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December 28, 2018

DUE DILIGENCE Alert: MODERATE
COMPETITIVE Alert: 3
Event: Federated files to offer a global equity ESG mutual fund.
Briefing Points: i) Federated new mutual fund will focus on providing long-term capital growth incorporating an assessment of quality and risk “associated with a company’s approach” to ESG issues, ii) The fund will be sub-advised by Hermes Investment Management, Ltd., which is 60% owned by Federated, iii) Hermes will utilize its proprietary quantitative scoring process to weight companies according to their sustainability practices. The fund will not exclude any sectors or industries, but will vary company holdings based on their ESG scores.
Affected Fund(s): Federated Hermes Global Equity Fund
Asset Classes: US and Non-US Equities
Management Company: Federated Global Investment Management Group (Pittsburgh, PA)
DD Concern: New untested mandate
Marketing Considerations: The firm’s integration of its sub-adviser’s established sustainable investment capabilities provides it with a solid foothold in the marketplace. The extent to which these capabilities are integrated into the firm’s global investment process is unclear and deserving of added and continued oversight.

December 18, 2018

DUE DILIGENCE Alert: MODERATE
COMPETITIVE Alert: 2
Event: FlexShares ESG ETF to change its exchange.
Briefing Points: i) Northern Trust’s FlexShares STOXX US ESG Impact Index ETF is changing the public exchange on which its shares are traded from the NYSE and the Nasdaq exchanges to the Cboe Global Markets exchange, ii) The change will take place “on or about” December 28, 2018 and is designed by Northern to “diversify the exchanges on which its ETFs are traded,” iii) A second FlexShares fund, the Morningstar US Market Factor Tilt Index ETF will also make the change, although other FlexShares ETFs will not.
Affected Fund(s): FlexShares STOXX US ESG Impact Index ETF
Asset Classes: US Equities
Management Company: Northern Trust Company, Inc. (Chicago, IL)
DD Concern: Cash flow/liquidity management
Marketing Considerations: The change is in some ways better suited for accessing international investors and sources of liquidity. It is unclear, though, why the firm only focused on these 2 funds at this time and this invites a discussion with the company and further clarification.

December 14, 2018

DUE DILIGENCE Alert: LOW
COMPETITIVE Alert: 1
Event: Search for ABN Amro ESG debt manager.
Briefing Points: i) ABN Amro is searching for a third-party manager to run its corporate debt pension fund portfolio, ii) The portfolio is a euro-denominated fund investing in “enhanced passive” credits conforming to ESG-aware guidelines, iii) The portfolio is benchmarked against the Bloomberg Barclays MSCI Euro ESG Sustainable Index and is mandated to track within a tracking error of 0.5%.
Affected Fund(s): ABN Amro Pension Fund
Asset Classes: Global Fixed Income
Management Company: ABN Amro Group (Amsterdam)
DD Concern: Portfolio management team change
Marketing Considerations: None at this time, but calls for review once the search has been concluded.

December 13, 2018

DUE DILIGENCE Alert: LOW
COMPETITIVE Alert: 2
Event: MAN Group institutes a firm-wide “responsibility” exclusion list.
Briefing Points: i) MAN Group has operationalized a global firm-wide list of sectors that all of its portfolio managers will not be allowed to invest in, ii) This exclusionary approach includes tobacco products, “controversial weapons”, and companies deriving “more than 30% of their revenues from producing coal and coal-burning energy,” iii) As part of this initiative, MAN has established an “exclusionary committee” to set ESG standards, guidelines and ensure consistency throughout the firm and its products.
Affected Fund(s): All MAN investment strategies and portfolios
Asset Classes: All
Management Company: MAN Group plc (London, UK)
DD Concern: Company or fund product governance/culture
Marketing Considerations: While notable, the move into sustainable investing via a negative screenings or exclusionary approach seems quite limited for a global firm of Man’s stature. It may reflect the firm’s view that this is all that is needed at the present time and this very limited approach can be expanded in the future.

December 13, 2018

DUE DILIGENCE Alert: LOW
COMPETITIVE Alert: 2
Event: NATIXIS affiliate Ossiam, offers ESG ETF using “machine learning” approach.
Briefing Points: i) The new portfolio from Ossiam uses a “machine learning algorithm” ro rank and select companies according to their ESG and “financial potential,” ii) ESG factors are core to Assiam’s quantitatively driven “allocation decisions”, which uses AI data assessment of companies ESG characteristics and “future financial performance” relationships, iii) Ossiam’s process employs an exclusionary overlay and their “minimum variation portfolio construction technique”.
Affected Fund(s): Ossiam World ESG Machine Learning UCITS ETF
Asset Classes: US and Non-US Equities
Management Company: Ossiam (Paris, FR)
DD Concern: New untested mandate
Marketing Considerations: While intriguing from a new innovative product perspective, additional due diligence is needed to determine not only the fund’s workability, but whether it offers much beyond an exclusionary screening process. The use of artificial intelligence, however, makes it worth exploring.

DEFINITION — ALERT RATINGS
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Due Diligence (“DD”) Alert: Ranks each identified sustainable fund event or development according to a three-point “call to action” scale that ranges from Low to High, defined as follows:

LOW:  A preliminary review and evaluation is recommended, but no on-going monitoring or manager meeting is needed.  Non-US fund offerings will typically be assigned Low Due Diligence Alert levels as these are largely intended for informational purposes and potentially these may have marketing considerations locally.

MODERATE:  Near-to-mid-term review and evaluation is recommended along with a manager meeting.
HIGH:  Immediate manager contact and meeting are recommended, plus detailed review and evaluation – scheduled on-going more detailed monitoring and follow-up manager meeting(s) are advised.

Marketing Considerations:  Ranks the level of required response/urgency for each identified sustainable fund’s product development, sales, promotional or other strategic marketing event or development.  The ranking scale is 1 to 5, where a rank of 1 indicates the lowest level of urgency, requiring little or no competitive response, to a rank of 5 that indicates the highest level of urgency, requiring immediate competitive and/or marketing and sales force response.