The Shareholder Rights Directive II (“SRD II”) aims to encourage effective stewardship and long term decision making. These rules apply to CZ as a full scope Alternative Investment Fund Manager that invests in shares traded on a regulated market in the EEA and any ‘comparable’ markets situated outside of the EEA.
Under the FCA’s rules, CZ is required to:
a) develop and publicly disclose an Engagement Policy; and
b) publicly disclose on an annual basis how CZ’s Engagement Policy has been implemented in a way that meets the requirements; or
c) publicly disclose why CZ has chosen not to comply.
CZ’s Investment Approach
CZ manages an equity market-neutral long/short strategy, investing in UK and Irish listed securities. The manager believes that excess returns can be achieved through a long-term investment approach which marries fundamental analysis of companies with an understanding of ‘soft’ issues. Fundamental analysis examines the source and sustainability of cash flows, as well as the deployment of these cash flows over time. ‘Soft’ issues are factors which are important to long-term returns, but which are more difficult to incorporate into a traditional valuation framework. These include environmental, social and governance factors, and in a broader context the manner in which companies engage with all of their stakeholders. Engaging with the management teams of investee companies with respect to fundamental and soft issues plays a key part in assessing their importance to the investment case. It also provides feedback to management teams with respect to how their shareholders view these issues.
Monitoring investee companies on relevant matters
The initial analysis and monitoring of investee companies includes an assessment of company strategy as it relates to the likely shareholder returns over a long-term investment horizon; this requires an understanding of the gains which can be made from a successfully executed strategy, as well as the risks involved. Company strategy needs to fit within acceptable financial parameters, incorporating expectations of turnover, margins and an appropriate capital structure. ESG factors are closely monitored as these influence financial returns in the short and long-term and are becoming a greater risk (both positive and negative) to companies’ share prices.
Conducting dialogues with investee companies
CZ is of the view that active dialogue with senior management of investee companies is valuable in terms of CZ’s understanding of the investment proposition, but also in providing the companies with investor feedback. CZ meets with management teams, one-on-one, or in group meetings in order to address a range of issues as they relate to shareholders and stakeholders more broadly. CZ also provides feedback on company meetings and company strategy to the advisors of these companies (corporate brokers) and occasionally third party firms which have been mandated to collate investor feedback.
Exercising voting rights and other rights attached to shares
In accordance with CZ’s Proxy Voting Policy, CZ will generally vote proxy proposals, amendments, consents or resolutions relating to client securities, including interests in private investment funds, if any, on a case-by-case basis and in accordance with the following guidelines:
1. Support a current management initiative if CZ’s view of the issuer’s management is favourable;
2. Vote to change the management structure of an issuer if it would increase shareholder value;
3. Vote against management if there is a clear conflict between the issuer’s management and shareholder interest;
4. In some cases, though CZ supports an issuer’s management, there may be corporate governance issues that CZ believes should be subject to shareholder approval; and/or
5. May abstain from voting proxies when it is determined that the cost of voting the proxy exceeds the expected benefit to its clients.
The portfolio managers receive all proxies and will determine how to vote. The elections will be applied consistently for all eligible positions across the accounts managed by CZ.
Co-operating with other shareholders
CZ may engage with other shareholders of an investee company where CZ deems this appropriate and as permitted by applicable law or regulation. However, this is not expected to occur on a regular basis.
Managing actual and potential conflicts of interests in relation to CZ’s engagement
CZ’s Conflicts of Interest Policy requires any potential conflicts of interest to be notified to the Compliance Officer for appropriate consideration, discussion with senior management as appropriate, action and record keeping. CZ has not identified any relevant actual or potential conflicts of interest.
It is the responsibility of the portfolio managers to consider and identify whether any potential conflicts of interest may arise in each case.
On an annual basis, CZ will disclose a general description of voting behaviour, an explanation of the most significant votes and reporting on the use of services of proxy advisors. The disclosure will include details of how votes have been cast unless they are insignificant due to the subject matter of the vote or to the size of the holding in the company.
CZ believes firmly in the importance of effective stewardship and long term decision making, involving transparency of engagement policies between institutional investors and the investee companies.