This Best In Class column looks at Standard Life Investments UK Ethical fund.
The VW emissions scandal, Sports Direct's poor treatment of employees and Trump’s tearing up of the Climate Change Agreement have all highlighted, in different ways, what the implications of corporate, social and environmental responsibility (or the failure thereof) can be.
The fact that they have made the headlines, and impacted share prices, indicates that these issues are important to the investing population.
With this in mind, you might assume that ethical funds would be very popular, but that doesn't seem to be the case.
While UK retail investors have piled more than £23bn into UK authorised funds so far this year, assets under management in ethical funds represent just 1.2 per cent of the industry total, according to data from the Investment Association.
Examples of changing investor values in recent years include a dislike of high interest rate lending companies and a noticeable relaxing of attitudes towards animal testing.Why is this? It's certainly not because you have to sacrifice investment returns for your principles. A recent report from moneyfacts.co.uk examined the performance of ethical funds versus conventional non-ethical funds over a number of investment periods and found that, over one and three, ethical funds have the edge.
Over five years, they really excelled, outperforming non-ethical funds by 12 per cent, according to the Moneyfacts/Lipper Investment Management data (all figures quoted as percentage growth, total return, UK net, no initial charge, as at 1 July 2017).
This week is Good Money Week. It's an annual event to raise awareness of sustainable, responsible and ethical finance to help people to make good money choices. So I thought I would take the opportunity to highlight one of the stars in this area of investing: Standard Life Investments UK Ethical.
This fund encapsulates the best ideas from the experienced team at Standard Life Investments, which manager Lesley Duncan uses alongside a ‘no compromises’ ethical screening tool. If a stock doesn’t pass, it doesn’t go in.
Ms Duncan joined Standard Life in 1995 and has run this fund since 2004, putting ethics at the heart of her investment strategy, and she doesn't rest on her laurels. Ms Duncan and her team regularly survey their investors to better understand how ethical themes are evolving.
The results influence which sectors or companies are eliminated by the screening tool, as well as the positive characteristics they will actively seek out. This means they are picking companies that truly reflect the values of their investors.
Examples of changing investor values in recent years include a dislike of high interest rate lending companies and a noticeable relaxing of attitudes towards animal testing – as long as it is for drug development rather than cosmetic use.
The fund will generally have between 50 to 100 positions, with a noticeable bias towards medium-sized companies. Ms Duncan aims to hold each stock for three to five years, expecting it to grow in value and provide some income (although income isn’t the fund’s key focus).
If the behaviour of a company starts to look unethical, or falls out of favour, Ms Duncan will sell it completely.
Due to the ethical screening, the fund may avoid entire sectors. This means its performance can differ quite significantly from the benchmark and exhibit a different volatility profile in comparison to the sector average.
However, the cumulative long-term returns speak for themselves: over one and three years, the fund is top decile in the UK All Companies sector, outperforming the average fund by 10 per cent and 16 per cent respectively.
It is top quartile over five and 10 years, outperforming by 25 per cent and 31 per cent (data according to FE Analytics, total return, as at 26 September).
It goes to show that good investing behaviour can be rewarded.
Darius McDermott is managing director of FundCalibre
