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The unloved UK equity and bond funds topping the tables this year

19 September 2014

Ethical funds across UK equity and fixed income sectors are having a great 2014 and outperforming their sectors, but are you put off by their name?

By Daniel Lanyon,

Reporter, FE Trustnet

The vast majority of investors in mutual funds immediately switch off when they hear the words ‘ethical’ or ‘sustainable’; after all, why invest in a manager with a smaller pool of stocks to choose from?

However, our research shows that those who discard them are missing out on some of the best performing funds this year.

While there is no standardised notion of what constitutes an ‘ethical’ fund, with each tending to carry their own definition, they tend to mostly avoid tobacco and defence companies, among others.

These sectors are extremely popular with fund managers and especially those with an income focus. Neil Woodford and Mark Barnett are among those attracted to the tobacco sector, which has a wealth of quality companies with strong balance sheets and dividend records.

In spite of this, some have delivered eye-catching returns in 2014.

Four funds across IMA UK All Companies and Sterling Corporate Bond – two in each sector –are top quartile having significantly outperformed this year, while several have done so for much longer.

Within the popular and competitive IMA UK All Companies sector the £81m Premier Ethical and £17.3m Royal London UK Ethical Equity fund are top decile in 2014.

The Premier fund was also top quartile in 2013 and 2012, resulting in very strong three year numbers.

According to FE Analytics, over the past three years the two funds have beaten the average fund in the sector and stayed ahead of the FTSE All Share as well.

Premier Ethical has returned 81.21 per cent, while Royal London UK Ethical Equity has returned 60.66 per cent.

The sector average for this period is 48.66 per cent while the FTSE All Share has gained 44.18 per cent.

Performance of funds, sector and index over 3yrs

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Source: FE Analytics

Managed by Chris Wright since November 2011, Premier Ethical has overweight exposure to financials with 29.8 per cent of the portfolio exposed to names such as HSBC, Prudential and Capita, which are the three largest holdings in the fund.

According to Premier the fund avoids several areas to comply with its name, avoiding companies involved in gambling, the arms trade or other activities “considered to have an adverse overall effect on health, the environment or human dignity”.

Royal London UK Ethical Equity, managed by Bradley Mitchell, outsources the setting of its ethical standards to EIRIS – an independent investment research organisation that blacklists companies with more than 10 per cent of their revenues come from gambling, alcohol, pornography, tobacco or weapons.


Its top positions include Royal Dutch Shell, Rio Tinto and HSBC.

Premier Ethical has an ongoing charges figure [OCF] of 1.01 per cent while Royal London UK Ethical Equity’s OCF is 0.81 per cent.

In the IMA Sterling Corporate Bond sector the £211m Rathbone Ethical Bond fund has been a top quartile performer over one, three and five years as well as every full calendar year since 2008, apart from 2011.

Manager Bryn Jones has managed the fund since 2004 and recently told FE Trustnet that the ethical dimension adds an extra layer of scrutiny to investment ideas, helping him to assess the credit worthiness of companies.

Exposure includes social housing organisations as well as banks and insurance companies.

The £210m Royal London Ethical Bond fund has also been top quartile in 2014 and over one and five years.

The two funds have returned 30.63 per cent and 27.13 per cent over the past three years while the average fund in the sector has made 23 per cent.

Performance of funds and sector over 3yrs

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Source: FE Analytics

The Rathbone Ethical Bond fund has an OCF of 0.71 per cent while the Royal London Ethical Bond fund’s OCF is 0.96 per cent.

FE Trustnet news editor Gary Jackson recently revealed why he bought the Kames Ethical Cautious Managed fund for his ISA due to its track record rather than ethical branding.

Other strong top-performing funds that tick the ethical box include the First State sustainability range, including First State Asia Pacific Sustainability, which is a top decile performer in its Asia Pacific ex Japan sector over one, three and five year periods.

Demand is increasing for ‘ethical’ funds, albeit slowly, according to Lothar Mentel, chief executive of Tatton Investment Management.

His firm has recently launched a new fund of funds range with an ethical focus, to meet this demand.

“There has been growing demand from our adviser community to introduce an ethical strategy and we believe the portfolio we have put together will prove extremely popular with them and their clients,” he said.

Paul Warner, managing director of Minerva Fund Managers, says investors should consider ethical funds even if they don’t frame themselves as an ethical investor, as these may contain rarer investment ideas.

“For example, Rathbone Ethical Bond fund has charity’s bonds which have done quite well this year but you are unlikely to find them in an ordinary bond fund.”


“There also things such as the Guinness Alternative Energy fund that was the best performing fund last year.”

“In the long term an ESG [environmental, Social and Governance] fund is more likely to outperform over the long term because if you don’t have integrity in the way you run a company, nowadays with all the regulatory risk, your end up screwing up.”

“Peter Hargreaves used to say that you want a ‘bad’ fund and to some extent that is true as tobacco used to do really well but it is less true now.”

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.