● One area of increased focus for Merck Sharp and Dohme (MSD) in the past year has been on the small cap equity segment of its portfolio and the managers that run it. This is the result of several factors including weaker than expected performance over various time periods, including some where MSD felt value should have been added, resulted in deteriorating conviction. This led to the appointment in spring 2023 of a replacement manager to provide the exposure to quality and growth that MSD seeks.

● Changes to a portfolio of this size, which is around €325m in equity trading, involve considerable transition management planning including appointing a transition manager, internal governance, stakeholder communications, documentation updates, operational set ups and regulatory filings. Within three months, the revised portfolio was in place – demonstrating swiftness of implementation following the decision to appoint the new manager.

● ESG and sustainability are key components of MSD’s equity strategy and focus in this area has continued over the past year, with MSD taking several steps to enhance the credentials of its equity portfolio. Within the small cap equity segment, it transitioned to an existing manager’s ‘carbon penalty’ small-cap equity strategy, which penalises high carbon-emitting stocks at the outset. This effectively allows some flexibility to hold higher emitting names when they are very attractively priced but will reduce carbon intensity by 30% on average through time. Analysis showed that implementing this lower carbon strategy has minimal impact on the risk/return characteristics over the long term.

● MSD also agreed to add tobacco to the list of its exclusions, given that it is a pharmaceutical company associated with cancer research and treatments. It believes that this is a positive step from a reputational perspective, reflecting its core values as a business. Its exclusion list also includes cluster munitions and controversial weapons, as guided by Dutch Regulation.