Aberdeen puts ethical slant on global fund

Aberdeen Ethical World aims to achieve long-term capital growth through investing in global equities, but avoids companies that fail to meet certain social, ethical and environmental criteria.

There is no formal performance target but in practice the team aims to generate outperformance of at least 3 per cent above the MSCI World index over rolling three-year periods.

The fund is managed by the Edinburgh-based 12-strong global team headed by Stephen Docherty. The team leverages off the research carried out by the regional desks and the process has been in place since 2003.

The starting point is the global equity buy-list, which combines all the regional portfolios and includes around 330 stocks.

These stocks are selected by the regional teams using Aberdeen’s team-based bottom-up research process. They seek to identify good quality companies which they define as companies with sustainable, competitive business models, strong balance sheets and high returns on assets and capital.

The team puts an emphasis on understanding the business, the drivers of growth and the management’s ability to deal with that growth. Management is scrutinised closely to ensure it is trustworthy, capable and has the right attitude towards corporate governance and plans for the business. The team likes companies that generate significant levels of cash and spend that cash wisely in value-accretive projects or return it to shareholders.

The global team then carries out a comparative analysis at the sector level, which in practice consists of looking at valuation differentials and pricing anomalies between stocks. It considers a variety of valuation metrics, including P/E, P/B and dividend yield, which it applies differently depending on the sectors.

The global equities team then selects stocks for Aberdeen World Equity and the stocks in this portfolio are screened for evidence of acceptable social behaviour. Companies that fall out on social, ethical, or environmental grounds are replaced where a suitable alternative can be found.

The portfolio comprises 40 to 60 holdings, with initial positions at 1 per cent and average position sizes of around 2 per cent. The team has a buy-and-hold approach, takes a five-year view when investing in companies and hence fund turnover is very low. Individual stock positions are capped at a maximum of 5 per cent.

In terms of risk, buying a lower-quality company and overpaying for it is the most significant risk but the team also imposes formal constraints of +/-15 per cent at the sector level and +/-35 per cent at the regional level. With respect to the sell-discipline, when a stock is taken off the main list the global equity team has 30 days to sell the stock out of the fund. A stock is also sold when valuations become stretched or when the team identifies a better opportunity.

Oliver Kettlewell, investment research analyst at OBSR, says: "We think this fund is one of the better options for investors seeking a global fund with an ethical mandate."

"It is managed by Aberdeen’s 12-strong global equity team headed by Stephen Docherty in Edinburgh. The team’s quality bias and conviction-led portfolio construction has served investors well. While the ethical screening leads to structural biases that can impede short-term performance, these have not inhibited the fund’s ability to outperform the index over the long-term."