Susan Spence, Vice-President of Portfolio Solutions Group discusses how PSG incorporates consideration to environmental, social and governance (known as “ESG”) factors on an ongoing basis and in a defined manner as part of PSG’s decision making in managing the asset allocation funds.
Christine: Hello, I’m Christine Wellenreiter, Vice-President of Marketing and Communications at GLC Asset Management Group and you are listening to a regular podcast series that I host featuring quarterly updates from PSG about the asset allocation funds they manage.
For those of you who don’t already know, PSG is short for Portfolio Solutions Group – a division of GLC Asset Management Group that is solely focused on the portfolio management of asset allocation funds…primarily target date and target risk asset allocation funds.
To discuss these two topics, I’ve got Susan Spence here with me today. Susan is the Vice-President, Portfolio Solutions and head of GLC’s Portfolio Solutions Group division.
Susan: Thank you, Christine.
As a division of GLC Asset Management Group, the Portfolio Solutions Group manages $28 Billion dollars in asset allocation funds…and for even more context…a little less than half of that $28 billion is from the individual segregated fund business – about $12Billion or put another way, they are responsible for about 10% of the entire individual seg fund market in Canada!
….let me throw out some more numbers about PSG. PSG monitors 24 firms that have mandates in the asset allocation funds and a dozen or so more that are potential candidates for future consideration. And these managers want to be a part of PSG’s AAFs… even a small allocation within the asset allocation funds can equal many hundreds of million dollars. So make no mistake, PSG is a big player in the Canadian asset allocation fund market, and an important client with a fair amount of influence for any manager looking to manage an underlying fund for them. That’s going to matter when you hear more about PSG’s commitment to responsible investing.
Christine: Susan, I want to start by asking you about GLC becoming a signatory to the United Nations-supported Principles of Responsible Investing (UN PRI)…that was back almost two years ago in February 2016. What did that mean to you?
Susan: PSG joined GLC around that time. So as a division of GLC it meant that we to would need to uphold the commitment that GLC had formally made, which is stated clearly and plainly in GLC’s Responsible Investing policy…that being: “As a signatory to the UN PRI, GLC aims to contribute to the development of a more sustainable global financial system.”
Christine: Okay, as an on-the-ground portfolio manager, that must sound pretty aspirational…but what are the tangibles…what did that mean you needed to do?
Susan: It meant we as a team needed to ensure we consider environmental, social and governance (known as “ESG”) factors on an ongoing basis and in a defined manner as part of our decision making in managing the asset allocation funds, as the purpose of the GLC RI policy is essentially to formalize the inclusion of ESG factors into all of GLC’s investment management processes in order to uphold that commitment we made as a firm.
Christine: As an asset allocation fund manager, you’re not doing the individual stock or bond selections? You’re a manager of managers…
Susan: That’s right, so it’s a bit of a different proposition than for the other divisions of GLC that are investing directly in the equity and bond markets. For us it factors into the decisions we make about what funds to hold within our asset allocation funds. We decide on all the underlying funds that are included as components of the asset allocation products, and a huge part of our job and a key part of our investment process is the monitoring and rigorous oversight of those managers to ensure they are doing what they are supposed to in order to fulfill the role they are meant to play within our funds.
Christine: How much time do you spend on the monitoring and oversight?
That’s hard to quantify exactly, because realistically some aspect of monitoring or oversight comes into play on a daily basis. With focused, deep review of underlying funds on a monthly and quarterly basis. Each of those meetings lasts several hours. We also meet in person or have a direct conversation over the phone with all our managers at least once a year through our participation in the broader company’s investment manager review process, in meetings we set up as a team or at events that the managers themselves put on (earlier this week, for example, I attended a one-day seminar that Fidelity hosted in Toronto).
Christine: What if you spot an issue or an event occurs?
SUSAN: in that case we can just pick up the phone. If it warrants immediate attention, it gets it.
In all, we estimate that we spend the equivalent of approximately 40-50 business days a year meeting directly with underlying fund managers (a combination of those we currently use and those that essentially form our broader universe of funds offered as a standalone basis on Great-West Life’s investment fund platforms). As it relates to responsible investing specifically, ESG considerations by third party managers are drawn out in a couple of ways.
Christine: Okay, so how do you do that?
Susan: First, we work with the Investment Funds area of GWL on questionnaires. On a semi-annual basis, some high level responsible investing questions are asked of all managers in that broad universe of funds, and then once a year a more in-depth questionnaire goes out to third party managers we currently include in the asset allocation fund products.
Christine: So, some annual reporting.
Susan: These questionnaires provide a good overview of the ESG landscape at each of the third party managers we invest in, and a high level picture of other standalone third party managers on the shelf.
That leads to the second way we explore ESG considerations…in our due diligence meetings with managers. During these meetings, we can draw out more responsible investing-related information through discussions about investment process and performance of mandates and resolve any questions we may have regarding previous responses in the questionnaires.
Christine: How do you find that working?
Susan: Through these initiatives, we are able to build a picture of if and how ESG considerations factor into each manager’s process for every mandate. This knowledge base then becomes another input for our team in terms of assessing the strengths of mandates that we currently hold or may consider for use in our funds in the future.
Christine: Re: questionnaire? What have you learned from those questionnaires?
Susan: First of all, all the third party managers do give consideration to ESG factors…but there is a wide range of levels of integration and/or engagement as well as differences in reporting practices with respect to responsible investing. To throw some numbers at you, 74% are UNPRI signatories as of the end of September of last year, and 43% of them even have dedicated ESG teams.
Christine: do you expect that number to grow?
Susan: I do expect the numbers to grow, because already we have observed increased emphasis on responsible investing over just the last few years since we have been formally tracking ESG-related information on third party managers. For a lot of managers ESG considerations have always been a part of their investment processes, but like GLC they are putting more effort over time into developing their approach to responsible investing and formalizing their documentation and reporting of it. There does seem to be momentum building in terms of managers recognizing the value of becoming a UN PRI signatory and also the benefits that ESG considerations bring to an investment process.
Christine: I would imagine that seeing inquiries from stakeholders like PSG helps managers to realize that it is in their interest to take ESG considerations into account…
Susan: I agree – they must think, if we are engaging them on these issues, then maybe they should be doing the same…
Christine: Give me an example of a question you might ask one of those managers at these regular meetings?
Susan: ESG considerations often come out in discussions about fund holdings that are controversial for some reason. One example that readily springs to mind is from a couple of years ago when Valeant Pharmaceuticals was in the news a lot – questions were emerging about the lack of clarity around the company’s accounting practices and overall governance. At the time it was also a style issue in our minds, as while the stock became a bigger and bigger part of the S&P/TSX Composite Index it caused a lot of benchmark risk for Canadian managers, particularly those with value-oriented mandates – style drift is something we are always watching out for. So we had a lot of discussions around managers’ views on Valeant, including around governance issues, and why or why not it made sense for them to hold the stock in their portfolios. These discussions helped us as asset allocation fund managers to assess whether fund managers were incorporating ESG considerations into their investment decisions in a thoughtful and appropriate manner.
Christine: Our fiduciary duty is to maximize total return within the prescribed guidelines of the investment mandates. Perhaps some don’t think considering ESG factors contributes to that. What do you think?
Susan: I think it comes down to having a disciplined investment process and a holistic investment philosophy. Formally considering ESG factors is another means of assessing risks and opportunities within a portfolio. And that is just as important for a fund of fund portfolio as it is for a standalone mandate. We believe that being aware of and understanding all types of risks and opportunities allows us to best deliver on our fiduciary duty.
Christine: One final question for you Susan…do you think people care? Do they care that the managers of their asset allocation funds are pursuing responsible investing practices by considering ESG factors in their investment decisions?
Susan: I think people do care. Responsible investing is becoming more and more topical within the investment community, especially as the mindset is shifting from not just thinking of the benefits of considering ESG factors from a risk management perspective but of the opportunities it can also provide in terms of helping to drive superior investment returns.
Christine: Thank you Susan, it was great hearing from you today.
<Narrator> If listeners want to learn more about GLC’s approach to responsible investing, or read our policy on responsible investing, just go to our website and search ‘responsible investing’ it will take you right there.
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