Our tailored investment solutions manage an investor’s assets relative to their liabilities (or investment goals) – so that their assets either perform in line with or outperform the liabilities. We achieve this by immunising the impact of changes in interest rates and inflation risks; and deliver alpha by including credit assets.

OUR INVESTMENT APPROACH

In managing liabilities, our approach is to firstly use fixed income instruments to create an asset portfolio that moves in line with the liabilities. We then overlay this portfolio with alpha-generating assets. We adopt a holistic approach to risk assessment by incorporating traditional fundamental analysis and also integrating our responsible investing philosophy into every part of the investment process.

OUR RESPONSIBLE INVESTING PHILOSOPHY

As managers of long-term liabilities, much of which are pension liabilities, we believe that a long-term perspective is essential. Our responsible investing philosophy is founded on the basis that not only do we want our clients to be financially secure, but we also want them to enjoy retirement in a world that is worth living in – a healthy and sustainable world. Actively considering environmental, social and governance factors is a crucial part of being responsible custodians of capital. Our approach to responsible investing has three primary focus areas:

1. SCREENING

The practice of screening typically involves applying filters to a list of potential investments so as to include

rule out issuers or specific securities for investment, based on an investor’s preferences. Examples of negative screening include avoiding issuers with complex group structures (think Steinhoff), avoiding issuers with questionable management teams, and not investing in “red flag” issuers, as per Old Mutual’s Responsible Investment Policy. An example of positive screening could be actively targeting renewable energy investments.

We have also developed a screening tool that allows us to assess the attractiveness of an investment from an ESG perspective – taking into account the nuances present in fixed income markets. We consider the instrument type: Is it a bond or a loan? These two instruments offer varying amounts of protection and customisation, which impacts our ability both to accurately assess ESG risk and to promote desired sustainable outcomes. The listing status of the issuer is also considered, as both private and public companies can issue debt. Johannesburg Stock Exchange (JSE) listed issuers tend to have significantly better disclosures than their non-listed counterparts. Listed companies are also more likely to adhere to voluntary guidelines like the King IV Code, which makes assessing ESG risks easier. The industry

sector that an issuer belongs to is also assessed. Certain sectors may be more favourable from an ESG perspective (such as renewable energy). There are also external risks that could impact entire industries. For instance, the introduction of a carbon tax can be significant for issuers in the fossil fuels industry. Finally, we use Old Mutual Investment Group’s proprietary ESG model to determine a quantitative ESG Profile Score of an issuer. Using the outcomes of this screening tool, portfolio managers can decide whether the proposed investment is favourable or not from a responsible investing perspective. It can also assist analysts by directing them to specific focus areas when conducting their fundamental analysis.

2. ESG INTEGRATION

ESG integration is the systematic and explicit inclusion of ESG factors in traditional financial analysis. Here credit analysts undertake ESG risk assessments on each investee company to identify material risks and to establish the financial implications of those risks materialising, with the aim of ascertaining the merits of the investment. This focus area is one that is most familiar across managers who consider ESG in investment decision-making, and has been an integral part of our investment process for many years.

3. ACTIVE OWNERSHIP

This is a critical component of our responsible investing philosophy. We do not just buy assets and allow them to run their course. We give voice to these assets by being active owners, so as to drive the right behaviour and promote sustainable outcomes. Notwithstanding the fact that fixed income investors are not owners in the companies we invest in, we still have an important role to play in encouraging issuers to improve their ESG risk management and to develop more sustainable business practices. One of the ways we exhibit active ownership is by engaging directly with a company’s management – both prior to investing and throughout the life of the investment. This engagement allows us to question management on ESG practices in their business, stress our preferences for sustainable outcomes and work together with these companies to provide funding solutions that not only generate financial returns, but also promote the United Nations’ Sustainable Development Goals (SDGs).

The Association for Savings and Investment South Africa (ASISA) has played an important role in encouraging more collaborative engagement. One of its initiatives that we were actively involved in was a forum of asset managers tasked with developing a set of principles to guide the market when engaging on domestic medium-term note (DMTN) programmes. This initiative to improve the standards in the listed debt capital market recently bore fruit with the publishing of the ASISA Debt Listing Guidelines in February 2021.