STEWARDSHIP CODE

SPARX Asset Management Co., Ltd made the following disclosure. It is English translation of the original Japanese version. If there is any inconsistency between the two versions, the Japanese version shall prevail.

Policy on Compliance with the Japanese Stewardship Code

October 20, 2020

Since our establishment, SPARX Asset Management Co., Ltd. (henceforth, "the Company") has taken a bottom-up approach to our investment activities that centers on dialogues with the management of our portfolio companies, based on its consistent investment philosophy that "the Macro is an Aggregate of the Micro." The fundamental principal of the Japanese Stewardship Code are to promote sustainable growth of portfolio companies and striving to expand medium- to long-term investment returns for beneficiaries. Because these principles are consistent with our investment philosophy, we have proactively accepted this code and created our policy on compliance with them as stated below.
The timing of purposeful engagement with portfolio companies and the degree of encouragement we provide during these discussions will vary, depending on our investment strategies and the circumstances of the portfolio companies at the time.

Principle 1. Institutional investors should formulate and publish a clear policy on fulfilling their stewardship responsibilities.

Since its inception, the Company has worked to develop innovative investment methods and to offer investment intelligence born from its thorough bottom-up approach. These are based on its consistent investment philosophy, "the Macro is the Aggregate of the Micro."
After researching disclosed documents, we evaluate portfolio companies' and candidate companies' status and medium- to long-term business growth by making visiting them in person. If we judge an investment target to have rational management practices and to show the potential for improved corporate value, we make an investment. During this coordinated process, we strive to have many conversations with the managers of portfolio companies and to gain a shared knowledge of their management challenges, which we then take into account when expressing our recommendations and opinions. Our intention is to do this in such a way that supports the improvement of corporate value. The bottom-up approach that we have pursued since our founding aims to contribute to boosting the portfolio company's corporate value, while also leading to greater medium- to long-term investment returns for beneficiaries. Furthermore, in order to enhance Company-wide capacity to respond to ESG issues, we have adopted a new framework for implementing responsible investment by establishing an ESG Committee. We have made it a basic policy to further strengthen our bottom-up approach and continue qualitative improvements in order to appropriately fulfill our stewardship responsibilities through these activities.

Principle 2. Institutional investors should have a clear policy on how they manage conflicts of interest in fulfilling their stewardship responsibilities and publicly disclose it.

Our parent company, SPARX Group Co., Ltd., is an independent company, unaffiliated with any corporate banking, securities, or insurance groups, and the first Japanese publicly listed company having several Group subsidiary companies mainly engaged in the investment management business. As such, we have endeavored to establish a code of conduct that would earn a high level of trust from the market. Half of the SPARX Group Co., Ltd. Board of Directors is comprised of independent, external directors, and the company has a governance framework that allows it to appropriately manage conflicts of interest. As a subsidiary of SPARX Group Co., Ltd., we are committed to complete transparency.
One of our fundamental principles is to preemptively avoid investment activities that may result in conflicts of interest with beneficiaries. Additionally, we remain cognizant of the fact that we also engage in Type I financial instruments business, and we have stipulated the types of conflict-of-interest transactions to be monitored, and the methods for doing so, in our Policy for Managing Conflicts of Interest, an overview of which is published on our website.

Principle 3. Institutional investors should monitor investee companies so that they can appropriately fulfill their stewardship responsibilities with an orientation towards the sustainable growth of the companies.

We strive to understand the circumstances of our portfolio companies, from the perspective of improving their medium- to long-term corporate value. We leverage our commitment to a bottom-up approach and carry out ongoing, direct dialogues with companies, over and above our verification of publicly disclosed information. This allows us to closely investigate whether a company has effective management strategies in tune with their business environment and whether they have an appropriate corporate governance structure.
In working to grasp a portfolio company's circumstances, we do not merely focus on financial indicators. We are intensely interested in whether the company's relationships with all its stakeholders--clients, employees, suppliers, business partners, and local communities--support the company's medium- to long-term growth.

Principle 4. Institutional investors should seek to arrive at an understanding in common with investee companies and work to solve problems through constructive engagement with investee companies.

Since our establishment, we have endeavored to learn about the management of companies by looking beyond financial information and engaging in continuing dialogues with the managers of a large number of companies. Through this practice of ongoing research, we can show support for activities that promote greater corporate value by choosing to make an investment, and at the same time, we can encourage change by expressing constructive opinions when we think that there is room for improvement. If our assessment indicates the possibility of the portfolio company improving corporate value by solving its management challenges, we express our support of the company's management policy by ramping up our investment. Conversely, if even after our dialogues, a company adopts management strategies that will clearly obstruct sustainable growth, we will protect the interests of our beneficiaries by ending our investment. Additionally, in some of our investment strategies, we may exercise our rights as shareholders and aggressively petition management.
We recognize collective engagement as one productive approach for enhancing the efficacy of dialogues between companies and shareholders. When other institutional investors who are also shareholders request to collaboratively engage in dialogues with portfolio companies that we are holding for strategic reasons, we sincerely consider the necessity and suitability of such action. If we determine that collaborative dialogues with other shareholders will be a more effective action in regard to the portfolio companies that we are holding for strategic reasons, we may lobby other shareholders to join us in collective engagement.
One of our fundamental principles for dialogues with portfolio companies is to pre-establish agreement, based on mutual trust, not to accept material nonpublic information. If we learn such material facts in the course of in-depth discussions intended to contribute to efforts for enhancing corporate value, we take appropriate action by, for example, following our internal regulations for immediately recording and handling such information, as well as activating necessary protocols regarding trading regulations and the like.

Principle 5. Institutional investors should have a clear policy on voting and the disclosure of voting activity. The policy on voting should not be comprised only of a mechanical checklist; it should be designed to contribute to the sustainable growth of investee companies.

Through our bottom-up approach, we invest after researching and understanding each target company's management policy, growth prospects, business model, corporate governance, and similar policies. Our criteria for exercising voting rights include whether or not each proposal contributes to greater corporate value over the medium to long term. Our internal company regulations cover guidelines for exercising voting rights on typical proposals, as well as management steps in such cases. Information on this basic policy is available on our website.*
*Policy on the Exercise of Voting Rights (https://www.sparxgroup.com/sustainability/proxyvotingguidelines/)

Nearly all our investment strategies follow an active investment approach. We only hold portfolio companies after our fund managers have researched and understood each company's business conditions. Leveraging that feature, we do not set extrinsic or quantitative criteria for exercising voting rights. Fund managers make individual decisions on each proposal, assessing whether it contributes to greater corporate value for the portfolio company over the medium to long term. If we exercise our voting rights and oppose a company proposal while supporting a shareholder proposal, we disclose that fact. Additionally, with regard to proposals that may be suspected, based on outward appearances, of involving a conflict of interest, we announce the reasons for the conflict, regardless of whether we oppose or support the proposal. Our policy is to disclose our votes on all matters for portfolio companies in our Sustainable Strategy.

Principle 6. Institutional investors in principle should report periodically on how they fulfill their stewardship responsibilities, including their voting responsibilities, to their clients and beneficiaries.

Through investment reports, meetings with clients, various seminars, our website, and other means, we announce our basic policies on stewardship-related responsibilities and activities. When explaining the status of investments, we strive to enhance disclosure of our thoughts on corporate value and the unique information gained from our bottom-up approach, which includes activities supporting a portfolio company's sustainable growth. Every year, we report the results of proxy votes on our website.

Principle 7. To contribute positively to the sustainable growth of investee companies, institutional investors should develop the skills and resources needed to appropriately engage with the companies and to make proper judgments in fulfilling their stewardship activities, based on an in-depth knowledge of the investee companies and their business environment, and a consideration of sustainability consistent with their investment management strategies.

In order to gain an in-depth understanding of a portfolio company's business and to form a shared awareness with management through dialogues, we must have sufficient knowledge and experience, in addition to sophisticated analytical capabilities. That is why, since our establishment, we have made a methodical bottom-up approach part of our basic mind-set for research and investment activities, while also thoroughly integrating high standards throughout our organization. At the same time, we have systematically trained and educated staff so that they can build and deploy their accumulated knowledge and experience throughout the Company. Furthermore, our management team has many years of professional experience at the Company and in the asset management industry. The team shares our investment philosophy and the principles on which we were founded, and it pursues business while striving for the ideal vision expected of the asset management industry. In order for portfolio companies to recognize the significance of engaging with us in dialogues, we believe that it is necessary to hone corporate analytical skills not just from a shareholder perspective but from a total value creation perspective that includes the views of all portfolio company stakeholders, be they managers, employees, clients, suppliers, business partners, or local communities. Throughout the Company, we make a daily commitment to research and analysis.
We will regularly evaluate (approximately once a year) our adherence to the Stewardship Code, including the progress of dialogues with portfolio companies, while reporting the results to the Board of Directors and the general public.

Self-Assessment of Stewardship Activities in FY2019

October 1, 2020

SPARX Asset Management ("SPARX") conducted a self-assessment of its stewardship activities in fiscal 2020 (April 2019-March 2020). The following report covers the results of this assessment.

Principle 1: Institutional investors should formulate and publish a clear policy on fulfilling their stewardship responsibilities.

SPARX has created a responsible investing policy to clarify our approach to the subject and posted it to the SPARX Group website. (Link: https://www.sparxgroup.com/pri.html )
In February 2018, we signed the United Nations-backed Principles for Responsible Investment (PRI) to raise awareness across the company of the relationship between corporate activities and environmental, social, and corporate governance issues (ESG), and to reflect this association in our investment activities. This year, as in the previous year, we created and presented a transparency report per the format required of PRI signatories.
Furthermore, in January 2020, we announced our agreement with the recommendations published by the Task Force on Climate-Related Financial Disclosures (TCFD), as part of our active involvement in realizing, through investment, a society in which human beings can coexist with the global environment.

Principle 2: Institutional investors should formulate and publish a clear policy on managing conflicts of interest, as required to fulfill their stewardship responsibilities.

In addition to funds that invest in publicly traded stocks, SPARX manages funds that invest in renewable energy and start-ups. These funds receive investments from external clients, including corporations. As a result, a situation could arise that a client investing in one SPARX-managed fund is a publicly traded company and it also becomes one of the portfolio of another SPARX-managed fund. In such circumstances, undue consideration of client relationships with such listed companies could result in our inappropriate exercise of voting rights, which could harm the interests of our listed equity fund clients.
Therefore, recognizing the importance of properly managing conflicts of interest, SPARX continued to conduct business this year per our "Rules for Managing Conflicts of Interest" to prevent transactions with conflicts of interest. When exercising voting rights, we took measures to prevent conflicts of interest concerning any potentially problematic portfolio companies by deliberating on the votes through the Committee for Managing Conflicts of Interest.

Principle 3: To fulfill their stewardship responsibilities, institutional investors should accurately assess the circumstances of portfolio companies so that these investments can achieve sustainable growth.

Again this year, SPARX has continually promoted research using a bottom-up approach. This year, we spoke with and visited 2,396 companies (including those that are not portfolio companies) . Narrowing down to our portfolios, we had discussions with 290 companies. The frequency of engagement breaks down to 22 companies with four or more visits, 118 companies with two to three visits, and 150 companies with one visit.
To improve our ESG monitoring, our fund managers began referring to ESG data in their meetings with companies. In addition to referring directly to corporate disclosure information, we also referred to ESG ratings from external information vendors, as we tried to understand the entire picture of companies with low disclosure or unclear disclosed data by asking questions at meetings. We used this information to identify new investment opportunities and avoid potential investment risks.

Principle 4: Institutional investors should seek to share perspectives with portfolio companies and work to remedy problems through constructive, purposeful engagement.

SPARX has traditionally placed a high value on individual meetings with companies. As a shareholder, if we have concerns about the management of a company, we may request, through face-to-face discussions, that the company address the issues.
Since the introduction of the Stewardship and Corporate Governance Codes, we have followed their requirements and engaged more assertively when necessary.
This year, as in the previous year, we continued our efforts to enhance and improve communication with the companies we research, focusing on engagement from perspectives of improving IR, increasing ESG disclosure, optimizing financial strategies, and bolstering management systems (refer to the engagement example below).

Engagement Example: Real Estate Company A
Company A's share price showed a low market capitalization relative to the value of its assets, and the disparity between the two was significant. Because a significantly undervalued market capitalization relative to asset value exposed Company A to takeover risk, we continually spoke with the firm, based on our belief that it needed to improve both its management stability and its share price valuation. This year, based on our awareness of the above issues, we asked Company A at every engagement opportunity to improve its management.
Subsequently, our concerns were realized when a TOB was announced for the firm and the share price skyrocketed. However, the reported TOB price was still low compared to the value of the assets, which led to a takeover battle as another TOB was made. During this period, SPARX maintained an ongoing dialogue with Company A, communicating our views from a shareholder's perspective and seeking an outcome that was good for both Company A and its shareholders.
As a result, the employees took the initiative to buy the firm and manage it themselves. The purchase price was set at a price that entirely took into account the interests of the shareholders, leading to a conclusion that was highly satisfying to a majority of stakeholders.

Principle 5: Institutional investors should have clear policies on publishing their exercise of voting rights and the outcomes of their votes. They should also design policies on exercising voting rights that go beyond merely outlining decision-making criteria and that contribute to sustainable growth in their portfolio companies.

As a general rule, SPARX conducts a fundamental analysis of all its equity holdings, a process that includes interviews before and during the investment period, to understand the entire picture of a company. When exercising voting rights, the fund managers who conduct corporate research and make investment decisions by themselves whether to approve or object to individual proposals.
To ensure that SPARX can exercise its voting rights optimally under such a system, we have established guidelines based only on essential decision-making criteria rather than detailed formal criteria or methods that rely on voting rights advisory companies. We have a process in place to allow fund managers to make voting decisions based on their past research and discussions, the individual circumstances of each company, and a rational examination of the proposals.
This year, SPARX continued to exercise its voting rights based on the individual judgments of fund managers per the above policy. Additionally, when receiving a critical proposal or request from a company, we spoke with it before and after the proposal vote to optimize our decision. We also encouraged the company to more thoroughly consider improvements to its management.
We publish aggregate totals of our votes for each type of proposal on our website. We disclose to the public the names of companies and the details of individual proposals only if we oppose a company proposal or agree with a shareholder proposal.
Our voting policy and results are available at the following URL:
https://www.sparxgroup.com/sustainability/proxyvotingguidelines/

Principle 6: Institutional investors should periodically report to their clients and beneficiaries on how they are fulfilling their stewardship responsibilities, including on how they exercise their voting rights.

This year, as in the previous year, we published the results of our stewardship responsibility self-assessment and voting results on our website. Through the submission of our transparency report to the UN-supported Principles for Responsible Investment (PRI), we disseminated information so that a wide range of stakeholders, as well as our clients, could review our activities.
We also report on our activities to clients and beneficiaries through written documents and meetings. This year, as in the previous year, we made efforts to respond to the growing number of requests for disclosure from clients by enhancing the content of our disclosures.
Furthermore, we voluntarily prepared an annual report to further enhance our disclosures for some investment strategies.

Principle 7: Institutional investors should be capable of making appropriate decisions about their engagement and stewardship activities with their portfolio companies. These decisions should be based on a deep understanding of the portfolio companies and their business environments, so as to ensure that institutional investors help these companies achieve sustainable growth.

This year, to enhance our organizational ability to execute engagement and stewardship activities with our portfolio companies, we took the following initiatives:

  • As in the previous year, our fund managers worked to improve their analytical capabilities by independently participating in ESG briefings held by issuer companies and in ESG seminars held by various organizations and securities companies;
  • We also entered into new agreements with Sustainalytics and S&P Global to improve our systems by referencing their ESG data in our corporate research and engagement;
  • We continued our efforts to improve the quality of engagement by exchanging opinions not only between fund managers but also with other internal and external parties. For some of our investment strategies, we continued last year's initiative to conduct surveys of companies after IR meetings to receive feedback on the quality of our engagement and to devise ideas for improvement:
  • We shared ESG issues with domestic and international stakeholders through their facilitation at ESG workshops organized by the World Economic Forum and through presentations at the Pan Europe ESG Summit in Europe.
  • We exchanged the information across investment teams in Japan, Hong Kong and South Korea to understand trends of ESG on a cross-border basis.

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