For some reason or another, a lot of UK investors shun funds with ‘ethical’ in the title. This could be for a number of reasons – many are underweight in oil & gas stocks or tobacco stocks, for instance, which means they will inevitably underperform when these areas of the market do well.
Others argue that referring to a fund as ‘ethical’ can prove to be somewhat of a grey area. For instance, while some funds will hold shares in supermarket giants such as Tesco for the fair treatment of their staff, others would steer clear for their treatment of livestock.
However, if investors are turning their backs on ethical funds, they could be missing out on some top-performers with consistent track records.
In the below article, FE Trustnet explores the three ethical UK equity funds that are shooting the lights out and boast a stellar performance record.
Ecclesiastical UK Equity Growth
Out of 274 funds in the IA UK All Companies sector, Ecclesiastical UK Equity Growth is the twelfth highest performer over five years, providing a top-decile total return of 138.28 per cent compared to its sector average’s return of 77.67 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The £204m fund has been managed by FE Alpha Manager Andrew Jackson since 2003 and has maintained top-quartile total returns over one, three, five and 10 years.
However, last month the firm announced that he will be departing. Ecclesiastical’s Sue Round, director of group investments, and chief investment officer Robin Hepworth have taken the helm of the fund until a long-term replacement is found.
Throughout his tenure, Jackson has adopted a combination of growth and value investment styles while maintaining the firm’s ethical investment requirements.
Currently, the fund’s top five holdings are residential property developer Bellway, ITV, AA, Prudential and Next. The fund also has more than 2 per cent in BP, International Airlines Group and biopharmaceutical company Shire.
Generally, the portfolio consists of 50 per cent FTSE 100-listed stocks and 50 per cent small and mid-cap companies that Jackson deems to be good value for money and able to grow over the long term.
His blended stock-picking approach has resulted in a top-quartile Sharpe ratio, which measures risk-adjusted performance, and a top-quartile alpha, which shows performance above the benchmark.
Ecclesiastical UK Equity Growth has a clean ongoing charges figure (OCF) of 0.82 per cent and yields 1.06 per cent.
This £104m fund, which was launched in 1986, has been run by Chris Wright since 2009 and boasts top-quartile returns over one-year and five-year periods, as well as a top-decile performance over three years.
Performance of fund vs benchmark and sector over 3yrs
Source: FE Analytics
Despite Premier choosing not to compare the fund to its peers in the IA UK All Companies sector because of its ethical restrictions, it has outperformed its peer average by 35.12 percentage points over three years.
The fund’s ethical principles are set out by Premier’s independent ethics committee and require Wright to avoid companies with more than a 10 per cent turnover from the sale of tobacco, have a significant involvement in gambling, print, publish or sell violent or pornographic material or promote the irresponsible use of alcohol.
Premier Ethical is also required to avoid companies with a record of poor labour relations, that test on animals, that target children with inappropriate advertising and that breach international norms of behaviour related to pollution and the environment.
Instead, Wright looks to invest in companies that focus on improving the individual’s standard of living and businesses that aid or promote environmental sustainability.
Currently, the fund’s top five largest holdings are HSBC, software business Micro Focus International, advertising and PR company WPP, Morrisons and Prudential.
Its biggest weighting is in consumer products at 34.1 per cent, which is followed by financials at 29.1 per cent and telecom, media & technology at 10 per cent.
Premier Ethical has a clean OCF of 0.98 per cent and yields 1.67 per cent.
This fund has been managed by Audrey Ryan for 16 years and has earned a stellar reputation among investors regardless of whether they have an ethical focus.
Over over one, three and five years, the fund has achieved a top-quartile performance. Over 10 years, the fund performed exceptionally well, delivering a top-decile total return of 172.12 per cent and outperforming its peer average in the IA UK All Companies sector by 63.61 percentage points.
Performance of fund vs sector over 10yrs
Source: FE Analytics
The performance is particularly noteworthy given Ryan’s ‘dark green’ mandate, which means that the fund’s ethical requirement are particularly strict.
For instance, the negative screening process that the manager applies to the FTSE All Share and AIM indices when picking stocks excludes companies involved in gambling, alcohol, tobacco, genetic engineering, nuclear power, pornography or damaging the environment.
The fund also does not invest in any stocks that have made political donations in the last year, banks that have a significant exposure to third world debt and any companies that practise cruelty to animals.
As such, the fund tends to have a bias to small- and mid-cap stocks, which attributes to its top-quartile alpha rating over 10 years. The fund also fares well in terms of its risk-adjusted, achieving a top-quartile Sharpe ratio over the same time period.
Rated ‘A’ by Square Mile, the research team said: “This fund is invested in line with some very strict ethical requirements and it will tend to have a structural bias to mid and small-caps. This may mean its performance, at times, could be very different to that of the broader market.”
“Its ‘dark green’ approach does set this fund apart from many of its ethical peers, which may use a slightly more subjective framework or looser guidelines. Supporting the strategy is an experienced investment team, which also benefits from interaction with the firm's expertise in other asset classes.”
Kames Ethical Equity has a clean OCF of 0.79 per cent and yields 1.62 per cent.
