Ethical funds continue to divide opinion among investors. Indeed, with constraints on where they can and can’t invest, ethical funds can often miss out on investment opportunities and underperform the market in certain circumstances.
Last year the FTSE 100 index rose by 19.07 per cent, while the FTSE4Good UK Benchmark delivered a 15.62 per cent. Of course, the rally in the blue-chip index, particularly in commodities-related stocks where ethical indices are lacking, was particularly unprecedented given the political headwinds of 2016.
Other times lend themselves to better performance for ethical investors. The FTSE4Good outperformed the blue-chip index in each calendar year between 2012 and 2015, for example.
Ethical equity income funds can find it difficult to pay comparable yields to their unconstrained peers given that some of the highest dividend payers include companies in sectors not considered ethical, such as those operating in the fossil fuels.
Indeed, oil & gas producers paid out £16.6bn in dividends during 2016 from a total of £78.5bn, according to Capita Asset Services.
However, for investors who want exposure to higher yields there are some ethical equity fund options available.
FE Trustnet created a bespoke sector from the ethical funds in the IA UK Equity Income and UK All Companies sectors to see how they compared with their generalist peers.
Historic yields of UK ethical equities funds
Source: FE Analytics
Below FE Trustnet takes a closer look at some of the top yielding ethical UK equities funds and how they are managed.
Castlefield B.E.S.T Income
The two crown-rated Castlefield B.E.S.T Income fund has delivered a yield above the IA UK Equity Income sector average in each of the past five years, with the exception of 2016.
The fund, managed by Simon Holman, aims to deliver “a relatively high level of current income, coupled with income growth & capital growth over the long term”.
The BEST acronym highlights the four factors it considers when making an investment: business & financial, environmental & ecological, social, and transparency & governance.
Yet, the £27.5m fund generated a 2.16 per cent return during 2016, below the IA UK Equity Income sector average return of 8.84 per cent.
Performance of fund vs sector in 2016
Source: FE Analytics
In its January factsheet, the manager noted the challenging market conditions for ethically-focused UK equity income managers in 2017.
“It proved to be a testing time for ethical strategies focusing on the UK markets given the sustained upturn in the fortunes of the oil & gas and mining sectors following on from their steep falls in 2015,” he wrote.
“The combination of a bias away from commodity-related businesses and towards smaller and more domestically-focused companies was an obvious headwind.”
Castlefield B.E.S.T Income has an ongoing charge figure (OCF) of 1.29 per cent and is currently yielding 4.01 per cent.
Henderson Global Care UK Income
The £192m Henderson Global Care UK Income fund, managed by Andrew Jones, has generated a yield below the IA UK Equity Income’s average in each of the past five years.
However, the fund – which is located in the IA UK All Companies sector – has managed to deliver better yields than funds in its peer group, outperforming the sector’s average yield in each of the past five years.
The four crown-rated fund aims to provide income with the prospects of capital growth by investing in companies contributing to social wellbeing and the protection and wise use of the natural environment, according to its factsheet.
Over one year, the fund is in the sector’s bottom quartile for total returns, returning 19.57 per cent compared with a 26.68 per cent gain for the average fund. However, it fares better over longer time frames with a second quartile gain of 32.64 per cent and a top quartile five-year return of 104.24 per cent.
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
The fund’s portfolio has a 33.7 per cent weighting towards the financials sector, including names in among the top 10 such as asset manager Schroders, banks HSBC and Lloyds, and life insurer Standard Life.
It also has significant exposure to the consumer services (16.0 per cent) and healthcare (11.6 per cent) sectors.
The fund yielded 3.32 per cent last year compared with a yield for the average UK All Companies fund of 2.32 per cent.
Henderson Global Care UK Income has an OCF of 0.85 per cent.
Royal London UK Ethical Equity
The final fund with strong annual yields is the Royal London UK Ethical Equity fund. The fund, which is also situated in the IA UK All Companies sector, has delivered stronger yields than its average peer in each of the past five calendar years.
The £33.8m fund is managed by FE Alpha Manager Mike Fox, who joined the firm following its acquisition of Co-operative Asset Management in 2013.
Fox, who is head of sustainable investment at Royal London Asset Management, aims to achieve capital growth and income over the medium-to-long term (defined as 5-7 years).
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
Over one year the fund has returned 22.21 per cent compared with a 26.68 per cent rise for the average sector fund. Over three years performance deteriorates with a 19.13 per cent gain compared with 27.16 per cent for the sector and over five years the fund’s 81.25 per cent return slightly lags the 82.25 per cent rise for the sector.
Fox manages a range of ethical funds at RLAM, including the five crown-rated mixed asset funds: Royal London Sustainable World and Royal London Sustainable Diversified trusts.
Royal London UK Ethical Equity has an OCF of 0.89 per cent and is yielding 3.06 per cent.