10/04/2017 Victor Heinänen

The Year 2016 Through the Eyes of the Unitholders’ Representative

Beggar Thy Neighbour – ylivelkaantumisen ja protektionistisen kauppapolitiikan koko kuva
Zidisha – Solution into Microfinance

During the year 2016, HCP’s business developed steadily, according to the plan. The funds received 48 new customers, and the amount of assets under management grew to 78.5 million euros. The amount of assets under management grew 12% from the year 2105, which is well below the previous year’s growth (23%). Generally, this is due to three factors: the redemptions, subscriptions and returns of funds. These three factors are naturally connected to each other. The more funds yield results, the more subscriptions are made in the hope of future income and the more fund units are sold to redeem any winnings. In 2016, all kinds of upheaval was witnessed in the market, such as terrorist attacks, the Brexit vote, the US presidential election homestretch, repetitive peaks in the stock market as well as continuous increase of liquidity in the market.

Subjects That Roused Most Discussion in the Meetings

In the board meetings, plenty of discussion was caused by, for example, Tommi’s view of the global economic development and the company’s preparedness for a recession with a cash buffer. At the same time, HCP prepared for market upheaval with derivatives. This technique slightly reduces the company’s returns if the market continues to rise, but at the same time it helps to ensure the sufficiency of cash in case of a possible upheaval. This doesn’t have an effect on the unitholders’ holdings and their value development.

Another subject that caused plenty of discussion is expenditure budget. Is it inconsistent to predict negative market development but at the same time raise expenditure according to the previous plan? No it’s not. While other companies are preparing for dark clouds by cutting costs, HCP takes responsibility for the ecosystem. The well-being of both employees and partners has to be taken care of even in difficult times. Last year, the staff was given equal wage increases (in euros) regardless of their position. In this respect, HCP’s compensation practice curbs reckless risk-taking, which, for example, the Finnish Financial Supervisory Authority (FIN-FSA) has taken a stand on.

Last year, HCP’s ownership base was expanded by a private share offering to employees. Now every employee with a permanent contract of employment has ownership of the company. Therefore, in the long run, it is likely that work is done in the best possible way, by building your own company.

Internal Audit

At HCP, an internal auditor carries out an audit every year. Although the audit is an annual procedure and may seem like a routine, the audit is not only about viewing the implementation of the previous year’s development proposals but also about raising new development targets. The audit’s findings and proposals for corrections are examined in the board meetings, and the board is responsible of acting on them as well as supervising the implementation of corrective measures.

In the internal audit of 2016, Juhani focused on the following issues according to the audit plan:
1. Storing of contracts and other documents as well as information security,
2. timeliness and adequacy of procedures and guidelines as regards key functions and
3. handling customer complaints.

As regards these issues, the following were the main findings:
1) Storing of contracts and other documents as well as version management works well; the documents can be found as both hard and electronic copies. The previous year’s development proposal, the filing of annexes in the same file with the minutes of board meetings, has now been implemented in an exemplary way.  Control measures related to information security, as regards physical and electronic documents, are arranged in an appropriate manner.

2) Procedures and guidelines, for the most part, are up to date. It is proposed that (summer) employees shall go through the oldest guidelines, and they can be, for example, discovered unnecessary or updated.

3) In 2016, HCP received one customer complaint, which arose from a fund unit redemption order. The funds’ rules state that the redemption notice shall be made one month before the redemption date, but the customer did not act according to this rule. The dissatisfaction arose – quite understandably – from the decrease in the fund unit’s value after the late notification. The complaint was handled according to instructions and a good form of procedure. Despite this, the customer was dissatisfied. As an improvement, the guidelines for complaints are published on the company’s website, and customers will be further reminded of the funds’ rules.

I have been pleased to discover that the development proposals of internal audits at HCP have resulted in action. The necessary actions have been taken immediately rather than left to the last minute. Some of the development proposals are clear steps and some are ongoing processes which are “never ready”. At HCP, it is understood that every decision and action permanently affects the company DNA; work is being done with professional pride and a long-term vision.

Understanding the Customer

There is a code in HCP’s DNA that guides working in a distinctive way, unlike the rest of the industry. There are certainly not many asset management companies in the world that organise electronic music parties to increase brand awareness. An excellent example of this is the Asylum concept developed by Farrél Boussir. This inbound marketing concept is unique: the machine music fan finds out the party organiser, learns about the different funds available and then makes an investment decision without any pressure. An integral part of HCP’s organizational culture is publicity gained by actions rather than paid advertisements.

Indeed, understanding and respecting the customer is an important part of trustworthiness. I think that a fund management company has to know not only what the law requires to know about its customers but also their values. In that sense, the Asylum concept is at the heart of understanding and sharing the customers’ values.

Another important customer group for HCP is professional athletes. It was therefore quite natural to challenge the norm in the sector by introducing an alternative to the sport-specific trust funds. Competition will definitely lower the fees paid by athletes, which means that they will have more to spend in their days of retirement. The number of HCP Sports customers is growing steadily.

Last year, HCP received international recognition when the best in the investment industry were awarded. The awards included Fund Manager of the Year in Finland and Best Multi-Strategy Asset Manager in Finland. The awards are listed at the top of the web page. In addition to this, the AI Hedge Fund Awards rewarded HCP for the systematic inclusion of responsibility in all of the company’s operations under the label #HCPSPIRIT.

Responsibility

When discussing with Tommi about responsibility, it turned out that the most memorable thing for him was when two students from Umeå University contacted him. They interviewed two of HCP’s employees after finding the company in the Global Reporting Initiative’s database. In their comprehensive final thesis, HCP appeared as a model student: the company knows how to make responsibility concrete, formalized and systematic, and in addition, it is integrated as part of society. This is the most advanced form of corporate social responsibility. In other words, responsibility at HCP is not mere icing on a cake but the cake itself.

Although the image seems picture perfect, the work has just begun. It’s important to stay on the same track and aim for constant improvement, step by step. The next step is the B Corporation certification with its strict certification process. Last year, HCP was not yet good enough for this certificate. The work for the systematic improvement of responsibility continues this year.

This year again, HCP offers a summer job for a couple of young professionals. Summer jobs at HCP are more educational than lucrative, as Felicia who compiled the meritorious responsibility report last year suggests in her work. Links to the report can be found below. At the moment, HCP has received 79 summer job applications, one third of which are from women. At HCP, there is neither negative nor positive discrimination, but the best are selected regardless of their gender. I hope that in the future, approximately half of all employees and members of the board would be women. At least with the summer job applications, we’re heading to the right direction:

Year: summer job applications / percentage of women
2017: 79 / 33% (March 21)
2016: 59 / 20%
2015: 64 / 20%
2014: 22 / 9%

Final Words

The last two years at HPS’s Board of Directors have been very interesting and have given me a lot of new insight not only about the financial sector but also about board responsibility. When talking to other members of the board, I’ve had the impression that a member from outside the board of directors brings positive pressure to do things well and ethically. In addition, it can be accidentally beneficial to cross-pollinate the practices of different sectors. I will now use this opportunity and tell you what I think is required of the unitholders’ representative.

Firstly, the task requires common sense and the courage to ask so-called stupid questions. The right decisions are largely based on these two things. One can’t expect that the new representative is immediately aware of all FIN-FSA’s policies, for example about asset management and fund fees, or the contents of various directives and licenses. In general, the best grounds for new policy definitions are rational, but they appear in hundreds of pages long documents filled with professional jargon.  As regards these, Elias, for example, has done great work with helping me go through the contents of each reform and license application and explained what implications they have.

In addition to this, it’s very important to challenge the team in a good spirit about the current operating models in case one finds any flaws. In my case, this critical thinking has been welcomed, and it has brought about action if there have been good grounds for change. The team has also welcomed my stories about my experiences and my thoughts about cross-pollination.

In issues related to business and decision-making, I demand critical and systematic thinking. Often I’ve had the temptation to say the first thing that has popped into my mind – without thinking the issue in the long term. I think that the best thing has been to think for a moment and try to examine the issue in question from several perspectives. The most important reason for this is that every decision that is made affects the company’s very DNA. HCP follows the so called no chalk principle, for which you can find material in the link below. Other qualities that are required of the representative, like all employees at HCP, are high integrity, moral and ethics to be able to make far-reaching decisions. I would also try to avoid black-and-white thinking, as the best possible solution can often be found when issues are reorganised.

As the unitholders’ representative, the number of contacts/questions that I’ve had outside the unitholders’ meetings can be counted on the fingers of one hand. And most of them have been from my own friends. The role has required an average of two day’s work per month, most of which is done in the beginning. That’s when I spent time getting to know the business and people and a couple of bigger one-off decision-making processes. Towards the end I’ve spent my time going through documents and discussions, and calling Tommi and Elias on a regular basis. In these calls, I’ve always received the latest updates and quarterly information about subscriptions, redemptions, and fund performances, and got to know whether there have been any special contacts or complaints from customers.

I can also state that I haven’t only benefitted from my background, but it has also been a disadvantage. One benefit is a basic knowledge about the industry and some knowledge of legislation. As regards legislation, though, it’s been more about me daring to explore it in more detail. The downside is my lack of courage to ask the stupid questions because I have thought that I knew enough about the subject.

I can say that the representative’s educational background doesn’t really matter. Success in this task mostly requires common sense, a high level of ethics and morality, systems intelligence, ability to see the impact of decisions two, three years ahead and, above all, eagerness to learn new things. The most important thing is to make decisions in such a way that they not only take into account the unitholders’ interest, but also the company’s long-term development.

Again this year, a representative – even two – independent of the company will be chosen in the unitholders’ meeting that will be held by the end of April. The task is very interesting, and I warmly recommend it. If you are a HCP fund unitholder and want to run as a candidate, please send an email to shareholderservicing(a)helsinkicapitalpartners.fi. Remember to use the text Unitholders’ representative on your subject line.

See you at the meeting!

Best regards,
Victor

Sources

Kauppalehti on techno parties (in Finnish):
http://m.kauppalehti.fi/uutiset/rahastoyhtio-laajentaa-toimintaansa—alkaa-jarjestaa-teknobileita/BN6h3HiP

FIN-FSA on remuneration (in Finnish):
http://www.finanssivalvonta.fi/fi/Tiedotteet/Valvottavatiedotteet/Pages/09_2017.aspx

On the Professional Athlete Foundation:
http://app.kauppalehti.fi/uutiset/jaakiekon-sm-liiga-alkaa-rahastointien-kilpailulla/mjm9Bjuk/luetuimmat (in Finnish)

Felicia’s report:
https://www.helsinkicapitalpartners.fi/yritysvastuuraportti/

Legg Mason’s No Chalk code of conduct:
https://www.leggmason.com/content/dam/legg-mason/documents/en/corporate-and-organizational/governance-document/lm-code-of-conduct.pdf

Thesis from Umeå University. HCP has code “K” in the text:
http://urn.kb.se/resolve?urn=urn:nbn:se:umu:diva-131700

Beggar Thy Neighbour – ylivelkaantumisen ja protektionistisen kauppapolitiikan koko kuva
Zidisha – Solution into Microfinance

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