With awareness of ethical investing continuing to grow and the strategies becoming more commonplace in investors’ portfolios, Chase de Vere’s Ben Willis highlights four funds that might be worth a look.
After years of being maligned for mediocre performance, greater awareness of ethical investment aims and the strategies has resulted in the growth of the sector and the launch of more sophisticated funds.
Ethical strategies have seen steady inflows in recent years and now represent 1.4 per cent of total industry funds under management at £17bn.
Research by FE Trustnet parent FE earlier this year revealed that 22 per cent of advisers had added to their ethical exposure during the latter half of 2018.
And there may be signs that ethical investing can pay off.
As the below table shows, the FTSE 4Good indices have made strong returns when compared with mainstream benchmarks and even beaten them over many time frames.
Source: FE Analytics
The FTSE 4Good index series aims to measure performance of companies demonstrating strong environmental, social & governance (ESG) practices.
Willis, head of portfolio management at Chase de Vere, said there are a number of myths surrounding ethical investing that persist among investors.
“There is a fallacy that ethical investing is simply about avoiding investments in certain sectors, such as tobacco, alcohol and gambling, and as a result ethical investors are left with more-concentrated, volatile and underperforming portfolios,” said Willis.
“However, while this view takes account of where ethical funds don’t invest, it doesn’t consider where they do invest.”
He explained: “Ethical portfolios will often have exposure to stocks and bonds which wouldn’t typically be found in mainstream portfolios. This can provide additional diversification and growth or income prospects within a portfolio.”
In addition, Willis said investors in mainstream funds might not come across the ethical stocks or bonds making a difference for the environment or society in general.
“Meanwhile ethical investors can not only benefit from these opportunities, but can also be aware that they are doing that little bit more to help the ‘greater good’,” he added.
Below, Willis highlights four ethical funds that investors might want to take a closer look at.
Baillie Gifford Responsible Global Equity Income
The first fund recommended by Chase de Vere’s portfolio management head is a relatively new one: Baillie Gifford Responsible Global Equity Income, managed by James Down and Toby Ross.
Launched in December 2018, Baillie Gifford Responsible Global Equity was the first ethical offering to be launched into the IA Global Equity Income sector.
“Baillie Gifford is an excellent investment company which often goes under the radar,” said Willis.
“We rarely invest in new fund launches. However, there aren’t many ethical funds which pay a sustainable dividend and so, with the investment credentials of Baillie Gifford and the emphasis they’re putting on sustainable criteria, it is a fund that we’ve already added to the ethical client portfolios that we run.”
Baillie Gifford Responsible Global Equity Income aims to achieve a higher level of income than the FTSE All World index and deliver income and capital growth over the longer term.
Since launch the fund has delivered a 9.3 per cent total return against a 5.54 per cent gain for the average IA Global Equity Income peer and a 7.67 per cent rise in the FTSE All World + 1% benchmark, albeit over a short time frame of just over five months.
The Baillie Gifford Responsible Global Equity Income fund has an ongoing charges figure (OCF) of 0.63 per cent and a yield of 2.65 per cent.
BMO Responsible UK Equity
Next up is the £430.9m BMO Responsible UK Equity fund overseen by Catherine Stanley since June 2009. However, the strategy is a longstanding feature of the industry having launched in 1984 and previously known under the F&C and Friends Provident Stewardship range.
The fund targets growth and increasing income by investing in attractively priced, high-quality UK businesses.
“It boasts an experienced investment team and also utilises an external advisory council which is headed up by the Archbishop of Canterbury,” said Willis.
“The fund employs negative screening but also looks to invest in companies which make a positive contribution to society and the environment and uses its influence as an investor to encourage best practice through engagement and voting.”
Performance of fund vs sector & benchmark under manager
Source: FE Analytics
Under Stanley, BMO Responsible UK Equity has made a total return of 203.01 per cent compared with a gain of 156.37 per cent for the average IA UK All Companies peer and a 147.05 per cent return for the FTSE All Share index.
The fund has a yield of 2.2 per cent and an OCF of 0.79 per cent.
Kames Ethical Equity
The third strategy backed by Chase de Vere is another IA UK All Companies member, the £529m Kames Ethical Equity fund.
Willis highlighted the long track record of the fund, which during its 30-year life has only seen two managers, the latest of whom is Audrey Ryan who joined the fund in 1999.
“This consistency is reflected in the long-term consistent performance of the fund,” said the Chase de Vere portfolio management head. “It is a ‘dark green’ fund, which means it has stricter ethical criteria than many other funds.
“For example, it has no exposure to the big oil companies, no corporate or international banks with exposure to third world debt, no pharmaceuticals, no supermarkets and no companies which have made a political donation of more than £25,000 in the past year.”
Under Ryan, the Kames Ethical Equity has made a 318.15 per cent total return compared with a 198.75 per cent gain for its average peer.
Rathbone Ethical Bond
The final fund recommended by Willis is a fixed income strategy, the £1.1bn, five FE Crown-rated Rathbone Ethical Bond fund.
The fund is managed by Rathbones head of fixed income Bryn Jones and Noelle Cazalis and targets a regular, above-average income through investing in bonds that meet its ethical and financial criteria.
The managers use its ‘Four Cs Plus’ principles to guide security selection: character, capacity, collateral and covenants. The ‘Plus’ principle is the conviction that they must think differently to the market to achieve above-average long-term performance.
“This is a good quality corporate bond fund,” said Willis. “It has a robust investment process which has helped it to produce a strong risk-adjusted track record, a good quality manager, pays a yield of 4.1 per cent and invests in many underlying holdings not found in other funds, meaning it provides strong diversification benefits.”
Performance of fund vs sector & benchmark under Jones
Source: FE Analytics
Rathbone Ethical Bond has made a total return of 103.59 per cent under Jones’s tenure compared with a 113.04 per cent gain for the IBOXX UK Sterling Non-Gilts All Maturities benchmark index and a 82.56 per cent return for IA Sterling Corporate Bond peer group.
It has an OCF of 0.67 per cent.