Why oil and banks aren’t barred from ethical funds
Chris Watt of the Jupiter Responsible Income fund is happy to invest in companies that sit in the much maligned sectors as long as they actively seek to reduce their environmental and social impact.
With BP still feeling the ramifications of the Deepwater Horizon oil spill and PR disaster, and barely a day going by without news of another scandal in the UK’s banks, investors could be forgiven for thinking that an ethical fund would automatically shield them from sectors such as financials and oil and gas.
However, the only industries that the Jupiter Responsible Income
fund rejects are those associated with armaments, tobacco, nuclear power and animal testing for toiletries and cosmetics.
The only other non-financial related criteria applied to prospective investments is that they actively seek to reduce their environmental and social impact and, as a result, it holds HSBC and Royal Dutch Shell in its top-10.
Manager Chris Watt
has no control over the stocks that are prohibited to him.
"We have a sustainability team of analysts which covers the non-financial side of the stocks," he said.
"Every year the stocks are reviewed. We have no influence over whether the companies are approved or not."
From the pool of stocks that survive the filter, the only criteria that Watts uses for selection are performance related.
The fund’s unconventional approach to ethical investing seems to be working and it has delivered 24.01 per cent over the past year as against 20.38 per cent for the FTSE All Share and just 16.21 per cent from its FTSE4 Good benchmark.
It has also slightly outperformed the FTSE All Share over three years, despite being restricted in the stocks it can invest in.
Rob Morgan, investment analyst at Hargreaves Lansdown, is encouraged by recent developments in the fund – for example it was revamped last year, when it took the FTSE4 Good UK index as its benchmark and introduced the current stock-selection process.
Morgan said: "The long-term performance hasn’t been strong, but the processes they are putting in place are promising. I am hoping to see an upturn in performance over the coming years."
Performance of fund vs sector and indices over 3yrs
Source: FE Analytics
Over 10 years the fund has underperformed the IMA UK Equity Income average, returning 117.2 per cent as against the sector’s 121.69 per cent.
The difference is not huge, however, and Morgan points out that investors who choose ethical funds have strong convictions that mean they may overlook a degree of underperformance.
He also says that investors should be cautious when looking at the track record of ethically minded funds, as comparing past performance with their sector or benchmark does not make clear the effect of restrictions on holdings.
"Ethical funds will overperform or underperform their benchmark or more generic indices like the FTSE All Share depending on how well their unfavoured industries perform."
"Therefore investors have to be careful because of the inherent biases in the portfolio of ethical funds, like for some the lack of miners in their holdings," Morgan added.
Jupiter Responsible Income
is currently yielding 3.70 per cent, which is slightly less than the sector average.
It is currently underweight financials – while Watt is not barred from the sector, he told FE Trustnet
that ethical and financial reasons made him reluctant to increase his exposure.
"We have been engaging with the banks for many years. I can invest in banks but some are on the watch list," he said.
Unlike many ethical funds, the portfolio is allowed to buy mining stocks. Rio Tinto is among its top-10 holdings.
Watt says that he takes a best-of-breed approach to this sector, explaining that mining and resource exploitation is necessary, and that he selects companies that are responsible compared with the rest of their sector.
The fund's minimum initial investment is £500 and it has a total expense ratio of 1.72 per cent.