Bryn Jones, who runs the £1.1bn Rathbone Ethical Bond fund, has said he will not invest in companies engaged in what he considers to be practice of lending at what he deems excessive interest rates.
Mr Jones' fund is the absolute top performer out of 73 funds in the IA Sterling Corporate Bond sector over the past year, competing against both other ethical and non-ethical funds.
In the 2017 calendar year he returned 9.8 per cent, versus the sector return of 4.8 per cent.
The fund is run on the principle that any investment must pass a positive screen, that is, the company issuing the bonds must be shown to be engaged in business activity that has a positive impact on the world.
A potential investment must also pass through a “negative screen” to show its business is not specifically engaged in an activity that is harmful to society.
What Mr Jones calls "predatory lending” has been formally added as a negative screen, having previously just been a consideration.
Mr Jones said gave the example of Provident Financial, a doorstep credit provider and payday loans company often described as a "subprime lender" advancing money to poorer people at higher interest rates, which he has excluded from his fund.
Provident Financial's share price drop over the past year from £29 to £9.30 showed how excluding an investment on ethical grounds can help an investor avoid mistakes, Mr Jones said.
Neil Woodford, who runs the £6.8bn Woodford Equity Income fund, remains a significant investor in Provident Financial. He said Provident provides lending in a part of the market that is not served by banks.
The Royal Society for Public Health this week branded payday loans the “unhealthiest” form of credit. The organisation said consumers with a payday loan are more likely to feel depressed.
“One reason for this is the ‘poverty premium’ – the system whereby the poorer you are, the more you pay goods and services, including credit," the organisation said.
"It is now all too commonplace to see people in desperate situations, often with low incomes and insecure employment, forced into taking out loans with punishingly high interest rates as the only way to make it through to the next pay cheque.
"This system forces the most vulnerable in our society further into an inescapable spiral of debt – with all the accompanying damage to health and wellbeing, as illustrated by our report, that goes along with it.”
The Financial Conduct Authority (FCA) has recently warned about the level of expensive consumer debt in use in the country such as credit cards, which generally charge higher rates of interest to those with poorer credit histories.
Standard Life's recently launched UK Equity Impact fund doesn’t have a specific screen related to lending, but does focus is on employment.
The positive screens used by this fund include the firm being a living wage employer, the average wage of the company relative to the sector in which it operates, gender diversity, and economic diversity, through firms that create jobs in areas of economic deprivation.
Lindsay Duncan, who runs the sustainable fund range at Standard Life, said: "Each potential investment is assessed for impact using company level and sector level data and will be scored based on the above four pillars, weighting the portfolio towards those companies best placed to make a positive contribution to [the UN's sustainable development goals] aim of “full and productive employment and decent work for all”.
"While the focus of the fund is on employment opportunities, the manager of the fund will be mindful when investing in companies whose activities, products and services may not be deemed to be aligned to, or are incongruous with the UN's sustainable development goals."
David.Thorpe@ft.com
