A common perception of ethical investing is that the price you pay for a clean conscience is poor performance. While this is true for some ethical funds, there are others that have not only made money but also beaten conventional funds. A case in point is Standard Life Investments UK Ethical Fund (GB0004331012), which in four of the last five calendar years has outperformed the FTSE All-Share Index, and has beaten both this and the Investment Management Association (IMA) UK All Companies sector average over three, five and 10 years.
The fund invests using the same investment process as Standard Life's other UK funds. All FTSE 350 shares are covered - whether Standard Life's funds invest in them in not. The company's small-cap team, which includes Harry Nimmo, manager of IC Top 100 Fund Standard Life UK Smaller Companies Trust (SLS), also has an input.
"We get good access to companies and meet the ones we cover about twice a year," explains Lesley Duncan, manager of Standard Life Investments UK Ethical Fund. "We take a long-term view with a horizon of at least three to five years, and because we tend to back winners we have a low turnover of around 20 per cent. We don't have a bias to value or growth."
An investment idea can be driven by a whole raft of things such as an analyst changing a recommendation, newsflow or competitor analysis. The team process involves bottom-up stock-picking and identifying companies where positive change is not priced in.
The UK equities team work closely across all funds and fund managers are also sector analysts: Ms Duncan, for example, covers housebuilders and support services. "We do quarterly updates on stocks, and consider things such as what expectations are in a share price and what things are not captured," she says.
There are of course, some differences. "The main difference with UK Ethical Fund is screening, though even with that our top 10 active bets are held widely across the other UK funds, such as Inchcape (INCH) and Bellway (BWY)," she explains. "There is significant crossover but there are some sectors I can't hold, for example pharmaceuticals. But we don't like these anyway from a fundamental bottom-up approach, so our analysts are not recommending them. However, in 2008 we underperformed the FTSE All-Share because a lot of the defensives we can't own did well."
The fund has negative criteria which, if a company is involved a banned area, can mean it is not eligible for the portfolio. These include environmental damage, animal testing, genetic engineering, intensive farming, human rights, fur, weapons, alcohol, tobacco and airlines.
Companies can also move up to preferred status if they meet positive criteria such as:
• making a positive contribution to the environment;
• promoting sound employment practices; and
• having clear policies on bribery and corruption, and encouraging good business behaviour and ethics.
"Banks, for example, have never failed our negative screen," she says. "In 2008 our corporate governance team had a lot of engagement with these and we hold Barclays (BARC) and Standard Chartered (STAN)."
The fund can invest in around 336 out of 425 shares in the FTSE All-Share Index.
But it doesn't hold traditional ethical areas such as solar. "We have looked at and held some green types of investment such as solar," she says. "But these didn't work out - the situation in Germany has changed as has the subsidy regime in the UK. And this is not a green fund."
Ms Duncan has recently invested in a number of initial public offerings (IPOs) such as Poundland (PLND), Bohoo (BOO), Saga (SAGA) and Polypipe (PLP).
"We look at IPOs on a case-by-case basis and these ones worked for us as an investment case," says Ms Duncan. "With IPOs it always comes back to the valuation. We go to maybe two or three pre-IPO meetings which are the basis of information we can build our investment case off."
Recent performance
Over the shorter term performance has not been so strong, with the fund slumping into the third quartile of its sector over one year. "Performance has not been so good over the last few months for reasons including our holding in Asos (ASC), which had been a fantastic contributor," says Ms Duncan.
Over the half year to February, Asos's pre-tax profit fell 22 per cent and the company has suffered a sharp fall in its share price this year.
The fund no longer holds Asos, which was bought at around £3. "We started selling this in December and sold most of it at around £70, and then some more at £40 and £31," says Ms Duncan.
"Stocks in that area are also perceived as being highly rated, other examples being SuperGroup (SGP) and Rightmove (RMV)," she adds. "We also held ITE (ITE) of which the share price was hit by political unrest in the former Soviet area. But there has been lots of momentum-based selling, so it is a case of trying to understand if these periods create buying opportunities: this period of corporate releases is a turning point and the trading results will be important. There is also an expectation of interest rate rises and when we get clarification it will help."
Ethical choices
What is ethical or not is ultimately a matter of personal belief, so investors not only need to find a fund that performs well but also one that meets their criteria. However, Standard Life surveys its UK Ethical Fund's investors every year on what they are concerned about. "The views of our investors actively help mould the criteria used in accepting positive or negative screening suggestions," says Ms Duncan.
While over the past decade they have wanted the fund to avoid companies in areas such as armaments and tobacco, more recently the number one area of concern is business practice and remuneration.
"Current affairs can colour people's views, for example, issues relating to banks," says Ms Duncan. "People are also concerned with issues such as health and safety at work, and another new area of concern that has ranked highly is very high interest lending - so we will do more work on this. But a company we do hold is International Personal Finance (IPF): we have worked with them and come out of those meetings feeling that it does treat its customers fairly."
