More than half of ethical UK equity funds in the Investment Association universe outperformed the FTSE All Share index during the first half of 2018, according to research by FE Trustnet.
Ethical funds saw net retail sales of £517m during the first five months of the year, according to the Investment Association trade body, with funds under management reaching £16.3bn.
While inflows to ethical funds have continued to trickle in, as a proportion of total industry assets they remain steady at 1.3 per cent.
As such, we decided to compare how UK equity funds with an ethical/socially responsible investment (SRI) focus have fared this year compared with their counterparts and the FTSE All Share index – which captures 98 per cent of the UK market capitalisation.
To do this, FE Trustnet created a bespoke sector composed of ethical funds from the Investment Association universe with at least 80 per cent exposure to UK equities.
Last year, the average fund from the custom sector delivered a total return of 14.34 per cent compared with a 13.10 per cent gain for the FTSE All Share index and a 13.99 per cent gain for the average IA UK All Companies fund.
This year the bespoke peer group has again outperformed the index, albeit with lower returns than last year, having risen by 2.56 per cent compared with a 1.69 per cent gain for the index and a 2.66 per cent return for the IA UK All Companies sector.
Source: FE Analytics
Indeed, according to FE Analytics research, more than half of the ethical UK equity funds in this study outperformed the FTSE All Share, with the outperformers shown above.
Below we take a closer look at some of the top performing ethical UK equity funds during the first half of the year. It should be noted, however, that not all funds in our study are benchmarked against the FTSE All Share index.
Aberdeen Responsible UK Equity
The best performer of the first half of 2018 was the four FE Crown-rated Aberdeen Responsible UK Equity fund, which rose by 5.84 per cent.
The £26m fund is overseen by the Aberdeen Standard Investments UK equity team, which chooses companies on the basis of their financial record, management and business prospects.
Performance of fund vs sector & benchmark in H1 2018
Source: FE Analytics
Environmental, social and other relevant criteria are also considered and the team will encourage management to adopt more responsible practices where it believes these criteria are lacking.
Aberdeen Responsible UK Equity has relatively constrained portfolio of 40 stocks with the largest holding being consumer goods company Unilever, which represents 5.2 per cent of the portfolio.
Other significant holdings include food services company Compass Group, technology firm AVEVA Group and consumer credit reporting agency Experian.
The fund is benchmarked against the FTSE All Share index, has an ongoing charges figure (OCF) of 0.87 per cent and a yield of 1.90 per cent.
Liontrust Sustainable Future UK Growth
Following closely behind the Aberdeen fund is the five FE Crown-rated Liontrust Sustainable Future UK Growth fund, which was up by 5.82 per cent compared with a 1.39 per cent gain for its MSCI UK index benchmark.
The £340.5m fund has been managed by Peter Michaelis since 2001; he was joined by Neil Brown in 2013.
Following Liontrust’s ‘Sustainable Future’ process, the managers invest in “high-quality companies with robust business fundamentals, strong management and attractive valuations”.
According to the firm, these companies are usually adaptors and innovators capitalising on change, accessing new markets and opportunities, and also outperforming competitors.
There are three key themes in the portfolio including: ‘safer and more resilient’ (42 per cent of the portfolio), ‘healthier and with higher quality of life’ (38 per cent), and ‘more efficient’ (18 per cent).
The largest holding in the portfolio is drug maker GlaxoSmithKline at 5.2 per cent. Other holdings include Irish building materials company Kingspan, life insurer Prudential, life science company Abcam, and Compass Group.
Liontrust Sustainable Future UK Growth has an OCF of 0.85 per cent.
Royal London Sustainable Leaders Trust
Another top performer was the four FE Crown-rated Royal London Sustainable Leaders Trust, which has risen by 5.51 per cent during the first half of the year.
The £638.8m fund is managed by FE Alpha Manager Mike Fox and targets growth by focusing on core themes of the environment, human welfare and sustainability.
Performance of fund vs FTSE All Share in H1 2018
Source: FE Analytics
Fox has overseen the fund since 2003, during which time it delivered a total return of 359.33 per cent compared with a 230.58 per cent gain for the FTSE All Share index.
“After the initial ethical screening, the manager runs an in-depth analysis on each company before deciding what should go into the portfolio; this includes looking at corporate governance,” noted analysts at FE Invest. “Valuation is also taken into consideration, as Fox looks for mispriced investment opportunities.”
Top holdings include Rentokil Initial (5 per cent), US online retailer Amazon.com (4.9 per cent), pharmaceutical company Astrazeneca (4.4 per cent) and Unilever (4.2 per cent).
Royal London Sustainable Leaders Trust has an OCF of 0.76 per cent.
Scottish Widows Environmental Investor
Last in our study is the £213.8m Scottish Widows Environmental Investor fund, managed by Ben Ritchie and Jeremy Whitley.
The fund invests in companies which demonstrate a positive commitment to the protection and preservation of the natural environment, according to the firm.
As such the managers avoid investing in companies which are considered to demonstrate a pattern of non-compliance with local environmental regulations or those that significantly contribute to environmental problems.
Negative screens cover nuclear power, fines for offences or repetitive breaches of water pollution regulations and dumping waste in inappropriate areas.
According to the most recent factsheet, the fund’s top holdings include Unilever (5.0 per cent), Prudential (4.4 per cent), and Compass Group (3.8 per cent).
The fund has delivered a total return of 5.22 per cent compared with a 1.68 per cent gain for the benchmark FTSE 100 index.
Scottish Widows Environmental Investor has an OCF of 1.62 per cent.