Stewardship Code and Shareholder Rights Directive II Disclosure

Effective from 1 January 2020, the Financial Reporting Council’s (“FRC”) UK Stewardship Code (the “Code”) has been substantially updated to be applicable to a broader range of investment strategies, other than purely listed equity, such as fixed income bonds, real estate and infrastructure.  It also reflects the growth of environmental factors, particularly climate change, as well as social and governance factors (together, “ESG”) as material issues for asset managers to consider when making investment decisions and undertaking stewardship.

The 2020 revised Code defines stewardship as “the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society”.

The Principles of the Code

There are twelve Principles of the Code that apply to asset owners and asset managers. These are grouped under four headings:

Purpose and governance

1. Purpose, strategy and culture
2. Governance, resources and incentives
3. Conflicts of interest
4. Promoting well-functioning markets
5. Review and assurance

Investment approach

6. Client and beneficiary needs
7. Stewardship, investment and ESG integration
8. Monitoring managers and service providers

Engagement

9. Engagement
10. Collaboration
11. Escalation

Exercising rights and responsibilities

12. Exercising rights and responsibilities

The FRC requires that firms aiming to be signatories to the Code must produce an annual Stewardship Report explaining how they have applied the Code in the previous 12 months. The FRC will evaluate these reports against an assessment framework and those meeting the reporting expectations will be listed as signatories to the Code.

FCA Regulatory Disclosure on the Stewardship Code

Rule 2.2.3R of the FCA Conduct of Business Sourcebook (“COBS”) requires an FCA authorised firm to disclose the nature of its commitment to the FRC’s UK Stewardship Code or, where it does not commit to the Code, its alternative investment strategy.

Crake Asset Management LLP (“Crake”, the “Firm”, “we”, “our”) aims to maximise absolute returns for investors by generating capital growth and income over the long term. Crake seeks to identify as investments undervalued companies whose business models will provide superior growth of profits and cash flows.

Adherence to the Code is voluntary and, while Crake generally supports the objectives that underlie the Code, the Firm does not consider the provisions of the Code to be relevant to the activities that it currently undertakes for the following reasons:

• Although the Firm may have interaction with the management of companies in which it invests as part of both its initial and ongoing analysis of such companies, it does not employ an “activist” investment strategy;
• The Firm has chosen an alternative approach to stewardship consistent with its overall approach to ESG.

At Crake, we take a clear view on ESG. We are a responsible corporate citizen and we expect the companies that we invest in on behalf of our clients to be so too.

Our approach is both moral and practical. Moral because it is right and practical because an assessment of a company’s compliance with its legal and ethical responsibilities to all stakeholders (shareholders, government, the environment, customers, suppliers and society as a whole) is a crucial factor in determining a company’s cost of capital and therefore its ability to successfully invest in and grow its own business. Put simply, ‘bad’ companies and ‘bad’ business models tend to make bad investments.

The five factors we use to analyse every company we consider for investment are Management, Growth, Liquidity, Currency and Valuation. Our analysis of ESG falls within “Management”. Using an empirical score regarding a company’s ESG track record from an external specialist consultant, and qualitative analysis by the Crake analyst team, we make an assessment as to whether the company falls into one of three categories, whereby management is either:

1. Complying with its ESG responsibilities; or
2. Not complying with their responsibilities and making no effort to do so; or
3. Not complying with their responsibilities but embarking on a serious effort to do so in the future.

If a company falls into category (a), there are no ESG implications with regard choosing whether to invest or not. Conversely, Crake is extremely unlikely to invest in companies in category (b) – there would have to be an extraordinary and clearly documented reason for doing so. Crake might invest in companies in category (c), but only if it is clearly documented that positive change is in train; change that we would of course actively support.

Crake also take a clear approach to our role as shareholders. We have retained external consultants to highlight proposed votes at the companies we are invested in for ESG implications and we also monitor directly ourselves proposed votes for all the companies we invest in on behalf of our clients, with a particular emphasis on any companies in category (b) and (c). Crake will support (or oppose) measures that we believe will improve (or deteriorate) a company’s approach to complying with its ESG responsibilities.

Should Crake’s activities change in such a manner that the provisions of the Code become relevant, the Firm will consider committing to the Code and will amend this disclosure accordingly.

Shareholder Rights Directive II Disclosure

Under COBS 2.2B.5R, Crake is required to either develop and publicly disclose an engagement policy that meets the requirements of the Shareholder Rights Directive (“SRD II”) or to publicly disclose a clear and reasoned explanation of why it has chosen not to develop an engagement policy that meets the SRD II requirements.

Crake has chosen not to develop an engagement policy that complies with the requirements of SRD II, as the Firm considers that it has an investment strategy that is not commensurate with the outcomes sought thereunder. Moreover, the Firm ensures that its clients are regularly and routinely apprised of the investment strategies employed by the Firm. As such, it is felt that clients would not expect the Firm to achieve compliance with the core requirements of the SRD II.

Crake’s investment strategy is driven by fundamental research and portfolio construction based on individual modelling of companies and of the macro economies in which they operate. Although the Firm’s investment approach is predominately long-term, the Firm does not seek to engage with investee companies in the manner envisaged by SRD II and Crake does not consider that it would be constructive for the Firm or its investee companies if the Firm were to actively engage with them.

Crake is a signatory to the UN Principles for Responsible Investment.

For further details on any of the above information, please contact [email protected]