Redpoint Australian Industrials SMA

Product Name

Redpoint Australian Industrials SMA

Issuer

Redpoint

Category

Investment

Type

SMA - via Platform only

Target

Retail

Certified Since

2021

Asset Classes

Australian only equities

Markets

Australia

Investment Approaches

ESG Integration, Negative Screening

It Includes:

  • Investment2 More sustainable companies

It has some level of screening for:

  • Riaa icons 41 Alcohol
  • Riaa icons 42 Gambling
  • Riaa icons 52 Human rights abuses
  • Riaa icons 38 Labour rights violations

It fully excludes:

  • Riaa icons 36 Armaments
  • Riaa icons 33 Fossil fuels
  • Riaa icons 50 Nuclear power
  • Riaa icons 99 Pornography
  • Riaa icons 35 Tobacco

Overview

We believe that the incorporation of ESG issues can add value for clients and, consequently, all our structured beta and quantitative alpha strategies integrate and/or screen on ESG considerations. We encourage clients to incorporate ESG issues in the solution when engineering structured beta strategies. We incorporate ESG issues into all quantitative alpha strategies where we have full discretion and encourage incorporation where the client limits that discretion. We have developed the Redpoint Rating, a proprietary asset ranking model that evaluates the investment quality of a company along EESG criteria – a four pillar metric consistent with Global Reporting Initiative (GRI) guidelines. The Redpoint Rating utilises two of Redpoint’s six alpha drivers. Elements of the Sustainable Quality and Fundamental Growth alpha drivers are blended in a ratio that ensures ESG criteria have at least a 50% weighting in the overall rating: • Sustainable Quality – is a combination of traditional, financial statement-based measures and selected ESG indicators. We believe that: companies that exhibit financial strength and enduring profitability are more resilient to volatility in business conditions and perform better during periods of general economic stress. We also believe that selected ESG metrics can help identify good business practices – indicators of companies that are managing their business risks well, and hence less susceptible to external shocks, and that are better positioned to foster long term business growth and increase company value. • Fundamental Growth – uses quantitative fundamental analysis to capture financial statement characteristics and trends associated with quality companies – with a focus on companies demonstrating strong and improving profit margins coupled with measures of quality and improving earnings. Our analysis seeks to identify well managed companies that are changing from their current business equilibrium to new faster or slower growth trajectories likely to forecast substantial market revaluations. More explicitly, we consider labour standards and environmental, social, ethical and corporate governance considerations when selecting, retaining or divesting investments in our portfolios. Key inputs to the Sustainable Quality (ESG) component of the Redpoint Rating, relevant to this disclosure, include: • labour standards: workplace health and safety measures. • environmental considerations: emission reduction, resource reduction and product innovation measures; • social and ethical considerations: • human rights policies and records; and • corporate governance considerations: board structure and shareholders rights indicators. Redpoint uses data collected within a framework aligned with the GRI G3 Sustainability Reporting Guidelines (www.globalreporting.org) for most of the information relevant to this disclosure, on companies it holds or is considering holding in a portfolio. Redpoint references the Occupational Health and Safety aspect of the Labour Practices and Decent Work category of the GRI G3 Sustainability Reporting Guidelines, which in turn reference relevant International Labour Organisation (www.ilo.org) and UN Conventions. The focus of the Redpoint Rating is a subset of available EESG information that Redpoint believes will impact the future financial performance of companies. The strategy follows a quantitative research driven investment process. The RISMA model portfolio is designed to minimise active risk with constraints tailored to meet the particular requirements of effective SMA implementation. The model portfolio utilises the Redpoint Rating to moderate exposure to lesser quality companies in the investible universe and provide long horizon risk control and a modest boost to expected performance.


Description


Redpoint employs a structured (rules-based) investment management strategy, which seeks to construct a representative portfolio of better-quality companies that provides a return broadly comparable to that of the S&P/ASX 100 Industrials Index. The approach is designed to provide a model portfolio with low turnover, appropriate risk controls relative to the Industrials Index and comparatively lower costs.

The selection bias towards quality companies – using the Redpoint Rating as a screening device – is expected to give the model portfolio a slight defensive tilt. This is expected to provide a modest outperformance during periods of market stress but marginal underperformance when speculative stocks are in favour. This slight bias is our preferred method for sensibly allocating capital, given the model portfolio is constrained to holding less than half the stocks in the benchmark universe (Industrials Index). Given the long horizon characteristics of our quality metrics – as defined by the Redpoint Rating – this selection approach is consistent with the objective of minimising turnover.

In order to meet the investment objective, the strategy differs from the S&P/ASX 100 Industrials Index by:

·         investing in a subset of the universe, pre-qualified to include better quality companies (as defined by the Repoint Rating), while broad enough to ensure appropriate industry, sector and market capitalisation representation; and

·         holding companies at weights that are broadly in line with their weights in the Industrials Index, and in aggregate in line with the characteristics of the Industrials Index, while at the same time minimising active risk and portfolio turnover – being aware of the tax management considerations of the investor (capital gains and dividend franking).

The investible subset is determined by flagging those companies that rank worst on the Redpoint Rating. Flagged stocks are excluded from the investible universe whenever possible. However, allowance is made to ensure that the investible universe has sufficient industry, sector and market capitalisation representation. Where poorer rated stocks are to be included in the investible universe (for industry, sector and risk purposes) they are generally held at an underweight position relative to their weight in the Industrials Index. Portfolio optimisation, with tight risk controls, is utilised to determine a low active risk model portfolio of higher quality stocks chosen from the investible universe.

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