete period analysis helps us to isolate performance and investigate performance anomalies, both positive and negative.  It also allows us to understand how a fund is likely to perform under certain market conditions should they re-occur, which is important when combining funds for portfolios.  We can also look at a fund manager or management team’s performance in previous roles, often at other companies, in addition to their current position, which provides us with a longer-term picture.

• Risk Statistics

We look at a number of statistical risk measures to further understand funds and how they operate.  We consider funds in relation to their benchmark and sector and also in relation to their objectives.  Specifically, we consider volatility, Sharpe ratios, information ratios, value at risk, maximum loss and maximum drawdown and we measure each fund against its peers and an appropriate benchmark in order to find funds performing in line with expectations.

These measures are used to assess risk in terms of a fund’s positioning relative to its peer group and benchmark, as well as in absolute terms.  This allows us to gauge how much risk a fund may take, which is an important consideration when creating a balanced list of funds, as well as when combining funds in portfolios.

• Ongoing Charges Figure

The charges taken by the fund manager can impact substantially on a fund’s returns, particularly in low return and falling market conditions. We use the ongoing charges figure (OCF) as our preferred measure and look for funds to have an appropriate OCF based on their asset class exposure, aims and objectives and investment strategy.

• Fund Size

Fund size is a consideration, as we want to ensure that any fund we are analysing has sufficient ‘buying power’, i.e. they are able to get access to the companies or research that they need and are able to purchase assets relatively easily. For example, in the Corporate Bond market some companies looking to raise debt may offer their bonds only to the key fund managers.

The minimum fund size depends on the sector.  For established funds in the mainstream sectors (such as the Mixed Investment sectors, Corporate Bond, UK Equity Income, Europe, UK All Companies, Global) we would generally look for a minimum size of £50m, however this may be reduced to £30m for sector funds (for example Specialist, Asia ex Japan, Japan, Global Emerging Markets, North America).  We are not restricted by this policy and may consider funds (new launches for example) that do not meet these minimum requirements if they fulfil a majority of other requirements.

Conversely, a fund can become too big and too cumbersome to deliver strong returns against its initial objective.  This is also something we would consider when analysing a fund.

• Questionnaire

When we identify a fund that requires more in-depth analysis, we will issue a detailed fund questionnaire for completion by the fund management team. This covers all the main areas that we feel require detailed investigation and where this highlights further areas of interest, we obtain additional information directly from the management groups.

Some of the areas we consider are:

• Fund technical data – objective, sector and asset allocation, charges etc.
• Range of investable assets
• Team structures and CVs
• Manager incentives
• Macro and micro influences
• Decision making processes
• Buy and sell disciplines
• Company visits
• Turnover
• Attribution analysis
• Risk monitoring
• Fund style
• Fund differentiators
• Research tools

Qualitative Screening

Where a fund looks attractive from an initial research perspective, we then move on to look at the fund from a qualitative perspective.  This is a very important part of our research, as it enables us to look in detail at how a fund operates. Some of this information is obtained from the questionnaire mentioned above, but most comes from detailed meetings with the fund management team.

The areas that we look at would include the following:

• Fund Manager/Management Team Background

We need to ensure that the fund manager/management team has sufficient expertise in the area in which they are operating.  This involves making a judgement on the relevant experience of the manager/team, the roles and responsibilities within the team, what resources they have access to, both internally and externally and the support structure.  It is important to understand these roles and responsibilities so that, if a fund manager leaves, we can make a reasonable assessment of how this will affect the fund by knowing who is likely to take over and their relevant skills and experience.

• Manager Resources

The resources that the fund manager has available to them can be important in the success of the fund. We therefore look at what research capabilities there are within the fund management team (clearly important in finding new investment opportunities) and also whether or not any research is bought in (this can be good as it can provide an alternative view, although in some cases it can indicate a lack of resource within

the team itself).  We also look at the fund managers other responsibilities, for example, if the fund manager is responsible or inputs heavily into other funds this can mean a lack of focus on the fund being analysed, which may also affect future performance.

• Fund Philosophy

What is the fund manager’s/fund management team’s investment philosophy, and how does this influence how they manage the fund?  Answering this question helps us to identify any inherent investment traits/biases within the process at fund, manager/team and company level and whether managers have scope to deviate from these.  This can also help to place the fund within its peer group and within portfolios in terms of how it is managed in broad terms - for example, a fund with a more flexible investment philosophy may complement one with a relatively strict investment process - and also understand how a fund may be positioned in more extreme market conditions.

• Fund management processes

Much of our qualitative research looks at how a fund operates and particularly how robust the investment process is.  This involves gaining a full understanding of how a fund is managed, what would trigger the manager to buy or sell a particular stock, what they are looking for in the stocks that they hold, any stock, sector, region, style or market cap biases, the risk management process, etc.

• Risk Controls

The risk management of a fund, including the internal checks and balances and the formal and informal fund parameters, are an important consideration.  It is essential that risk is managed according to a robust process and in line with any published risk tolerances.

Responsible Investment Process

The process is identical to the main active rating list in terms of stages and areas we review. The only difference is the further scrutiny at both firm and at fund level to ensure the two are connected in terms of responsible investment.

Firm – There are varying aspects in determining whether the firm itself is a good steward of capital.  This can be assessed by considering a variety of factors ranging from, for example, annual reporting, the firm’s responsible investment policy or whether there is an independent advisory board.  The firm’s voting record is important at determining how active they are at holding companies to account as well as how integrated ESG risk analysis is in the investment processes firmwide. Proprietary client communications on thought leadership in the area of responsible investment can also be reviewed.  This is a fluid area that is evolving as standards increase and as such these examples are not exhaustive.

Fund – At the fund level, we assess the investment process to determine if the fund is delivering on its objective whilst adhering to the responsible investment elements of the mandate.  As with all funds, we start with the underlying asset class exposure to compare peer group quantitative analysis.  If the fund is of interest, a bespoke questionnaire for responsible investment mandates is requested to be completed.  Areas that are of interest specifically at the fund level cover the investment process, whether any parts of the process are outsourced or whether there is sufficient in-house resource to conduct the initial responsible investment elements internally.  We are also looking at how committed the manager is to responsible investment, does it form part of their investment DNA, how long have they been active in this space, do they manage other mandates that would not be categorised as responsible investment?  In addition, due to our tenure in providing responsible ratings, we are aware of the asset managers and funds that have been active in this space for some time. Combined with the due diligence we undertake, this allows us to identify propositions which are not meeting our required standards to be categorised as responsible.

If, after this scrutiny the sector committee are satisfied with the output, the fund can be put forward to be responsibly rated in isolation or dual rated gaining both a responsible and an active rating.  The latter occurs where a fund is deemed to be demonstrating the characteristics within its sector to outperform the peer group whilst being responsible.

Once rated, we can then determine which of the four RSMR Responsible Investment categories the fund resides in:

• Sustainable – Funds that select and include investments on the basis of responsibly contributing and benefiting the global sustainable economy. This may include referencing the portfolio to one or more of the UN Sustainable Development Goals (SDGs) or the application of a screen.
• Impact – Funds that can demonstrate that they are aligned to the Global Impact Investing Networks definition of Impact:

“Investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.”

• Thematic – Funds that use macro themes to identify long term responsible structural growth trends.
• Ethical – Funds that apply a screen, either positive, negative or both, that may be based on ethics or on a ‘best in sector’ approach. Each fund will have its own defined screen and may vary between providers.

The funds can then be further subdivided using the SRI Services Categories which categorise funds at a more granular level whilst providing advisers with synergy between both RSMR and SRI Services.

Review and Monitoring Process

Selecting funds is, of course, only part of the process – the ongoing monitoring of the fund lists and the procedure for making changes is equally important.  As stated earlier, the IA sectors are reviewed formally on a rolling three-month basis.  In the case of funds that are already rated, we are monitoring the performance and risk information to make sure that funds are performing and behaving as we would expect given the prevailing market and economic conditions.  Should this not be the case then we will conduct further in-depth research, revisiting our original reasons for rating the fund, and if we are not happy with the overall outcome then a fund will no longer be rated.  This is in addition to monitoring information on a more frequent basis, including maintaining regular contact with fund management groups and updating our fund information.

Resources, Affiliations & Corporate Strategies:

The RSMR Responsible Portfolios are managed by the RSMR Portfolio Services Investment Management team who are supported by the wider research resource at RSMR.  The wider research resource is the RSMR team of investment research managers and analysts.

Responsible rated funds are assessed each month within the RSMR Sector Committee that reviews existing ratings as well as protentional new ratings.

SDR Labelling: Not eligible to use label