Asset Manager Overview
Royal London Asset Management (RLAM) is part of the Royal London Group, the UK's largest mutual pension and investment provider. Established in 1988, RLAM manages over £180 billion in assets. The firm manages a significant portion of these assets following a passive investment strategy. RLAM invests on behalf of both the parent insurance company, Royal London, and external investors.
Fund Manager/Team Overview
The passive and quantitative team at RLAM manage over £40 billion across a number of different systematic equity strategies. The team is headed by Matt Burgess, who has over 25 years of industry experience. He joined RLAM in 2016 and has since focused on enhancing the technology implemented by the team to improve the efficiency of their processes. Matt is supported by a team of eight, each with varying levels of experience.
Investment Philosophy & Process Overview
The fund invests in physical securities and, due to its slight ESG approach, follows an optimization strategy to replicate the benchmark. An optimization approach involves selecting a subset of securities from the index rather than investing in every single security in the index. The managers can adjust stock weightings by +/- 0.25% relative to the index and sector weightings by +/- 0.10% relative to the index. The goal of the fund is to maintain similar risk characteristics, industry and country membership, and market capitalization as the index.
The fund aims to have a carbon intensity that is at least 10% lower than its benchmark, the FTSE 350 Index. The managers will seek to achieve this by holding slight overweight and underweight positions in stocks, thereby reducing the fund's carbon intensity and improving its ESG credentials relative to the benchmark. Although the fund will continue to track the FTSE 350 Index, these changes will result in a slightly higher tracking error compared to peers. We believe that the higher tracking error is a fair compromise for the reduction in the carbon intensity.
The fund is priced and traded at 12 PM GMT. If the underlying market is closed, a fair pricing adjustment may be applied to align the fund with the expected price of the tracked index. Most of the time, fair value adjustments have no material impact on the fund's pricing operations. However, occasionally, when a market is closed, an event may occur that would materially impact prices. This was the case in February 2022 when Russia's invasion of Ukraine led to the suspension of all Russian stocks to international investors. Therefore, a fair price adjustment was applied by valuing all Russian securities at zero.
The fund is priced at a different time to the benchmark, which can slightly increase the tracking error of the fund and lead to notable differences in performance if there are market moves between when the fund and the benchmark are priced. This difference should then be eradicated the following day.
The fund can undertake stock lending activity, but no more than 15% of the NAV of the fund can be on loan at any point in time. Stock lending involves lending securities to another party and receiving income in return. Trades are typically conducted with another entity, usually an investment bank, which introduces counterparty risk—the risk that the other party may renege on their agreement and fail to repay the stock in full.
RLAM has strong risk controls in place to protect the fund in the event of a default on any stock lent. This includes strict over-collateralization requirements as well as a third-party indemnification agreement.
The fund benefits from the income generated through stock lending, with approximately 85% of the gross income returned to the fund. The impact on the fund's performance from stock lending tends to be limited.
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