Join our community of smart investors

Strong structural growth via a principled approach

Lesley Duncan tells Leonora Walters how strict ethical criteria has led them to companies with structural growth drivers
Strong structural growth via a principled approach
  • ASI UK Ethical Equity surveys its investors each year to see what their ethical concerns are
  • It avoids investing in areas such as fossil fuels, animal testing, weaponry, pornography and gambling
  • It seeks companies with good records in areas such as human rights, environmental safeguards and combating corruption

When you invest in funds, you accept that you are handing your money over to someone else to decide how to invest it. But ASI UK Ethical Equity's (GB00B6Y80X40) investors get a chance to say how they want their money to be deployed – at least from an ethical perspective - in the fund’s annual investor survey. And if enough investors continue to express concern on an area it may be taken into consideration.

“We don't ever move on one year's piece of data,” says Lesley Duncan, co-manager of ASI UK Ethical Equity. “Ethical issues can influence and be in fashion at any one point in time, so we look for a trend. If we see something emerging and think it's really relevant we will continue to test that piece of information. Normally, if we see a trend evolving over a two to three year period that is when we make a change to the policy.”

Over the past few years, the largest shift in ASI UK Ethical Equity’s policy has been on environmental issues. “We looked at fossil fuels and the supply chain related to fossil fuels,” explains Duncan "After a number of years of looking at this aspect, we changed the portfolio and criteria relating to fossil fuels. So now, if a company makes 40 per cent or more of its revenues from activities related to fossil fuels [we cannot hold it]. For example, the fund used to hold DCC (DCC), a supplier of petrol, diesel and liquefied petroleum gas to petrol stations. Our criteria meant that we could no longer own that company due to its exposure to that aspect of fossil fuels.

"It isn't just about companies that drill in the ground - we've taken it a step further in terms of companies that provide services to the oil and gas industry. A number of support service companies supply specific operations to fossil fuel companies, for example, John Wood (WG.) which provides an engineering service. But alterations to our fossil fuel criteria mean that we can no longer own those types of companies.”

Ms Duncan and her team also avoid investing in companies involved in areas such as animal testing, weaponry, pornography and gambling services. And they seek companies that they consider are making a positive contribution towards preserving the environment, or improving the quality and safety of human life. They assess areas including human and labour rights, environmental safeguards, and combating bribery and corruption.

Duncan says that a good example of a company making a positive contribution is Avast (AVST) which supplies consumers, and small and medium sized businesses with security software. “That company is promoting safety in terms of the data that an individual has in their own PC, making sure they’re not being threatened by cyber risk,” says Duncan.

She also highlights Genuit (GEN), which until recently was called Polypipe (PLP). The company provides sustainable water and climate management solutions for the built environment, and is the UK’s largest manufacturer by revenue of piping systems for the residential, commercial, civil and infrastructure sectors.

“Genuit provides building materials and solutions for water legislation, flood management and climate control which is quite relevant with the recent horrific floods in Germany and Belgium,” says Duncan. “And this company has very strong legislative drivers for its business.”

When seeking investments which meet the fund’s ethical criteria, Ms Duncan and her team, which includes many Aberdeen Standard Investments analysts, conduct very rigorous analysis. However, companies have slipped through the net, a high profile example being online clothing retailer Boohoo (BOO). This was the fund’s largest holding until last summer when allegations of poor worker practices in its UK supply chain emerged. Duncan sold Boohoo out of the fund at the beginning of July 2020 as they felt that its response to the allegations was “inadequate in scope, timeliness and gravity.”

In terms of why this didn't happen until after press reports about poor working practices, Duncan says: “A big part of our process is engaging with companies and their management teams so that we can drive change. We had been engaging with Boohoo: we visited their factories, had management meetings, and believed that we were starting to see progress where there were some areas of weakness and areas for improvement. We'd given the company a list of ‘asks’ and were seeing some traction. So we were absolutely shocked and appalled by what came out, and spoke to the company about it and took the decision to divest. We were looking for Boohoo to go above and beyond what it was doing. The progress was slower than we had hoped for. So we were probably getting to that point of divestment.”

As a result of having to sell Boohoo, Duncan and her team have amended their screening and monitoring processes.

“Our research process includes what we call our environmental, social and governance (ESG) scores,” she explains. “After the situation with Boohoo, we decided that we would put a minimum level on the stocks that we can invest in once the ethical screen has been applied. If the stocks are below this cut off point we do not invest in them. And that led to us disposing of several names because they were below that line of ESG measurement. These include Cineworld (CINE) and J D Wetherspoon (JDW) because its governance was not meeting the standards that we had hoped for. And we sold Mitchells & Butlers (MAB) because of governance issues and its board structure.”

A consequence of applying the ethical screens as well as financial analysis is that ASI UK Ethical Equity tends to have a bias to small and mid-cap companies.

“Because of our negative screen we can’t invest in a number of defensive sectors such as pharmaceuticals, healthcare, fast moving consumer goods and alcohol production companies,” says Duncan. “Because of that, if the market has a defensive trend the fund sometimes under performs. And because we are investing in the mid to smaller cap end of the market, when they are particularly weak that tends to be the main driver of under performance.”

Despite such periods, the fund has a good record of beating the FTSE All Share index and many UK equity funds which do not apply such a strict ethical screen, especially over longer periods. The fund has been doing well so far this year, which Duncan says is due to a large exposure to companies with “structural growth drivers, such as software companies which have performed well. That's a part of the market we really like because you've got visibility of earnings, recurring revenues, and software companies' products and technology.”

The fund’s software companies holdings include Kainos (KNOS), its fourth largest holding at the end of June.

“Kainos develops software which the UK government buys to move paper processes that we can't stand doing, to paperless,” says Duncan. “So for example, getting a passport and applying for your driving licence have moved online. We've owned Kainos since its initial public offering (IPO) and it has done incredibly well due to the growth in that part of its business. It also provides human resources software to large corporates and this has been performing incredibly well in terms of the level of sales and recurring revenues.”

The UK equity market is not associated with technology companies but Duncan says: “Over the past six to nine months there have been quite a few IPOs in the software sector. The market is developing further and it's a range of different companies, from platform companies to quite specific ones developing technology driven software processes. It's an area of the market [in which] we've seen a lot more opportunities arise from IPOs. We invested in Trustpilot (TRST) recently, a platform company with software [that enables] consumers to do independent reviews of the things they buy.”


Lesley Duncan CV

2020: manager of ASI UK Sustainable and Responsible Investment Equity (GB00B131GD17)

2018: deputy head of UK equities.

2004: manager of ASI UK Ethical Equity.

1999-2001: manager of a pension fund.

1995: joins Standard Life, initially as trainee UK equities investment analyst.

1993: trainee UK equity analyst, Bothwell Asset Management.


ASI UK Ethical Equity (GB0004333059)
Price243.2pMean return7.74%
IA sector UK All CompaniesSharpe ratio0.28
Fund type Open-ended investment companyStandard deviation25.13%
Fund size£360.26mOngoing charge0.40%
No of holdings77*Yield0.46%
Set-up date16-Feb-98*More
Manager start dateLesley Duncan 01/06/2004, Rebecca Maclean 01/04/2018
Source: Morningstar as at 27 July 2021, *Aberdeen Standard Investments


Fund/benchmark1 year total return (%)3 year cumulative total return (%)5 year cumulative total return (%)10 year cumulative total return (%)
ASI UK Ethical Equity38.3414.3965.33155.09
FTSE All Share index22.286.3632.4886.80
FTSE 250 index35.6518.7152.45153.27
Numis Smaller Companies ex Investment Companies index47.8320.0858.53161.90
IA UK All Companies sector average29.4612.3041.48104.02
Source: FE Analytics, 26 July 2021


Top 10 holdings (%)
DS Smith2.3
Gamma Communications2.2
Countryside Properties2
Source: Aberdeen Standard Investments, 30/06/2021


Sector breakdown (%)
Consumer discretionary21.8
Real estate5
Consumer staples4.2
Basic materials1.9
Source: Aberdeen Standard Investments 30/06/2021