A number of investors are not solely interested in making money, but also in making a difference with their investments. Although there is a smaller choice of ethical or environmental investments, if you look in the right places you can find funds that are not just good because of their returns. Increasing government regulation and interest in investments with this focus could help the returns of funds in these areas in the future.
If you are interested in this area, also see Royal London Ethical Bond and Rathbone Ethical Bond under bonds, Hermes Global Emerging Markets under emerging markets, and Renewables Infrastructure Group and John Laing Environmental Assets Group under alternative assets.
NEW ENTRANT: Troy Trojan Ethical Income (GB00BYMLFL45)
Troy Trojan Ethical Income only launched in 2016, but over one and three years is well ahead of the FTSE All-Share index and IA UK Equity Income sector average. This may be partly due to the fact that Troy Asset Management’s UK equity income team, led by highly regarded manager Francis Brooke, has a much longer record of delivering good returns.
This fund’s lead manager, Hugo Ure, is head of responsible investment at Troy and co-manager of some of the company’s other UK equity income funds. He has worked at Troy since 2009, before which he was an equity analyst.
Troy Trojan Ethical Income’s total returns so far have a typically defensive profile, in keeping with Troy's investment approach. This prioritises the avoidance of permanent capital loss via cautious asset allocations and investment in high-quality companies, to preserve the real value of its investors’ capital and providing a return that can compound over time.
So last year, for example, when the FTSE All-Share index fell -9.5 per cent and the IA UK Equity Income sector average was -10.5 per cent, the fund only fell -2.9 per cent. But it can lag in rising markets such as in 2017.
Troy Trojan Ethical Income’s yield of 2.85 per cent isn’t as high as those of many other UK equity income funds. Its managers think that growing the fund’s dividend in current market conditions is too great a risk to capital, so have reduced its exposure to higher-yielding stocks and added ones with better dividend growth potential. But the fund has made total returns ahead of most UK equity income funds over one and three years.
The fund aims for income with the potential for capital growth over three to five years. It excludes investments in areas including armaments, tobacco, fossil fuels and high-interest-rate lending. It still has exposure to a variety of sectors, in particular consumer companies, which accounted for 35 per cent of its assets at the end of July.
Stewart Investors Worldwide Sustainability (GB00B7W30613)
Stewart Investors Worldwide Sustainability is run by Nick Edgerton and highly regarded Asia investor David Gait, who has made strong returns with other funds, including Pacific Assets Trust (PAC) and Stewart Investors Asia Pacific Sustainability (GB00B0TY6V50). Stewart Investors Worldwide Sustainability has beaten MSCI AC World index and the IA Global sector average over one and five years, beating many funds that don’t invest with ethical constraints.
In keeping with the Stewart Investors investment style, it tends to do better in falling markets and can lag strongly rising ones. For example, in 2018 when this index and the IA Global sector average recorded negative returns, Stewart Investors Worldwide Sustainability returned 0.5 per cent.
The fund’s managers invest in companies they think can benefit from and contribute to the sustainable development of the countries in which they operate. They look to invest in companies that manage sustainability risks and opportunities, and include environmental, social and corporate governance considerations in their research. They also engage directly with companies on sustainability issues.
“The Stewart team is extremely selective – stocks must meet their strict criteria, in particular, sustainability of earnings and quality of management,” says Mr Morgan. “The emphasis on governance and management alignment [differentiates] Stewart Investors Worldwide Sustainability and allows its managers to invest with a much longer time horizon than [many other funds].”
The fund’s geographic weightings at the end of July were very different to MSCI World index, with, for example, a very underweight position to the US, and an overweight to Europe and the Middle East.
Impax Environmental Markets aims to tap into the growth of more efficient delivery of services such as energy, water and waste. It mainly invests in quoted companies that provide, use or advise on technology, products and services in areas such as alternative energy, water treatment, pollution control, waste technology and resource management.
It has a good record of beating environmental benchmarks such as the FTSE Environmental Technology index, and has also beaten broad global equity benchmarks such as MSCI AC World index and the IA Global fund sector average.
It is mainly invested in developed markets, with 43 per cent of its assets in North America and 35 per cent in Europe at the end of July.
The trust has a high tracking error – the difference between its performance and that of its benchmark. This means that in volatile markets it may under- or outperform by a significant margin, and its returns can be volatile from year to year. However, this has translated into good long-term returns so far.
“Equity markets remain volatile and the high-conviction strategy will see periods of relative underperformance,” say analysts at Numis Securities. “But a number of disruptive trends including electric vehicles, the war on plastic and fast-falling energy costs suggest that companies providing environmentally efficient products and services will deliver strong risk-adjusted returns over the long term. Impax Environmental Markets benefits from an experienced management team with a good long-term track record. The trust has significantly rerated in recent years, with the help of share buybacks, which represented nearly 30 per cent of share capital."
In January its board adopted a zero-discount policy and has made a number of share issues to help control the premium to NAV.
Aberdeen Standard Investments UK Ethical Equity (GB00B6Y80X40)
Aberdeen Standard Investments UK Ethical Equity has beaten the FTSE All-Share index and IA UK All Companies sector average over three, five and 10 years – by quite a margin over the latter period. This puts it in the first quartile of its sector in terms of performance over three, five and 10 years – beating many funds that don’t have an ethical focus.
The fund has been managed by Lesley Duncan since 2004, and aims for growth over the long term by investing in stocks that meet strict ethical criteria agreed with the Standard Life Ethical Funds Advisory Group. Ms Duncan in particular looks to include companies whose activities make a positive contribution to society.
About half of the fund’s assets are in FTSE 250 shares, a reason why its returns can be fairly volatile from year to year. At the end of July it had nearly a quarter of its assets in each of industrial and consumer service sectors.
FUNDS DROPPED: Unicorn UK Ethical Income (GB00BYP2Y515)
We have dropped Unicorn UK Ethical Income in favour of Troy Trojan Ethical Income (see above) because the latter fund has consistently outperformed it. Troy has a very established and proven UK equity income team, and its defensive approach makes it more of a core income holding, which could prove useful during market volatility.
|Fund/benchmark||1yr total return (%)||3yr cumulative total return (%)||5yr cumulative total return (%)||Ongoing charge (%)|
|Impax Environmental Markets (IEM) share price||11.31||51.50||107.15||1.04**|
|Stewart Investors Worldwide Sustainability (GB00B7W30613)||6.65||32.54||87.90||0.89*|
|MSCI World index||6.43||39.93||78.32|
|IA Global sector average||5.42||37.00||67.32|
|Aberdeen Standard Investments UK Ethical Equity (GB00B6Y80X40)||-6.79||23.91||41.70||0.9*|
|IA UK All Companies sector average||-3.18||17.35||29.68|
|NEW ENTRANT: Troy Trojan Ethical Income (GB00BYMLFL45)||13.25||27.71||NA||1.02*|
|IA UK Equity Income sector average||-3.75||10.61||24.91|
|FTSE All Share index||0.44||20.20||31.17|
|Source: FE Analytics as at 31 August 2019, *Morningstar, **AIC.|