UK Stewardship Code Statement Summary
Latitude is an independent investment boutique set up in 2016. It manages a fundamental global equity strategy and a global absolute return strategy, with Stewardship at the core of the business.
Central to its investment philosophy is a rigorous process of fundamental research with ESG analysis fully integrated into its research. The research process includes meeting with company management, as well as analysis of publicly available information and proprietary and independent research.
At Latitude, we consider ourselves stewards of our clients’ capital. Stewardship serves as a powerful philosophy that is focused on what really matters to our clients: Absolute performance, sustainability and the delivery of enduring value.
Systemic problems exist in markets and Asset Owners and Asset Managers are well-placed to see problems and implement change. Stewardship is as much about responsible ownership as a considered approach to selecting investments.
As long-term investors we believe it is critical to take a holistic view of the underlying financial performance of an investment, the risk and the sustainability.
When we invest on behalf of our clients our core principles at Latitude are:
We are long-term in our approach to managing money; As active managers we look for businesses that will deliver absolute performance and create enduring value. We aim to actively own, as opposed to trade, these companies.
We seek out and support exceptional senior management teams, but hold them to account where we have concerns. We believe that responsible companies will tend to create more durable economic value. Specifically, we favour businesses that articulate compelling longterm strategies, and take seriously their responsibilities to their customers, workforce, local communities, the environment and their shareholders.
We are not preoccupied with short-term market movements, but look at underlying fundamentals, financial performance and sustainability. Environmental and social factors also play a material role in determining risk and return. These are considered alongside other value drivers in determining a company’s ‘investment case’ or ‘associated risks to investment”. We believe that companies’ long-term success depends on strategies that sustainably deliver goods and services, such that companies earn an attractive return on investment, maintain their license to operate and deliver improving and durable returns to shareholders.
Our core investment principles guide our approach to investment and stewardship, but we avoid hard and fast rules in implementation, preferring a pragmatic approach. We also believe that our clients’ long-term interests are not best served by a narrow focus on relative performance against a market index. Performance goes beyond beating a benchmark: positive absolute performance achieved by the market as a whole is what really matters and we aim to do so sustainably with long term consistency.
A key Stewardship policy at Latitude is the use of leverage, short selling and derivatives. These more risky portfolio management techniques were a significant factor in causing the global financial crisis in 2008 and have no place in our portfolios. There is little alignment of interest between investment managers and clients. Managers are incentivised to maximise AUM. As Stewards of our clients capital we believe portfolio managers should focus on generating added value at a reasonable cost to their end investors.
UK Stewardship Code
The UK Stewardship Code, published in July 2010, is a voluntary code which sets out a number of principles relating to engagement by investors with UK equity issuers.
Latitude welcomes the publication of the UK Financial Reporting Council (“FRC”)'s Stewardship Code and is supportive of its objectives. The Code aims to enhance engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities. The Code sets out good practice on engagement with UK investee companies to which the Financial Reporting Council believes institutional investors should aspire. Through our stewardship policy, we aim to provide a robust and pragmatic framework to ensure our ownership responsibilities are exercised appropriately, that we effectively monitor the companies in which we invest for our clients and that, where we believe it is necessary, we intervene with those companies on issues that are likely to adversely impact the interests of our clients.
The principles of the Code, which is applied on a “comply or explain” basis, are that institutional investors should:
Publicly disclose their policy on how they will discharge their stewardship responsibilities.
Have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed.
Monitor their investee companies.
Establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value.
Be willing to act collectively with other investors where appropriate.
Have a clear policy on voting and disclosure of voting activity.
Report periodically on their stewardship and voting activities.
We have set out below our approach to the recommendations of the UK Stewardship Code and explained our reasons for taking this approach. Any questions on our statement and Latitude’s approach to Stewardship should be addressed to Mark Carter, Chief Operating Officer at firstname.lastname@example.org
Principle 1: Institutional investors should publicly disclose their policy on how they will discharge their stewardship responsibilities.
We acknowledge our fiduciary duty to preserve and enhance value on behalf of our clients however as active asset managers we also believe we are stewards of our clients capital.
Stewardship goes above and beyond just investment and at Latitude we have a distinct approach whereby Stewardship and ESG considerations are integrated into every aspect of our business.
Stewardship embodies the responsible planning and management of all our resources. From the decisions made by senior management to how we invest on behalf of our clients. We believe that if the business in its entirety has adopted a Stewardship “mindset” this then filters down and effects every level of the organisation. We believe it will then ultimately have a positive impact on how we deliver outperformance for our clients.
All investment activities and research are undertaken and monitored in-house. On the investment side Stewardship is fully embedded into our decision-making process to the extent that we believe issues may affect the long-term success of a company and investment returns. Central to our stock analysis is a rigorous process of fundamental research with ESG analysis fully integrated into our research. The logic of selecting companies based on narrow “ESG scores” and rejecting the worst, has not historically been rewarded by the markets. ESG factors are not an overlay of the process and ESG analysis directly impact our earnings assumptions, discount rates, asset values, underlying cashflows and the long-term return on capital. Integrating ESG analysis allows for greater insight into a number of intangible factors such as operational excellence and risk that can improve investment outcomes.
We invest on behalf of a variety of clients, from direct investors in our funds to segregated mandates on an institutional basis. As we hold investments in companies on a long-term basis, we regard the process of stewardship as a natural part of our investment approach.
We aim to ensure that investee companies are conscious of all risk factors, including social and environmental risks and we believe that good robust engagement on how shareholder interest can be improved adds value to the investment chain in producing superior returns for our clients.
The goal of our stewardship activities is to support decisions that we believe will maximise the longterm value of securities we hold in client portfolios. Our fundamental analysis helps tell us how companies go about their business as well as what they actually do or produce as a business activity.
Maintaining constant dialogue with company management is central to how we discharge our stewardship responsibilities on behalf of our clients. We do this through engaging with company managements and voting proxies on our clients behalf. We also monitor all investee companies through ongoing proprietary research, third party research and written communications to discuss a range of issues relating to strategy, governance, social issues, the environment, share value, performance, risk and remuneration. This engagement serves to confirm and support the investment thesis and establish a good ongoing channel of communication with companies to ensure that the strategy is being executed with the appropriate level of risk whilst monitoring effective control of the Board and relevant sub-committees. We believe that such monitoring provides us with a clear indication of the quality of the management and the board and consequently the company’s ability to deliver its key goals and anticipated operational performance.
Principle 2: Institutional investors should have a robust policy on managing conflicts of interest in relation to stewardship which should be publicly disclosed.
Latitude maintains a robust policy on managing conflicts of interest which is designed to ensure its decisions are taken wholly in the interest of its clients. Latitude aims to ensure that all potential and actual conflicts are identified, evaluated, managed, monitored and recorded.
Latitude’s ownership structure is that of a private Limited Liability Partnership managing assets for a pooled investment fund and segregated managed accounts. Material potential conflicts of interest are disclosed to clients and prospective clients. Our principal objectives are always to act in the best interests of our clients and to treat them fairly.
It is the responsibility of all Latitude staff members to familiarise themselves with the contents of the Policy and report conflicts of interest to the Compliance Officer using the appropriate channels.
A summary of the Latitude’s conflicts of interest policy is attached.
Principle 3: Institutional investors should monitor their investee companies.
Comprehensive and continuous research and monitoring of investee companies is fundamental to Latitude’s investment process. This allows for greater insight into intangible factors such as operational excellence and risk that can improve investment outcomes. Monitoring, engagement and an active use of voting rights helps deliver better performance for our clients and encourages sustainable business behaviour and lower risk.
Latitude utilises various research and support tools to meet this principle. The monitoring process will include meeting with senior management of the investee companies, analysing annual reports and financial statements, using independent third party and broker research and attending company meetings.
Latitude endeavours to identify problems at a very early stage to minimise any loss of shareholder value and we do this through direct interaction. Engagement is always undertaken by our investment team. This analysis will happen at the very start of the work we do on our investments and typically ahead of them being selected for portfolios. If the investment team has concerns, where appropriate, they will use their best efforts to ensure that the appropriate members of the investee company’s board are made aware of them. Such concerns may include societal issues where we believe they have an impact on shareholder value. These range from diversification, culture and fair employment. Environmental issues where there are concerns about future capital expenditure and the impact on climate change, pollution and fresh water. Corporate governance issues where we believe they have an impact on shareholder value. These range from disclosure, board structure, business ethics, audit, tax, reporting, executive remuneration and fees/pricing.
However, in seeking to act in the best interests of its clients, Latitude may also consider it better to reduce or eliminate an investment rather than to continue such dialogue. The Latitude investment team reviews the effectiveness of their monitoring on an ongoing basis as part of the investment process.
Latitude maintains records of votes cast and these votes are publicly available. Latitude may attend General Meetings of companies in which its clients have a major holding where this is considered appropriate and practicable.
Latitude does not generally wish to be made insiders in any circumstances, and therefore expects investee companies and their advisers to ensure that information that could affect Latitude’s ability to deal in the shares of the company concerned is not conveyed to Latitude without its prior agreement.
Principle 4: Institutional investors should establish clear guidelines on when and how they will escalate their stewardship activities.
As part of Latitude’s investment strategy, it seeks to build effective relationships with boards and management at the companies in which it invests. Latitude will generally look to invest in companies that it believes to be well managed. As part of the research and monitoring process, Latitude may look to intervene by holding meetings with management and/or directors to express Latitude’s concerns or express its views through other channels. These concerns will generally be motivated by the failure of management to uphold shareholder value and the failure to deliver products and services for the benefit of society.
Examples of recent engagement: Executive pay, remuneration, capital allocation, new share issuance, disclosure policy, cross-shareholdings, buybacks, environmental policies, pollution, shareholder value.
Latitude will continue to meet with the company and monitor developments to assess changes in the company’s approach. Should concerns persist, Latitude may seek to intervene formally through written letters addressed to the appropriate company board or committee members. In addition, Latitude will consider whether it would be more effective to intervene jointly with other institutions but will only do so where this is considered appropriate and in the best interest of its clients and where it is felt management are not maximising shareholder value.
Latitude acknowledges that it is a boutique asset manager and there are a variety of factors will make each situation unique. Therefore the approach taken to escalation of concerns will vary on a case by case basis.
Principle 5: Institutional investors should be willing to act collectively with other investors where appropriate.
Latitude is fully supportive of collective action by investors to seek change. It will however consider any specific action on a case by case basis subject to regulatory restraints, company strategy or governance.
Whilst Latitude may communicate with other shareholders regarding a specific proposal, it will not agree to vote in concert with another shareholder without approval from Latitude’s Chief Operating Officer.
We would normally pursue engagements with investee companies on our own, however as we are a emerging asset manager with a small but growing level of assets under management we believe a collaborative effort with other investors will be more effective. The extent to which we are listened to by a Board depends on a number of factors, including the power of our argument (i.e. how compelling it is); how deeply our points resonate with board directors; our size as a shareholder; and the level of shared concern of other shareholders.
A collective approach to engagement can help to ensure our concerns are listened to. These may be implemented jointly, or we may reach out to other investors to share concerns and seek a common position, which we may decide to communicate to a company.
We are also an active participant in a number of investor bodies such as the UK Investment Association, the board of the New City Initiative (NCI) and the United Nation’s Principles for Responsible Investment (UNPRI). Through these initiatives, we discuss and work with other investors on a range of collective engagement opportunities, including in the UK.
In participating in collaborative initiatives we remain alert to potential conflicts, issues of insider information and concert party rules. Where we believe there are any potential risks of falling foul of these rules, we ensure close involvement of our internal legal and compliance team.
Principle 6: Institutional investors should have a clear policy on voting and disclosure of voting activity.
Latitude maintains proxy voting policies and procedures that are designed to ensure that it makes a best efforts attempt to vote proxies in the best interests of its clients and will always seek to vote all of its shares. We publicly disclose all our voting activity.
Latitude generally votes in favour of routine corporate housekeeping proposals, including election of directors (where no corporate governance issues are involved).
For other proposals, Latitude will assess what is in the best interests of its clients and, in doing so, may take into account the following factors:
whether the proposal was recommended by management and Latitude’s opinion of management;
whether the proposal fairly or unfairly compensates management for past and future performance;
While we are boutique and our voice is small there is a willingness to speak out and to use our vote wisely to support engagement.
Securities lending programs can reduce the level of voting activity as the exercise of voting rights may be hampered when securities are on loan at the time of a shareholders meeting. As an engaged shareholder, Latitude believes it is in the best interest of investors to execute voting rights where possible and therefore, Latitude does not participate in securities lending programs,
Principle 7: Institutional investors should report periodically on their stewardship and voting activities.
Our stewardship activities are an integral part of how we manage money for our clients. Latitude believes that there must be an appropriate level of transparency designed to promote effective stewardship and assist the analysis and evaluation by asset owners.
We report regularly to clients on our stewardship activities in meetings and through our quarterly and annual reports. Our reports to clients include details of selected company engagements, voting activities, as well as updates on market-wide policy outreach.
Where acting as investment manager to a pooled fund, Latitude may provide to such underlying investors summary details of how it has voted.
In addition, Latitude may, on request, provide other details of its engagement approach and activities (such as number of company meetings held or examples of any concerns raised) to clients and underlying investors.
Latitude’s processes relating to its corporate governance activities are included within the scope of annual internal controls. The results of such testing are not generally made available but clients wishing to obtain further information should contact Latitude’s Chief Compliance Officer, Mark Carter.