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Hugh Cuthbert, manager of the £1m SVM All Europe SRI fund, admits socially responsible investing used to be a joke. Some 10 years ago, he asked Tim Bell, the marketing guru who advised Margaret Thatcher in her three successful election campaigns, whether the inclusion of General Pinochet in his client list was detrimental to his company’s image and, in an industry driven by image, to the actual economics of the company. “I’m used to working with fascist dictators,” quipped back the peer. In the 90s, money was one thing and social responsibility another.

Now, however, Mr Cuthbert believes image has become so important that SRI can actually drive a company’s stock price. “A bit of global warming, a bit of famine and investors are attributing a lot more value to SRI issues. If you invest in a company and then it changes its policy towards the environment or its workforce, that change will probably be good for its share price as well as society.”

To take advantage of such changes, however, a fund requires a new approach to SRI. Most investment houses screen out all companies in “bad” industries, such as gambling and tobacco for ethical funds or oil and gas for green funds. In the UK, this typically removes some 40 per cent of the FTSE All-Share index from their investment universe.

The SVM All Europe fund, by contrast, is overweight oil and gas to the tune of 17.5 per cent of the portfolio, compared with under 10 per cent for the FTSE World Europe inc UK index. “The key assumption behind our SRI approach is if one simply ignores the polluting industries out there one cannot do anything about it, whereas if you become a shareholder, you have the power to attempt to affect change.”

The debate is well illustrated by tobacco companies. Some investors would argue cigarette manufacturers are by their very nature harmful to society. In response, Mr Cuthbert points to the sweatshops in Thailand. “They are suffering from poor working conditions, low wages, virtual slave labour in some cases, yet they are ignored by the investment community. There are real concerns, which no investment fund is discussing with management.”

In this instance, however, the SVM fund is no exception. Mr Cuthbert’s colleagues in the marketing department decided tobacco, along with defence and pornography, were beyond the pale. This puts 4 per cent of the FTSE All-Share index off limits. All other industries, however, are welcome in the portfolio, as long as they show willingness to improve corporate responsibility in line with their profit margins.

Crucially, this means Mr Cuthbert’s investment universe is relatively unconstrained. “Putting a more cynical hat on,” he says, “if you are operating a fund that only invests in “ethical” companies, you are hampering your ability to perform. There is a large segment of the investor base who have a concern for SRI issues and want to see change, but who have an equal concern for making money. With this fund, they can have their cake and eat it too.”

These assertions are broadly supported by the performance statistics. The fund, which was launched in October 2006, grew 2.6 per cent over the turbulent year to 6 May, placing it well above the IMA Europe including UK sector average of a loss of 3 per cent. Moreover, it is top of the three-month league table, with cumulative returns of 8.2 per cent.

The fund’s explicit dual purpose is expressed within its management structure. Mr Cuthbert and his co-manager Neil Veitch are responsible for identifying attractive stocks, while their colleague Craig Jeruzal enters into a dialogue with the underlying companies to assess their attitudes to broader social concerns.

Mr Jeruzal has drawn up a scorecard that rates companies in four areas: personnel, society and stakeholders, human rights and the environment. When SVM buys stock, it works out a score for the company. “It doesn’t matter what that score is. We are not looking for a good score. It just gives us a line in the sand that must then be improved on,” says Mr Cuthbert.

The scorecard sets particular store by the company’s reporting standards. “We are looking for environmental reporting, for example – things like certification. How public is that reporting? If a company gets up on a mantel says ‘this is our attitude’, they then have to back up those statements. Unless the discourse is public, it can very easily fall by the wayside. But if we can get official documentation of what the strategy is, then we’ve got something to benchmark them against in the future,” he explains.

He cites Dana Petroleum as an example of a company that has improved its record, partly in view of SVM’s concerns. “When we first spoke to them they were largely operating to best practice but they had very little in the way of reporting, because they thought it was up to the big oil conglomerates to do that for them. Now they are doing much wider reporting. They’ve definitely changed over the past 12 months.”

If no improvement is noted, SVM eventually sells the stock. Mr Cuthbert estimates one in 10 holdings may be liquidated because no change in attitudes has taken place. “The hit rate is high because we never make an investment until we’ve met the management and got the scorecard out,” he says.

Putting his financial hat back on, Mr Cuthbert explains his approach to stock selection as focused on the fundamentals: “moving away from accounting towards reality”. He assesses the industrial value of a company on the basis of its operating profit margin and cashflows. “The advantage of operating profitability is that it’s real, whereas net profit and other measures further down the P&L are accounting fictions, and it’s comparable. That forms the basis of our discussions with management,” he says.

At the same time, he insists the line between financial and social returns is becoming ever more smudged. “This fund gets the same degree of attention to the numbers and conventional analysis as our regular funds, but with an extra layer,” he says. “I can’t believe that will detract from the investment process. It can only add.”