Ethical funds in the IA UK All Companies and UK Equity Income sectors have tended to hold up better than the index and their average ‘go anywhere’ peer in the recent correction, according to FE Trustnet research, as their structural underweights to mining and materials stocks helped them dodge the worst of the falls.
Between the start of May and 27 August, the FTSE 100 shed 13.16 per cent of its value while the FTSE All Share lost 11.38 per cent after panic over the falls in China’s stock market and concerns over growth in the Chinese economy gripped markets.
Given the source of the concerns, it is no surprise to see that sectors linked to China’s growth – such as mining, basic materials and oil & gas –suffered the largest falls.
Sectors largely unconnected to the country’s health, like leisure goods and home construction, even rose over the period in question.
Performance of indices since 1 May 2015
Source: FE Analytics
The average UK equity fund, however, performed much better than both indices since the start of May with the typical IA UK All Companies fund falling 6.97 per cent and the average IA UK Equity Income portfolio losing 6.28 per cent.
Of course, there are several reasons for this – one of which being that the sell-off has largely hit the international-facing FTSE 100 rather the more domestic-orientated stocks found further down the cap spectrum. The FTSE 250 is down only 4.14 per cent while the FTSE Small Cap index has lost just 2.55 per cent.
This combination of exposure away from oil, mining and materials and a tendency to look outside of the FTSE 100 means that several ethical UK equity funds have risen to the top of their peer groups as markets went through the China correction.
There are 16 ethical funds with the IA UK All Companies sector and our data shows that seven achieved top-quartile returns between 1 May and 27 August while another three are in the second quartile. Of the remaining six, three are in the third quartile and three are in the bottom.
Source: FE Analytics
As the previous table shows, only one of the ethical funds has posted a positive return over the period in question – Standard Life Investments UK Ethical, which is managed by Lesley Duncan.
Its outperformance does not appear to be a blip: even though it had a fourth-quartile 2014, the £242.4m fund is currently first quartile over one, three and five years. FE Analytics shows the five-year total return has been 100.55 per cent, compared with 60.07 per cent from its average peer.
The fund has 32.6 per cent of assets in the FTSE 100, with half in the FTSE 250 and 10.5 per cent in the FTSE Small Cap index. Top holdings include BT, Howden Joinery, DS Smith, Bellway and Vodafone, while the largest sector exposure is to consumer services, industrials and consumer goods; combined exposure to oil & gas and materials is less than 4 per cent.
Standard Life Investments UK Ethical has a clean ongoing charges figure (OCF) of 0.90 per cent.
Another notable fund on the previous list is the five FE Crown-rated Henderson Global Care UK Income, which is managed by Andrew Jones and was one of the 13 ethical funds to be recently added to the FE Select 100.
“Due to the fund’s SRI mandate, the manager is restricted from investing in the oil and gas, and basic material sectors, which do not pass the ethical criterion,” our analysts 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.”
Henderson Global Care UK Income has a clean OCF of 0.84 per cent and yields 3.40 per cent.
Performance of funds vs sector over 5yrs
Source: FE Analytics
When it comes to the IA UK Equity Income sector, there are two ethical members and both posted first-quartile returns since 1 May.
While the average fund in the sector fell 6.28 per cent, Catherine Stanley’s F&C Responsible UK Income was down 2.94 per cent and Simon Holman’s ConBrio B.E.S.T Income was down 3.71 per cent.
F&C Responsible UK Income is another member of the FE Select 100 and focuses on two types of companies: those with products or services that positively benefit society and those that are leaders in sustainable business practices. It will also hold investment-grade bonds.
The FE Research team said: “The portfolio contains a mix of companies that are either high-quality and economically sensitive, promise long-term growth, or are carefully-selected recovery situations. This balanced style, alongside the fixed-income exposure, should help the portfolio retain its below-average risk profile when compared to sector peers.”
It has outperformed its average peer over one, three and five years – making 71.02 per cent on a five-year view while the sector was up 64.31 per cent.
ConBrio B.E.S.T Income screens for companies on traditional investment metrics that focus on business and financial fundamentals, but also looks for certain environmental/ ecological, social/governance and transparency factors.
The fund is ahead of its peers over one year, but is in the third quartile over three years and fourth over five years. This comes on the back of fourth-quartile returns in 2011, 2012 and 2013.
It must be kept in mind that the fund's mandate was changed in 2012, including giving it an unconstrained approach and rebasing its targeted yield, which means part of the five-year performance is down to a mandate that is no longer in place.
Meanwhile the 2013 underperformance that is acting as a lag on the three-year return was down to its cautious positioning, which ultimately paid off in 2014 as it moved into the top quartile.
Performance of funds vs sector over 5yrs
Source: FE Analytics
F&C Responsible UK Income has a 0.80 per cent clean OCF and yields 3.10 per cent, while ConBrio B.E.S.T Income has a 1.85 per cent OCF with a 4.33 per cent yield.
