Channelling money towards sustainable investments is increasingly considered to be financially prudent rather than just an ethical preference. For example, over the past few months funds that consider environmental, social and governance (ESG) factors as part of their investment approach have outperformed conventional funds. Companies' governance and treatment of their employees is likely to come under increasing scrutiny as economies emerge from the coronavirus pandemic, as Boohoo's (BOO) recent share price plunge has shown. And environmental credentials are increasingly important with, for example, the UK government committing to invest £3bn in this area in the recent Budget.
Invests in long-term trends
Sustainable investment policy
UK equities may underperform
Ethical criteria may not match yours
A good way to get exposure to companies that should benefit from these trends could be Royal London Sustainable Leaders Trust (GB00B7V23Z99). This fund aims to outperform the FTSE All-Share index over a rolling five-year period by investing at least 80 per cent of its assets in UK companies that are deemed to make a positive contribution to society.
Mike Fox, head of sustainable investments at Royal London Asset Management (RLAM), has managed the fund since November 2003. It is among the top 10 best performing funds in the Investment Association (IA) UK All Companies sector over one, three and five years and has a reasonable ongoing charge of 0.76 per cent.
Mr Fox typically holds 40 to 50 stocks, all of which are screened by RLAM’s responsible investment team. They aim to identify companies with good managements and promising long-term growth prospects. Relative to the FTSE All-Share index, the fund is overweight in sectors such as healthcare and technology, which are often deemed to have more of a net benefit to society than areas such as commodities, which the fund tends to avoid. Mr Fox and his team also look at themes such as infrastructure and developing demographics to identify sustainable opportunities.
As well as looking at positive factors, they apply a negative screen to avoid certain industries. Companies involved in tobacco, weapons and animal testing not conducted for the benefit of human health are generally excluded.
The fund's largest holding at the end of May was AstraZeneca (AZN) and its eighth largest holding was GlaxoSmithKline (GSK), which are involved in trying to find and provide treatments for the coronavirus. Other top 10 holdings include Experian (EXPN), a global provider of credit data, which is experiencing strong demand for its products, especially in the US. Mr Fox thinks it has strong long-term growth prospects.
Although sustainability is integral to the fund’s investment process, Mr Fox also pays close attention to companies' financials and valuation. For example, he added Unilever (ULVR) in May after it underperformed the recent rally on the grounds that it is more attractive relative to other market opportunities.
Royal London Sustainable Leaders is unlikely to be suitable for investors with strict ethical preferences as some areas it invests in are considered by some to be controversial. For example, large pharmaceutical companies have been criticised for charging too much for drugs, and Glaxosmithkline and AstraZeneca conduct animal tests, albeit for medical purposes. The fund's largest holdings also include Rentokil Initial (RTO), a company that uses lethal methods of pest control.
There is also no guarantee that the fund will continue to perform well with substantial economic challenges ahead, including the risk that the UK may leave the European Union without a deal. This would be likely to have a negative effect on the prices of UK-listed companies, even if they are not wholly reliant on the UK for their revenues.
However, if you are a long-term investor you should be able to sit through market volatility over the next few years and eventually benefit from the growth these companies look as though they will deliver. So if Royal London Sustainable Leaders meets your ethical criteria, it is still a good way to tap into trends that look set to grow strongly in the years to come, such as decarbonisation, digitisation and healthcare. Buy.
|Royal London Sustainable Leaders Trust (GB00B7V23Z99)|
|IA Sector||UK All Companies||Sharpe ratio||0.70|
|Fund type||Unit trust||Standard deviation||12.85%|
|Fund Size||£1.93bn||Ongoing charge||0.76%|
|No of holdings||43*||Yield||1.40%|
|Set-up date||29-May-90*||More details||rlam.co.uk|
|Manager start date||03/11/2003*|
|Source: Morningstar 14 July 2020 *RLAM|
|Fund/benchmark||1-year total return (%)||3-year cumulative total return (%)||5-year cumulative total return (%)||10-year cumulative total return (%)|
|Royal London Sustainable Leaders Trust||5.28||29.8||58.6||205.21|
|IA UK All Companies sector average||-12.06||-5.67||9.58||86.5|
|FTSE All Share index||-13.41||-5.27||12.49||80.26|
|Source: FE Analytics, 14 July 2020|
|Top 10 holdings|
|London Stock Exchange||4.10%|
|Source: RLAM as at 31 May 2020|
|Source: RLAM as at 31 May 2020|