Demand for ethical and socially responsible investment (SRI) funds has increased in recent years, with a total of £10.2bn now being managed in this kind of product in the UK, leading the FE Research team to look for the best products in this space. 
SRI is a style that seeks to avoid companies that manufacture ‘harmful’ products, such as alcohol, tobacco, gambling and weapons, while focusing on those that are deemed to be beneficial for society or the environment, like firms active in the green technology or clean energy sectors.
However, ethical funds remain somewhat of a niche investment – we’ve noted before our readers seem to avoid stories with the word ‘ethical’ in the headline – and the area is relatively under-covered by investment analysts.
With this in mind, the FE Research team has reviewed the 218 funds in the Investment Association universe that have an SRI mandate and determined that 13 now have a place in the FE Invest Recommended list.
Charles Younes (pictured), fund analyst at FE Research, says: “Despite the fact that the market for ethical investments has grown quite a fair bit in recent years, there is still a distinctive lack of guidance for consumers who want to park their money in a more socially responsible manner.”
“For advisers of more ethically-minded clients the lack of true guidance backed up by research makes it that much more difficult to pinpoint just which fund does what it says on the label.”
“This lack of true assessment prompted us to look at this sector. Through both quantitative and qualitative assessment, we drew up a list of funds where the manager consistently met the fund’s SRI and ethical objectives but importantly – also offered a high-performing fund.”
Henderson Global Investors was the fund group coming out on top in the rankings, with three products on the list: Henderson Global Care Growth, Henderson Global Care UK Income and Henderson Institutional Global Care Managed.
FE Analytics shows all three funds have outperformed the average peer in their respective sectors over one, three and five years.
Henderson Global Care UK Income, with its UK focused portfolio and mandate to seek income with the prospective of capital growth, is the one that is likely to capture most investors’ attention. It holds five FE Crowns and has been managed by Andrew Jones since January 2012.
Performance of fund vs sector and index over manager tenure
Source: FE Analytics
Younes said: “Despite being relatively simple, the ethical screening has greater impact than expected, and helps explain the fund’s sector allocation, which has differentiated it from other equity income funds over the last few years.”
The fund’s ethical approach means it has to avoid areas such as oil & gas. Its largest sector exposure is to financials at 32.2 per cent, followed by industrials at 15.9 per cent and consumer services at 12.6 per cent, while the biggest holdings are Vodafone, AstraZeneca, BT Group and National Grid.
Royal London Asset Management – through its CIS line of funds – and Alliance Trust Investments each have two funds on the list.
FE Alpha Manager Mike Fox runs the CIS Sustainable Leaders and the CIS Sustainable Diversified funds and has taken them to the top quartile of the IA UK All Companies and IA Mixed Investment 20-60% Shares sectors, respectively, over one, three and five years.
The FE Research team notes that Fox’s investment approach is different to many UK equity managers, as he combines a SRI framework with in-depth company financial analysis. His competence in this approach has “proved the fund’s strength” and allowed CIS Sustainable Leaders to maintain a consistently decent performance.
Performance of fund vs sector over manager tenure
Source: FE Analytics
“The manager’s investment style is heavily influenced by the ethical process of the fund; therefore we expect his preference for healthcare, infrastructure and climate-change related companies to persist. The fund won’t perform well when sectors like mining, defence and tobacco outperform the market,” Younes said.
Alliance Trust Sustainable Future Absolute Growth and Alliance Trust Sustainable Future Managed, which are managed by Peter Michaelis and Simon Clements, are another two multi-asset funds to appear on the list.
Alliance Trust Sustainable Future Managed, a member of the IA Mixed Investment 40-85% Shares sector, is the largest of the two at £491m. It sits top quartile in its peer group over one, three and five years.
The FE Research team said: “This fund provides a one-stop shop for ethical global equity and bond exposure, with a particular bias for the UK. The team has achieved above average returns using a blend of macroeconomic and fundamental analysis, and both managers have ample investment experience.”
The fund has four main investment themes running through its portfolio: resilience, quality of life, climate change and energy efficiency, and environmental protection and resource efficiency. Examples of top holdings include Prudential, Vodafone, Greenspan Group, Legal & General and BT.
Performance of fund vs sector over 5yrs
Source: FE Analytics
Ethical equity income investors have another two options on the FE Invest Recommended list: Chris Watt’s Jupiter Responsible Income and Catherine Stanley’s F&C Responsible UK Income, which have both returned around 50 per cent over three years and 75 per cent over five years.
Two members of the list – Rathbone Ethical Bond and Royal London Ethical Bond – are found in the IA Sterling Corporate Bond sector. Both have posted total returns around 10 percentage points higher than their average peer over the past five years, with gains of over 40 per cent.
The final ethical funds to be highly rated by our analysts focus on specialist parts of the market and should therefore account for only a small portion of an investor’s portfolio.
Pictet Agriculture looks for opportunities in the agribusiness sectors, with major holdings including Deere, AGCO and Syngenta, and has environmental, social and governance engagement with companies as part of its process.
BlackRock GF New Energy’s investment universe consists of solar, hydro and wind-power generating business, as well as those working on emissions reductions, power and smart grids, energy infrastructure and storage, energy efficiency and alternative-fuel vehicles.
