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Top 100 Funds update

Our four ethical fund selections are worth considering if you truly don't mind sacrificing profits for your principles.
October 16, 2012

In the July 2012 launch of the second version of our Top 100 funds, we decided to include a section for ethical or environmental funds. The four ethical funds that we thought were interesting enough to warrant a place were Rathbone Ethical Bond, CIS Sustainable Leaders Trust, Impax Environmental Markets Trust and New Earth Solutions Recycling Facilities Inv Sub Fund. In the context of National Ethical Investment Week, let's take another look at these.

Rathbone Ethical Bond fund (ISIN: GB0030957020) aims to provide a regular, above-average income through investing in a range of bonds and bond market instruments that meet strict criteria both ethically and financially. Its ongoing charges are 1.36 per cent, which is more expensive than bond exchange traded funds (ETFs) and expensive among its peers in the Investment Management Association's Sterling Corporate Bond sector.

There is not a wide range of bond funds for ethical investors to choose from. Alternatives in the Sterling Corporate Bond sector are Royal London Ethical Bond, Kames Capital Ethical Corporate Bond, Standard Life Ethical Corporate Bond and Aviva Investors Sustainable Corporate Bond. There is also one fund in the Sterling Strategic Bond sector - the Ecclesiastical Amity Sterling Bond Fund.

The Rathbone fund came to our attention for its inflation-busting yield of 7 per cent, which still looks appealing for income investors as performance between all funds is much the same (see table below). However, if you are truly interested in ethical investing then you will have to dig deeper to find out which of these funds' principles correspond most with your views.

 

Ethical bond funds - performance and yield

FundIMA sector1 year3 years5 yearsOngoing charge*Yield**
Rathbone Ethical Bond£ Corporate Bond14.127.229.11.36%7.10%
Royal London Ethical Bond A Retail£ Corporate Bond15.43231.60.94%4.42%
Kames Ethical Corporate Bond£ Corporate Bond12.42725.11.07%3.88%
Standard Life Investments Ethical Corporate Bond£ Corporate Bond15.822.129.31.11%4.28%
Aviva Investments Sustainable Future Corporate Bond£ Corporate Bond17.326.227.31.13%4.30%
IMA £ Corporate Bond average14.624.230.1
Ecclesiastical Amity Sterling Bond£ Strategic Bond12.222.2n/a
IMA £ Strategic Bond average14.324.128.91.39%6.16%

Source: Financial Express as at 12 October 2012. *IMA. ** Fund managers

 

The Association of Investment Companies has an environmental specialist sector in which it lists four investment trusts. Of these, we still prefer Impax Environmental Markets Trust (ISIN: GB0031232498), which invests globally in companies involved in cleaner and more efficient delivery of energy, water and waste. It is trading on a wide discount of 18 per cent. You may think this is a buying opportunity, but it needs to be put into context – more than 10 years after launch the trust still trades below the issue price. There could still be significant upside here if the board addresses the discount, which remains wide despite increased buyback activity. However, Oriel fund analysts point out that 10 years on this is still a jam tomorrow story. They say: "The chairman's statement reports that he continues to be impressed by the rapid growth that has occurred in environmental markets and also by the quality of many of the businesses operating in this relatively young sector." This is a specialist fund and only suitable for investors who truly believe in the trust's strategy.

CIS Sustainable Leaders Trust (ISIN: GB0001615102) is an open-ended fund that invests in UK equities, but avoids companies involved in areas including animal testing, tobacco and nuclear power. Despite limiting the investment universe, the fund has recently performed better than its peers in the IMA's UK All Companies funds sector, posting returns of 19.4 per cent against a sector average of 11.1 per cent in the year to 31 August. Over longer periods, the fund lags behind its sector. However, it remains a solid mainstream option for ethically minded investors.

New Earth Solutions Recycling Facilities (ISIN: IM00B3B2JG43) is an offshore fund that invests in UK recycling facilities. We thought this added an interesting slant on green investment and would add diversification to a portfolio. The fund has posted a decent 38 per cent return over three years and 10 per cent over the past year. However, we still think its relatively high costs, inflexibility and high minimum investment levels mean this fund won't be suitable for everyone.

While we still think that our four funds are worth considering if you truly don't mind sacrificing profits for your principles, they don't really cut the mustard when pitted against mainstream funds. Their inclusion in the next fully updated version of our Top 100 Funds looks increasingly unlikely.