Axa Ethical Distribution fund manager Richard Marwood is adding to engineering firms beaten up by second-order effects from falling oil and commodity prices.
The £174m vehicle, which is part of Axa Investment Managers’ mixed-asset range, screens out companies and sectors against a range of criteria, including fossil fuels, mining, quarrying and pharmaceuticals.
While the fund cannot hold some firms such as oil and mining stocks that have been sold off in 2015, it is able buy secondary-impacted firms. For Mr Marwood, this meant engineering companies whose share prices had fallen, such as Fenner and Weir.
The manager said holdings in conveyor-belt manufacturer Fenner and valve maker Weir would help his portfolio not get “whipsawed too badly [against its benchmark] if there was a bounce in commodities or oil prices”.
Fenner’s share price fell 50 per cent in the year to November 2, while Weir’s plunged 54 per cent.
He said adding to these stocks seemed counter-intuitive, but the firms had suffered because of a lack of investment from oil and mining firms and their share prices would rise if oil and commodity prices rebounded.
“[Rising oil and commodity prices] would be a headwind for the portfolio [against the benchmark], because we can’t own direct exposure,” Mr Marwood said. But the second-order-affected engineering companies would give us some protection and upside.”
His ethical fund has been ranked in the top quartile in his sector for much of the past five years, underperforming only in the past three months, data from FE Analytics shows.
Mr Marwood currently holds 58 per cent in equities, close to the sector’s 60 per cent limit.
He said: “We have half an eye on income, but a lot our preference for the equity market comes from us really [not liking] the bond market.”
Much of the remainder of the fund is invested in index-linked gilts. The manager said the holdings had done well recently in spite of the continued absence of headline inflation in the UK.
“[Index-linked gilts] also make the overall portfolio much less volatile,” he said.
“We saw that the index-linked market held up well during the summer when the equity markets suffered quite a bit of pain.”
Mr Marwood said due to the ethical screening, the fund’s equity portfolio typically had a greater-than-average exposure to small- and mid-cap firms, particularly in active positions. Aside from benefiting against the index by not holding oil and commodities firms in 2015, some of the stocks have helped by becoming takeover targets.
Data firm Telecity is a large holding in the fund and became a target for US rival Equinix in a reported £2.5bn deal. Likewise, high-end cooker maker Aga was also subjected to a US takeover by Middleby.
“We have quite a few useful pop-ups from bid activity,” Mr Marwood added.
The Axa Ethical Distribution fund delivered 25.4 per cent in the three years to November 2, versus the Investment Association Mixed Investments 20-60% Shares sector’s return of 16.9 per cent, FE Analytics data shows.
