Investment approach

Summary

The SilverCross Global Small-cap Fund (the "Fund") promotes environmental and social characteristics in accordance with Article 8 of Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector (the "Disclosures Regulation" or "SFDR"), such as (i) avoidance of investments posing risks to sustainability or connected to controversial activities, (ii) promotion of human rights, (iii) promotion of good labour practices, (iv) promotion of anti-corruption, (v) selection of companies which promote environmental, social and good corporate governance, and (vi) integration of Sustainability Risks in the investment management process. "Sustainability Risk", as defined by the SFDR, is an environmental, social or governance event or condition that, if it occurs, could cause an actual or potential material negative impact on the value of the investment. "Sustainability Factors" are defined in the SFDR as environmental, social and employee matters, respect for human rights, anti-corruption and anti-bribery matters.

The Fund does not have as its objective a sustainable investment

IBS Fund Management B.V. ("the Manager"), in respect of the Fund, seeks to invest in companies that are part of the solution, or at the very least do not materially contribute, to environmental and social challenges. The Manager aims to invest in companies that act as responsible corporate citizens. The Manager only includes investments in the Fund that comply with minimum social and environmental safeguards, including those concerning labour rights, human rights, anti-corruption and environmental protection. Investee companies that are involved in significant controversies or materially detract from society achieving its sustainable development goals are not suitable investments for the Fund and will not be included in the portfolio of the Fund.

The Manager has developed its own proprietary ESG research process which is fully integrated into its investee company analysis. Screening is conducted to avoid companies which attain 10% or more of their revenues from controversial activities or have violated any of the UN Global Compact principles. “Controversial activities” are defined as any business activity over which the morality is heavily debated among international governing bodies. These activities are seen to cause net-harm to humans such as indiscriminate weapons and tobacco. Investee companies are then assessed against weighted environmental, social, and governance indicators within the Manager's proprietary SilverCross ESG template in respect of the Fund. Each ESG performance indicator, and its associated weight, is determined by the Manager's double materiality assessment. Investee companies are scored relative to their industry peers and best-practice protocols. While the Manager utilises external ESG-research to support its analysis, it establishes its own internally calculated ESG score in respect of investee companies of the Fund.

A variety of data sources are used to assess the ESG performance of the Fund. These include self-disclosures from investee companies (including one-on-one meetings, annual reports, company presentations, website disclosures and proxy statements), Clarity AI, MSCI ESG Manager and Bloomberg. The limitations of those methodologies can be around lack of ESG data for one chosen asset class and are detailed below. The full ESG process is reviewed by the Manager's team annually. Details of the Manager's due diligence policy and engagement policy are disclosed below. The Fund does not use a designated reference benchmark.

No sustainable investment objective

The Fund promotes environmental or social characteristics but does not have as its objective a sustainable investment.

Environmental or social characteristics of the financial product

The Fund promotes environmental and social characteristics in accordance with Article 8 of the Disclosures Regulation, such as (i) avoidance of investments posing risks to sustainability or connected to controversial activities, (ii) promotion of human rights, (iii) promotion of good labour practices, (iv) promotion of anti-corruption, (v) selection of companies which promote environmental, social and good corporate governance, and (vi) integration of Sustainability Risks in the investment management process . The above is achieved by:

1. 1. filtering out equity securities which demonstrate significant sustainability violations.
   2. following the principles of the UN Global Compact, which relate to human rights, labour, the environment and anti-corruption.
   3. Conducting environmental, social and good corporate governance, ("ESG") due diligence on Investments, as part of the selection process. There is strong awareness of Sustainability Factors by the Manager which aims to mitigate company risks, related to ESG. The Manager believes that Sustainability Factors may influence a Fund´s intrinsic value and has an approach of:
      1. Screening in the introductory phase of the research process to minimise the occurrence and severity of Sustainability Risks with the Fund. Companies that attain 10% or more of their revenue from ‘controversial activities’, such as indiscriminate weapons and tobacco, as well as those that have violated any of the themes outlined by the UN Global Compact are excluded from the Fund;
      2. having an exclusionary investment policy that is supported by data from a third party ESG research provider such as MSCI ESG Research;
      3. paying special attention to governance considerations and whether they enhance or detract from ESG considerations;
      4. actively engaging with its portfolio companies’ management teams to influence positive social change, including reducing Sustainability Risks;  and
      5. conducting calls with the management and boards of its portfolio companies in relation to governance considerations such as management compensation and capital allocation.

The Manager seeks to invest on behalf of the Fund in companies that are part of the solution, or at the very least do not materially contribute, to environmental and social challenges. The Manager aims to invest in companies that act as responsible corporate citizens. The Manager only includes investments in the Fund that comply with minimum social and environmental safeguards, including those concerning labour rights, human rights, anti-corruption and environmental protection. Investee companies that are involved in significant controversies or materially detract from society achieving its sustainable development goals are not considered suitable investments for the Fund and will not be included in the portfolio of the Fund.

Investment Strategy

The Manager employs a fundamental bottom-up investment process in respect of the Fund to construct a concentrated yet diversified portfolio of 25-35 stocks of undervalued companies with a market capitalisation of below EUR 5 billion at the time of investment. The Fund's investment process focuses on identifying what it considers to be high quality, undervalued companies that offer the potential for asymmetric risk/reward outcomes. The Manager's in-depth investment approach focuses on seven key investment characteristics:

1. Business quality;
2. Undervaluation;
3. Financial strength;
4. Understandable;
5. Aligned;
6. Proactive; and
7. ESG.

The Manager believes that environmental, social and governance (ESG) factors can influence a Fund's investee company’s intrinsic value. A key factor in determining a company’s intrinsic value is its long-term growth potential, which is driven by its sustainable competitive advantage. The Manager believes a company can increase its competitive advantage if it considers its long-term impact on the environment and society. It allows a company to better attract and retain key stakeholders, whilst reducing monetary, regulatory and reputational risks. Good governance practices and a strong awareness of Sustainability Factors demonstrates the desire of management teams of investee companies to mitigate these risks.

The Manager assesses ‘good governance practices’ of investee companies of the Fund in its ESG template as part of the Manager’s ESG due diligence process. Investee companies are assessed against a variety of factors, including sound management structures, employee relations, remuneration of staff and tax compliance.

The Manager is of the opinion that companies should have suitable practices and policies in place across all four of these areas to ensure that they are best placed to evolve in a sustainable manner over the long-term The Manager actively engages with investee companies on good governance practices during the initial due diligence process and on a continual basis upon inclusion in the Fund. Metrics used to monitor these factors include board composition, tenure and expertise; CEO pay ratio; voting rights structure and adherence to corporate governance policies.

Proportion of investments

The SFDR requires financial market participants to distinguish between direct exposures in investee entities and all other types of exposures to those entities. The Fund only includes direct investments in investee companies. The Fund does not include any indirect investments, such as through derivatives.

The Fund promotes environmental and social characteristics but does not have as its objective a sustainable investment and do not make any sustainable investments within the meaning of SFDR.

In respect of sustainable investments, the Manager, in consultation with the Manager, has determined that the proportion of investments in environmentally sustainable economic activities, as defined by the EU Taxonomy, is currently 0%, which comprises of 0% investments in transitional and 0% investments in enabling activities. If it is considered that the Fund should take into consideration the EU criteria for environmentally sustainable economic activities in the future in accordance with the Taxonomy Regulation, the Prospectus and this website disclosure will be amended accordingly.

The Fund allocates the majority of its assets to globally listed smaller companies (equities). These investments are used to meet the environmental and social characteristics promoted by the Fund in accordance with the binding elements of the investment strategy. The remaining proportion of investments included in the Fund is cash. These are required for portfolio management purposes as well as to maintain an adequate level of liquidity.  Although the basic precondition used in the selection of the Fund’s assets is the alignment to the environmental or social characteristics, there may be occasions when this is not the case. Such instances would include when a current investment is acquired by another entity or in the immediate aftermath that a controversy is identified.

Monitoring of environmental or social characteristics

Investee companies that meet the Manager's selection criteria in respect of the Fund are assessed against environmental and social factors at least annually under its ESG due diligence process. ESG analysis is carried out in-house by the Manager's team. While the Manager does utilise external data providers to support its analysis in respect of the Fund, the Manager does not depend on any third-party. The full ESG process is reviewed by the Manager's team annually. This is supplemented by daily monitoring including one-on-one meetings with management, outputs of shareholder meetings, daily briefs, press releases and news alerts.

As the Manager aims to position the Fund as a long-term owner in the capital of the companies it invests in, the Manager believes in active ownership. The Manager regularly engages with the Fund's investee companies about their operations, including environmental and social factors. If the Manager believes significant ESG risks are apparent, it will flag these concerns to the management of investee companies, provide guidance and encourage them to improve performance.

Methodologies

The Manager analyses a variety of sustainability indicators in its ESG template relating to the Fund. Each of the sustainability indicators are given a weighted score based on an investee company’s performance relative to its industry peers. The sustainability indicators and the associated score weights are determined by a double materiality assessment. The assessment is used to identify 1) the sustainability indicators that are most material to the Fund's investee companies and 2) the sustainability indicators which have the most material impact on society.  The indicators are split between three themes: environmental, social and governance.

Data sources and processing

The Manager uses the following data sources to assess the ESG performance of the Fund:

• Direct information from investee sources including one-on-one meetings, annual reports, company presentations, website disclosures, proxy statements;
• Clarity AI;
• Bloomberg; and
• MSCI ESG Manager including the BISR tool.

The Manager cross-references data sources to ensure data quality. The data is manually processed for each of the investee companies in the portfolio. Some estimates are used to provide an indication of performance where data is lacking.

Limitations to methodologies and data

A key limitation of the the Manager's ESG process centres around the lack of available ESG data among our chosen asset class, global small-cap equities. Gathering data on small-cap companies can be challenging as smaller companies often disclose little ESG data. Third-party data providers also frequently lack adequate levels of ESG coverage on small-cap companies, which means the Manager is unable to rely solely on such providers in respect of the Fund. This highlights the importance of the Manager's engagement process. It is vital that the Manager engages with the Fund's investee companies as it enables it to raise awareness and elevate the importance of ESG among the Fund's investee companies. The Manager's ESG process allows it to facilitate continual improvement to the Fund by providing guidance, as well as encourage more disclosure and transparency.

A further limitation is that there is some level of subjectivity involved in the calculation of the SilverCross ESG scores. To address this limitation the Manager has conducted a double materiality assessment to determine a weighting for each ESG metric within the total ESG score. The assessment aims to reduce subjectivity by selecting ESG metric score ranges guided by defined industry guidelines. Each metric in the Manager's ESG template is given a strict definition and measurable score range.

Due diligence

Sustainability Risks are considered under the Manager's ESG due diligence process. ESG due diligence is an integral part of the Manager's business operations, including in respect of the Fund, and is fully integrated into the Fund's investee company selection process. Before the Manager makes an investment decision on behalf of the Fund, it conducts ESG research on the prospective investment. Investee companies that are included in the Fund are reassessed periodically. The due diligence process includes the following stages: screening, proprietary ESG analysis, engagement and proxy voting.

Full details can be found in the Manager's ESG Due Diligence Policy.

Engagement policies

As the Manager aims to position the Fund as a long-term investor, it believes in active ownership. The Manager's focus is on building long-term relationships on behalf of the Fund with the Fund's investee companies by engaging on material issues with the relevant personnel. The Manager regularly engages with the management teams of the Fund's investee companies on their operations, including Sustainability Factors. Engagement topics are determined by the Manager's bottom-up analysis in respect of the Fund and are prioritised in terms of sustainability risk and impact. Engagement is conducted through one-on-one meetings and supplemented with conference calls, emails and, where possible, site visits. The Manager's engagement process can be broken down into four key stages: initial due diligence and engagement, in-depth engagement, proxy voting and continued monitoring and reporting.

Full details can be found in our ESG Engagement Policy.

Designated reference benchmark

An index has not been designated as a reference benchmark to meet the environmental or social characteristics promoted by the Fund.

Principal Adverse Impacts (PAI) Statement

The PAI Statement for the Fund's Manager, IBS Capital Management B.V., can be found here.