Nikko Asset Management (Nikko AM) adopts the “Principles for Responsible Institutional Investors”, also known as “Japan's Stewardship Code”, in relation to our investments in publicly traded Japanese stocks.

Acceptance of the Stewardship Code

“Japan's Stewardship Code” was established under the auspices of the Financial Services Agency in February 2014 as a guide for institutional investors to “promote sustainable growth of investee companies and enhance the medium- and long-term investment return for clients and beneficiaries.” In light of the contents of statements released by the Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance Code and other such changes, a revised version of the Code was released about three years later in May 2017. Nikko AM takes a global approach to the Code, focusing on the core components of stewardship.

Nikko AM's primary mission is to fulfill our fiduciary duty to clients and beneficiaries and this is our perspective in adopting Japan's Stewardship Code. We aim to increase medium- and long-term returns on the assets investors entrust to us by analysis of and appropriate engagement with investee companies and the exercising of voting rights.

Nikko AM offers its clients a range of pooled equity investments, including active strategies such as value, growth and concentrated portfolios, as well as long-short, enhanced index, and also passive strategies. These do not include “activist” investor strategies where investors directly intervene in the management of investee companies or seek to influence management in the setting and implementation of corporate strategy.

Notably, Japan's Stewardship Code adopts established international practices in its “Principles-Based Approach” (as opposed to Rules-Based), and its “Comply or Explain” provision allowing institutional investors to explain why they may not comply with some aspects of the Code. Moreover, the fact that “constructive dialogue” with investee companies can be based on public information (Guidance 4-3) is an effective measure, in our view.

Views and Policies on the Stewardship Code

1. Institutional investors should have a clear policy on how they will fulfill their stewardship responsibilities, and publicly disclose it.

Nikko AM is a global multi-asset manager providing clients with various investment strategies. For Nikko AM’s main activities to fulfill its stewardship duties, using publicly available information, it ascertains the statuses of the firms it invests in, engages with them and exercises voting rights in their shareholder meetings in the case of its active and passive management strategies, while in the case of its other management strategies, it exercises voting rights in firms’ shareholder meetings.

The sustained growth of a company is influenced by various factors, such as company culture, management vision, business and financial strategies, corporate governance and relationships with stakeholders. The degree of influence of each factor differs depending on the company's growth phase. Through appropriate engagement and analysis, Nikko AM has an investment management process with which it makes decisions on corporate value. With regard to medium- and long-term management strategies, shareholder return policies and ESG* strategies, Nikko AM engages in corporate research appropriate to each company's growth phase. In accordance with its emphasis on the exercising of voting rights as an opportunity to express its opinion to investee companies, Nikko AM established the Stewardship and Proxy Voting Committee and created the Stewardship and Voting Rights Policy Oversight Committee as a body to monitor, oversee and provide advice to the former committee. Based on the Guidelines on Exercising Voting Rights, which the committee administrates to ensure proper voting, the Stewardship and Voting Rights Policy Oversight Committee works to ensure that Nikko AM exercises its voting rights appropriately after first establishing whether or not the proposed agenda items will contribute to medium- to long-term growth in corporate value. From its perspective as a body composed of a majority of external members with no special interests in Nikko AM, the Stewardship and Voting Rights Policy Oversight Committee monitors and oversees whether Nikko AM’s exercising of voting rights and other stewardship activities are in line with its objectives and whether it is making the proper efforts to fulfill its fiduciary duties consistently. The committee also provides necessary advice from a fair and neutral standpoint.

* “ESG” means Environment, Social and Governance. An ESG Investment Strategy is a strategy that evaluates corporate value by taking into account ESG factors.

Guidelines on Exercising Voting Rights

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

When conducting analysis, appropriate engagement or exercising voting rights, for example, if Nikko AM invests in an affiliated company, an investee company or a client (including companies with connections to a client), the possibility of conflicts of interest cannot be ruled out.

Nikko AM has established appropriate risk management and compliance frameworks to ensure that the interests of clients and beneficiaries are the top priority and that such conflicts of interest are appropriately managed if they arise. Portfolio managers, research analysts and governance specialists aim to avoid the occurrence of any conflicts of interest in compliance with Nikko AM's internal regulations.

Nikko AM envisages that conflicts of interests may arise when it exercises voting rights in regard to the entities listed below. In order to avoid conflicts of interest and enable objective decision making in its exercise of voting rights, it has established the following control framework to maintain appropriate voting decisions pursuant to Item 4 of Article 3 of the Company's Guidelines on Exercising Voting Rights.

(i) Parent company: Nikko AM refers to the opinions of external third parties when making voting decisions regarding its parent company. It also ensures that its judgments are neutral and transparent by having them deliberated over by the Stewardship and Voting Rights Policy Oversight Committee.

(ii) Distributors: The exercise of voting rights regarding listed financial institutions that distribute Nikko AM’s products creates a risk of conflicts of interest regardless of whether Nikko AM has a capital relationship with the entity. When exercising voting rights regarding one of its distributors, Nikko AM not only refers to the opinions of external third parties, but also confirms whether its voting decisions give the highest priority to the interests of its clients and beneficiaries and fulfill Nikko AM’s stewardship responsibilities by reporting all proposals it votes on to the Stewardship and Voting Rights Policy Oversight Committee in order to receive fair and neutral advice and oversight.

(iii) Clients with which Nikko AM has a business relationship: Exercising voting rights regarding listed clients and entities with which Nikko AM has a business relationship also carries the risk of conflicts of interest arising. Therefore, when voting regarding clients and entities with which it has a business relationship, Nikko AM also refers to the opinions of external third parties and reports all proposals it votes on to the Stewardship and Voting Rights Policy Oversight Committee in order to receive fair and neutral advice and oversight.

Conflict of Interest Policy

Guidelines on Exercising Voting Rights - Article 8

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.

Portfolio managers, research analysts and governance specialists endeavor to accurately assess investee companies by utilizing public information. They also make investment decisions based upon the sustainable growth of investee companies by analyzing financial information, such as earnings trends and capital structures, as well as non-financial information like management strategies and firms’ ESG strategies. Such data is acquired by accessing disclosure material, holding regular meetings and appropriately engaging with investee companies.

Nikko AM became a signatory to the United Nations’ Principles for Responsible Investment (PRI) in 2007. By signing up to the PRI soon after they were launched, Nikko AM demonstrated its commitment to seriously addressing all six of them as part of its fiduciary responsibility. Nikko AM incorporates ESG issues in its investment processes for its Japan equity investment strategies.

Corporate philosophy and fiduciary/ESG principles:

Code of Conduct for Fiduciary and ESG Principles

Initiatives regarding Code of Conduct for Fiduciary and ESG Principles

Nikko AM’s Commitment to Responsible Investing

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.

Portfolio managers, research analysts and governance specialists endeavor to enhance corporate value through interaction with management and IR representatives of investee companies in respect of public information. For its investment decisions, in active and passive management strategies Nikko AM uses only publicly available information on the universe of companies including public disclosure documents, information obtained in one-on-one or group investor relations meetings and other information obtained through publicly available sources. For active equity investment strategies, Nikko AM enters into constructive engagement with investee companies with the intention to not become a recipient of undisclosed material facts. It engages with investee companies through Q&A in IR meetings, casting votes in shareholders' meetings, and in the case of active management strategies, buying, holding or selling stocks. For other equity investment strategies, Nikko AM exercises voting rights in shareholder meetings.

Governance specialists also endeavor to exchange opinions in-house where appropriate on the corporate governance of investee companies. The results of these activities are shared where appropriate between portfolio managers, research analysts and governance specialists and can be useful in assessing corporate value when making investment decisions. Interaction with investee companies aimed at enhancing corporate value is continuously implemented. Nikko AM has a policy to avoid receiving any undisclosed material facts and takes the utmost care to ensure that it does not receive any undisclosed material facts through its stewardship activities. Nikko AM continuously implements education and training to prevent the acquisition of undisclosed material facts. In the unlikely event that undisclosed material facts are acquired, countermeasures are immediately implemented to prevent insider trading from occurring in accordance with Nikko AM's internal rules for the management of insider trading.

5. Institutional investors should have a clear policy on the voting and 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.

Nikko AM established the Stewardship and Proxy Voting Committee and created the Voting Rights Policy Oversight Committee as a body to monitor, oversee and provide advice to the former committee. The Stewardship and Voting Rights Policy Oversight Committee ensures that voting is carried out in accordance with the Guidelines on Exercising Voting Rights, which the committee administrates to ensure proper voting. Based on the rationale that increased corporate value in the medium- to long-term from sustained growth of investee companies will lead to increases in assets that Nikko AM manages for clients and beneficiaries, Nikko AM votes in favor of agenda items that support this rationale, but will vote against agenda items that do not.

Guidelines on Exercising Voting Rights

Nikko AM’s carries out Japanese stock lending transactions in accordance with an investment management policy formulated by an internal committee whose members include managers in its investment management, compliance and risk management functions. The investment management policy stipulates that Nikko AM is to take measures such as setting an upper limit on the number of stocks of each individual name that can be borrowed in order to maintain the voting rights held in funds that carry out stock lending.

Nikko AM discloses individual results of its voting on the Japanese stocks in which it invests on its website and in press releases every quarter. Every year, it also publicly releases the results of voting in investee companies by proposal type, and the information includes the total number of proposals voted on as well as whether Nikko AM voted for or against the proposals.

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

Nikko AM's Stewardship Policy is regularly reviewed. In addition to publishing the results of its exercise of voting rights regarding Japanese equities on its company website, Nikko AM not only discloses how it voted on individual proposals but also provides to individual clients information on voting for stocks held as assets if requested, and the reasons for voting decisions in respect of those stocks.

7. To contribute positively to the sustainable growth of investee companies, institutional investors should have in-depth knowledge of the investee companies and their business environment and skills and resources needed to appropriately engage with the companies and make proper judgments in fulfilling their stewardship activities.

In order to appropriately and efficiently implement stewardship activities, Nikko AM has established a Stewardship and Proxy Voting Committee. This committee is mainly comprised of employees in management positions in Nikko AM's fund management and compliance departments and is charged with formulating and periodically reviewing Nikko AM's policy on stewardship activities and the use of voting rights.

Nikko AM also established its Stewardship and Voting Rights Policy Oversight Committee in June 2016 in order to increase transparency in its stewardship activities and strengthen its governance. From its perspective as a body composed of a majority of external members with no special interests in Nikko AM, the Stewardship and Voting Rights Policy Oversight Committee monitors and oversees whether Nikko AM’s exercising of voting rights and other stewardship activities are in line with its objectives and whether it is making the proper efforts to fulfill its fiduciary duties consistently. The committee also provides necessary advice from a fair and neutral standpoint.

Nikko AM consistently assesses its own implementation of the principles and policies included in the Code, which helps it to further enhance its stewardship activities. Nikko AM will continue to provide periodic updates of these assessments on its website.

November 24, 2017