The UK Stewardship Code

According to the UK Stewardship Code, we, as a business, follow these principles.

The UK Stewardship Code is a set of principles that we use to make good investment decisions, manage funds and avoid potential conflicts of interest. It requires us to be constantly vigilant, and is designed to give you peace of mind. Find out more below.

Principle 1

Institutional investors should publicly disclose their policy on how they will discharge their stewardship responsibilities

Fidelity pursues an active investment policy through portfolio management decisions, voting on resolutions at general meetings and maintaining an ongoing dialogue with the management of investee or potential investee companies. Our overarching objective is to deliver investment performance to our clients and in order to do so we seek a long term understanding of all aspects of the companies in which we invest.

Fidelity believes that high standards of corporate responsibility will generally make good business sense and have the potential to protect and enhance investment returns. In this regard we support the recommendations of the UK Corporate Governance Code although we consider carefully all explanations for non-compliance before determining our views. Our investment process takes environmental, social and governance (“ESG”) issues into account when, in our view, these have a material impact on either investment risk or return. We seek to gain an understanding of the relevant ESG issues applicable to our investments through our internal research process and to identify those issues which may potentially threaten the value of our investment. Our ESG integrated approach is applied across all the asset classes, sectors and markets in which we invest.

We do not screen out companies from our investment universe purely on the grounds of poor ESG performance but rather adopt a positive engagement approach whereby we discuss these issues with the management of the companies in which we invest or consider investing on behalf of our clients. We use the information gathered during these meetings both to inform our investment decisions and also to encourage company management to improve procedures and policies. We believe that this is the most effective way to improve the attitude of business towards corporate responsibility.

ESG analysis is carried out at analyst level within the equity, fixed income and real estate teams and our portfolio managers are also active in analysing the potential effects of these factors when making investment decisions but there is also a specialist in-house ESG team which coordinates Fidelity’s approach to ESG and the implementation of our voting policies. Fidelity subscribes to three governance research services as well as an external provider of sustainability research and the ESG team provides the investment team with quarterly reports and alerts on ESG-related topics as well as thematic ESG analysis.

The investment team is supported by the Head of Corporate Finance who reports to the Chief Investment Officer and who resides behind a Chinese Wall. The Head of Corporate Finance acts as a point of contact for all external parties who wish to engage with the investment team outside of the routine investment process. These external parties include company chairmen, independent directors, other shareholders, company advisers, customers, media and other agents of corporate change. The Chinese Wall facilitates a full and open dialogue and means that there is no information which Fidelity in principle cannot accept. In this context we encourage companies to consult at an early stage when they are contemplating major strategic or corporate initiatives.

The Head of Corporate Finance is responsible for the activities of the ESG team and works closely with the portfolio managers and analysts to assist them in all non-standard investment situations including those where intervention or escalation is deemed necessary. The Chief Investment Officer receives a weekly report on activity.

Fidelity’s voting guidelines are contained in the Principles of Ownership which can be found here and our most recent Governance & Engagement Report can be found here.

If you would like to learn more about Fidelity’s approach to stewardship then you should address your enquiry to Trelawny Williams who can be reached at trelawny.williams@fil.com or on (44) 207 961 4873.

Principle 2

Institutional investors should have a robust policy on managing conflicts of interest in relation to stewardship which should be publicly disclosed.

Fidelity is a privately owned, multiclass asset manager and has a documented policy for the management of conflicts of interest in its UK business which is approved annually by the Conflicts Oversight Forum (a sub-committee of the Board of the holding company) and is designed to ensure that conflicts between the interests of Fidelity and its clients or between clients of different types are managed appropriately. The full conflicts of interest policy can be found here.

The Fidelity Conflicts of Interest Policy addresses the obligations of Fidelity and its subsidiaries carrying on regulated business to maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps to prevent conflicts of interest from constituting or giving rise to a material risk of damage to the interests of its clients. It applies to perceived as well as actual conflicts. Where it is a fiduciary, Fidelity owes a duty to its clients never to put itself in a position where its own interest results in an irreconcilable conflict with its duty to its clients or where its duty to one client results in an irreconcilable conflict with its duty to another client or clients. Fidelity is also under a regulatory duty to manage conflicts of interest fairly, both between itself and its clients and between different clients. To that end, Fidelity will identify, record, manage and, where required, disclose actual or potential conflicts of interests and have in place a policy relating to conflicts of interest.

Conflicts are identified through various means, including regular interviews with the business heads, awareness training and internal reviews. There is a governance structure in place to ensure the effective implementation of the Conflicts of Interest Policy and the Conflicts Oversight Forum meets on a quarterly basis to review any issues involving material conflicts occurring the previous quarter. These will include any newly identified conflicts, any breaches of the policy and any other relevant regulatory matters. A Conflicts Register is also maintained to ensure that significant conflicts have been identified, addressed and recorded. All staff must adhere to the Conflicts of Interest Policy and the Code of Conduct and Associated Policies and they are made aware that clients’ interests must always come before those of Fidelity or its staff.
Situations where conflicts of interest could arise in the context of stewardship include the following examples:

  1. Investing - Within Fidelity there are companies which invest as principal for investment purposes in equities and/or bonds in which Fidelity may also invest for our clients. Potential conflicts can occur during acquisition and disposal of securities, voting and the use of research. To manage these potential conflicts, decisions regarding Fidelity’s investment portfolio are made independently of the investment management process which supports our clients’ funds and accounts. Policies and procedures are in place to ensure that these principles are properly followed. It is also possible that a Fidelity fund or account will own securities issued by a client, but in all situations Fidelity’s investment decisions will be guided by what we regard as the best interests of the relevant fund or account.
  2. Trade Allocation - When performing client transactions in securities, Fidelity will combine orders where this it is in the best interests of the clients as a whole. If there is insufficient liquidity resulting in a partial completion of the order then the securities will be allocated across all clients participating in the block and it is possible that one client may receive a more favourable allocation over another client. To manage this potential conflict, Fidelity maintains a Trading Desk Policy which ensures the consistent and fair application of trade allocations. Allocations are performed on a pro-rata basis based on the size of the order, and the system allocation algorithm is automatically applied for every trade, subject to three lines of oversight – the Trading Desk supervisor, Compliance and Internal Audit/Risk.
  3. Voting - In instances where a fund holds an investment in more than one party to a transaction we will always act in the interests of the specific fund in question and in instances where there is a conflict with Fidelity’s own interests, we will either vote in accordance with the recommendation of our principal third party research provider or if no recommendation is available we will abstain or not vote at all. We will not vote at shareholder meetings of any Fidelity funds unless specially instructed by a client. The Head of Corporate Finance is responsible for monitoring possible conflicts of interest with respect to proxy voting.

Principle 3

Institutional investors should monitor their investee companies.

As described under Principle 1, Fidelity pursues an active investment policy through portfolio management decisions, voting on resolutions at general meetings and maintaining an ongoing dialogue with the management of investee or potential investee companies. Our overarching objective is to deliver investment performance to our clients and in order to do so we seek a long term understanding of all aspects of the companies in which we invest. The intensive analysis which accompanies an initial investment continues throughout and beyond the life of the investment itself.

Fidelity’s investment analysts act as the hub for our communication with companies and they undertake extensive quantitative and qualitative analysis of potential investments. Formal meetings involving both portfolio managers and analysts are held with investee companies at least twice a year and these meetings focus on the drivers of long term performance, although shorter term issues are also relevant in the context of satisfying ourselves that the longer term investment thesis is still intact. In addition to financial and strategic matters, discussion will cover a wide range of related investment topics including, but not restricted to, corporate governance, business sustainability and management motivation.

Meetings are supplemented by an informal schedule of contacts such as site visits and ad hoc calls, and research analysts are also encouraged to develop knowledge of a broad range of industry experts across the value chain in their chosen coverage fields. Research may encompass customers, suppliers, competitors, external industry experts, sell side investment analysts and other shareholders, both directly and through intermediary networks. The investment analysts are responsible for producing most of our company research but for some of our larger holdings this research is complemented by in-depth due diligence reports prepared by senior investment professionals. In addition to internally produced research we also from time to time commission bespoke research from external agencies.

We believe that the more we can learn about our investee companies the better we can hold them to account for delivering on their strategy, and to this end there are numerous internal weekly, monthly and quarterly reviews designed to pool knowledge of our investee companies and to identify opportunities and matters for attention. Individual portfolios are also subject to an in-depth quarterly review with senior management in which every aspect of the fund in question is examined, including risk profile, volatility, performance and fund positioning as well as the individual investments of the fund in question.

Where there are particular issues giving rise to concern or when we want a broader perspective of a company’s business we will often seek meetings with Chairmen and/or independent directors. There is no automatic cycle for meetings of this nature and they take place when there is deemed to be a need for them. Meetings with Chairmen and/or independent directors almost always involve senior portfolio managers in addition to the investment analyst and representatives of the ESG team, and very often contain a strong governance content. In addition to a review of strategy, the proper operation of the Board is a key focus and discussion will cover matters such as Board effectiveness and balance as well as succession planning. Sometimes these meetings are one-off in nature but in other cases we will hold meetings with a particular Chairman and/or independent director on a regular basis until the matter under discussion has been satisfactorily resolved. We will also occasionally ask to see the Chairman of the Audit Committee to discuss audit and risk-related matters.

The ESG team is responsible for the exercise of Fidelity’s votes at company meetings and the ESG team conducts its own analysis of investee companies to determine whether or not they are compliant with our voting guidelines. It is not our usual policy to attend general meetings but if circumstances warrant we will on occasion vote in person and may additionally make a statement explaining our position. In exceptional circumstances we may also submit a resolution for a shareholder vote at a general meeting. Further information on Fidelity’s voting procedures is described under Principle 6 below.

The ESG team also hold their own meetings and calls with companies and these discussions focus primarily on corporate governance and ESG-related topics such as remuneration and Board independence. The investment analysts are encouraged to participate in these discussions so as to ensure that the investment and ESG teams give an integrated message to companies.

As described under Principle 1, the Head of Corporate Finance resides behind a Chinese Wall and will normally be the first point of contact for any price sensitive information. Whilst the Head of Corporate Finance may provide feedback on the matter in question, subject to the timeframe of the relevant information it may be shared with the investment team for their review and decision. The existence of a Chinese Wall means that Fidelity is able to accept price sensitive information if a third party deems it necessary for us to do so and we encourage companies to consult with us at an early stage if they are contemplating major strategic or corporate initiatives. Enquiries of this nature should be addressed to Trelawny Williams who can be reached at trelawny.williams@fil.com or on (44) 207 961 4873.

Principle 4:

Institutional investors should establish clear guidelines on when and how they will escalate their stewardship activities.

As a general policy we aim to support the management of the companies in which we invest but our dialogue with companies is a robust one and we will form our own views on the strategy and governance of a business. On occasion our views may differ from those of management or the Board and this may give rise to an escalation in our engagement. Factors taken into account prior to an escalation include an assessment of the materiality of the matter in dispute, the size of our shareholding, the timeframe of the investment thesis and the ownership profile of the business in question. Escalation can also occur when we become aware of differences between directors. Our specific response will always be determined on a case by case basis and there will be instances when we choose to sell our shares.

When escalation is deemed appropriate our first step is often to make contact with other significant shareholders to determine whether they share our views or concerns. Following these conversations we will speak to the company’s advisors and/or independent directors for a further exchange of views. Our strong preference is to achieve our objectives in a consensual and confidential manner but when differences with a company remain, we may consider joint engagement with other shareholders (see Principle 5 below) and more public forms of dissent although as a general policy we do not favour using the media to help achieve our objectives. As described under Principle 6 below, if differences with a company remain unresolved we may vote against the Board in a general meeting or even requisition an extraordinary general meeting to enable all investors to vote on the matter in dispute.

Topics which have given rise to escalation in the past include the need for management and/or Board change, strategy, capital structure, M & A, protection of shareholder rights, remuneration and other governance issues.

Principle 5:

Institutional investors should be willing to act collectively with other investors where appropriate.

We maintain close relationships with a wide spectrum of investors as well as other agents of corporate change. Where legally permitted we are willing to consider collective engagement initiatives. Relevant factors in determining whether or not to participate in a collective engagement will include the identity of the other leading investors, the relative size of their investment and a determination of whether a collective approach is necessary in order to achieve a satisfactory outcome. We seek to identify issues, both governance and otherwise, which are relevant to the performance or valuation of the business in question. We would not normally intervene on an operational matter but as described under Principle 4 above, topics which can give rise to escalation and collective engagement include the need for management and/or Board change, strategy, capital structure, M & A, protection of shareholder rights, remuneration and other governance issues.

Fidelity is an active member of the UK Investor Forum and we maintain close links with other investors through organisations such as the Investor Association, the Corporate Governance Forum and numerous investor gatherings and conferences. There are collective meetings and calls with other investors several times a month at which company specific and wider governance issues are regularly discussed.

The point of contact within Fidelity for potential joint investor initiatives is Trelawny Williams who can be reached at trelawny.williams@fil.com or on (44) 207 961 4873.

Principle 6:

Institutional investors should have a clear policy on voting and disclosure of voting activity.

As disclosed in the text under Principle 1, Fidelity maintains a specialist in-house ESG team who coordinate our approach to ESG and implement our voting policies. Our voting guidelines are updated on a regular basis and can be found here. Information to inform our voting process is derived from a variety of sources and includes material provided by the company, proxy voting advisory services and internal research. Discussions may also be held with investee companies themselves.

We subscribe to three proxy voting governance research services: Institutional Shareholder Services, Glass Lewis and the Institutional Voting Information Service of the Investment Association. We have established a set of customised guidelines with our voting agent but all votes are cast in accordance with our voting policies after consultation with the relevant portfolio managers where appropriate. We will vote all equity securities where there is a regulatory obligation for us to do so or where the expected benefit of voting outweighs the expected costs. Some markets are still subject to share-blocking where if shares are voted they are blocked from trading for a period of time before a general meeting, but we will still seek to vote at least 50% of our shareholding in these markets provided the value of the shareholding exceeds our minimum size criteria. We will also take account of the particular circumstances of the investee company concerned and of prevailing local market best practices.

We encourage boards to consult with investors in advance rather than risk putting forward resolutions at general meetings which may be voted down. Subject to the size of our investment, where our views differ from those of the Board we will seek to engage with the Board at an early stage to try and resolve differences. Where this is not successful and we decide to abstain or vote against a company, for all of our larger holdings we will generally ensure that management understands the reason for our opposition. We tend to abstain only when we have insufficient information or where we wish to give a cautionary message to a company. Our guiding principle is that voting rights should always be exercised in the best interest of investors.

It is not our usual policy to attend general meetings but if circumstances warrant we will on occasion vote in person and may additionally make a statement explaining our position. In exceptional circumstances we may also submit a resolution for a shareholder vote at a general meeting.

We disclose our voting record for the preceding 12 months on our website which can be found here. This information is updated on a quarterly basis.

Fidelity operates a very limited stock lending programme through a third party provider and stock may be lent up to agreed thresholds. We regard our votes as valuable and whilst we will not recall stock for routine votes where the revenue from lending activities is deemed to be of more value to the client than the ability to vote, we will recall stock when it is in our clients’ interest to do so. This may include votes of significant economic or strategic importance, votes which are anticipated to be close or controversial, votes where we disagree with management or votes where do not have sufficient forward visibility to make a timely and informed judgement. We do not borrow shares for the purpose of gaining additional voting rights.

Principle 7

Institutional investors should report periodically on their stewardship and voting activities.

We provide quarterly voting reports to our institutional clients including details of noteworthy votes within their portfolios. These reports include instances where we vote against management as well as an explanation for our voting decision together with a voting record of all meetings voted on behalf of the client in the previous quarter and a thematic ESG report. As described under Principle 6 above, we also disclose our votes on a quarterly basis on our web site. At the end of the year we prepare a more in-depth annual governance and engagement report which provides a detailed analysis of our voting activities for the year as well as a general update on our governance and stewardship related activities. Most of this report is posted on our web site and can be found here.

Fidelity has obtained an independent assurance Opinion on our stewardship & voting process. The scope of this Opinion includes assurance on our application of Principles 1, 2, 4, 6 and 7 of the UK Stewardship Code, in line with the AAF 01/06 framework. Our stewardship and voting process does not change materially from year to year and our most recent independent assurance Opinion was received in August 2016.

Fidelity International (“Fidelity”) refers to the independent group of privately owned companies which form the global investment management organisation that provides information on products and services in designated jurisdictions outside of North America.