A combination of cash flow analysis, meeting companies face-to-face, bottom-up stock selection and adhering to strict socially responsible investing (SRI) screening has been the key to the outperformance of the EdenTree Amity UK fund, according to Sue Round (pictured). 
The manager, who has headed up the fund since its launch in 1988, adopts a value approach when choosing stocks and combines this with EdenTree’s positive screening approach, which the firm refers to as their ‘Nine Pillars’ of responsible investing and includes a focus on ‘sustainalytics’, international law and protocols and company reports.
This has clearly stood the fund in good stead as it has outperformed both its sector average in the IA UK All Companies sector and its FTSE All Share benchmark over one, three, five and 10 years as well as over the last one, three and six months. Over the last five years, it has outperformed its peer group composite by 17.34 percentage points with a top-quartile return of 53.64 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
However, the fund is only £132m in size and has seen inflows of £3.7m over the last year, placing it 77th out of 101 funds in the sector in terms of how much money it has attracted over this time frame.
One possible reason could be its label as a ‘green’ or ethical fund and fears that such investment vehicles won’t be able to keep up with competitors because of their smaller stock pools.
In an article published last year, Elm Financial Management’s Tristan Scrivens said it is incredibly rare that he encounters clients who have a preference for ethical funds.
“It makes it quite difficult for the managers to put something together and to get income from it, because those areas are where the dividend stocks usually are,” he said.
“When I ask clients if they have any preference as to where their money is invested, the majority of them will say that they would just like an income, or they would just like a capital gain, for example.”
Because of the restrictions, many ‘dark green’ funds fail to outperform their peers but, because of this, investors could be turning their backs on ethical funds that are outperforming their less SRI-orientated peers.
Round says that EdenTree’s screening process has actually contributed to her fund’s outperformance due to avoiding troubled sectors such as oil & gas, as well strengthening focus on corporate governance which ultimately leads to higher quality companies.
“One of the reasons that the fund has done well is we’ve invested in a much greater number of medium and smaller-sized companies and our exposure to FTSE 100 stocks is much lower than others,” she explained.
“Our FTSE 100 exposure is now at 37 per cent and if you look at the distribution of the FTSE All Share it’s much higher. One of the main reasons for that is mining stocks and oil extractors account for a very large proportion of the FTSE and that has been helpful because those areas are not available to us. They score badly in on environmental grounds and in terms of human rights.”
“Some of our competitor funds do have the ability to invest in these types of stocks though and I find that quite strange, but that’s for them to justify and not me.”
While many investors fear that green managers veto stocks before their fundamentals are taken into account, Round says that EdenTree’s approach to stock selection is different from its peers in that the investment manager and the SRI analysts adopt an integrated approach.
“We start with an investment idea, then we apply our screening criteria to it. In order to do that it’s important that everybody in the process is involved – the analysts when they’re looking at new ideas start to think about the environmental and social governance factors and whether it’s going to meet the Amity UK criteria,” she explained.
“The driver is the investment idea. Many of the other funds work two lists – you have a separate team that does the SRI analysis and they often don’t sit with the investment manager. They produce a list of banned stocks, but the fund manager never gets to understand the intricacies of that.”
“I think that is a shame because managing those ESG topics is about managing your risk. If you’re investing in a company that has got a poor safety record, it’s a risk and it has a very real financial impact.”
Because of Round’s focus on valuation, cash flow and meeting with management teams, the portfolio has a low turnover at approximately 20 per cent – the manager aims to hold companies that will form a core long-term part of the portfolio.
On top of bottom-up stock selection, she also looks at long term themes that suggest a company will be successful over the long term – these often factor into EdenTree’s SRI screening process as well.
For instance, she particularly likes stocks with a focus on improving environmental impacts of products, and pharma stocks that benefit from the aging demographic and the increasing need for better healthcare.
Examples of holdings include green energy supplier Greencoat, hazard detection firm Halma and biotech firm Genus.
“When you think about testing for water pollution and gas emissions for instance, those are the sorts of themes that never become any less relevant – the rules become more stringent,” Round said.
“So, if you’re at the top of your game in these sorts of areas then it’s very difficult for somebody else to muscle in and gain trust in this area. That gives me some comfort around their market positioning and it often means the company has good, strong fundamentals and a motivated workforce.”
EdenTree Amity UK has a clean ongoing charges figure of 0.8 per cent and yields 2.4 per cent.
