It can be difficult for investors to find the right sustainable strategy for them, considering the plethora of options available and different interpretations of this style of investing.
The rise of sustainable and ESG (environmental, social & governance) focused funds has been something of a phenomenon in recent years, according to Adrian Lowcock, head of personal investing at Willis Owen.
As such, this has culminated in some standout performances these strategies in 2021.
“While historically investing in these types of funds was thought to provide lower returns,” said Lowcock. “The evidence in recent years shows sustainable stocks are leading markets more and more.”
Performance of MSCI ACWI ESG Universal vs MSCI World over 3yrs
Source: FE Analytics
Indeed, over the last three years, the MSCI ACWI ESG Universal index has delivered 48.65 per cent, compared to 46.82 per cent for the MSCI World index.
However, it has become increasingly difficult for investors to discern between the vast number of ESG, sustainable and ethical funds in the market.
It can also be difficult for the individual to align their goals and sensibilities about sustainable investing to the all-encompassing funds that are available on the market today.
Despite that, Lowcock said that there are ways for an investor to pick through these funds.
“Investing in ethical funds in your ISA offers a good opportunity to gain exposure to this growing trend, becoming something that is no longer a ‘nice to have’, but rather a necessity,” he said.
“Covid-19 has accelerated the trend for sustainable investing as people have realised the impact human activity has on the world and recent events such as US president, Joe Biden signing back up to The Paris Agreement, has solidified the fact that climate awareness is high on the agenda.
“However, there is a lack of clarity on what people are really investing in via the range of funds available, and without thorough research into underlying positions, it is very hard for investors to know much beyond the labels on the funds.”
Despite the noise, he is clear that some of these funds have both significant experience and understanding of sustainable and ethical investing - built on robust processes and dependable track records.
Below, Lowcock gives three choices for the sustainably-minded investor.
ASI UK Ethical Equity
The head of personal investing’s first pick is the £323.5m ASI UK Ethical Equity fund, managed by Lesley Duncan and Rebecca Maclean.
“Lesley Duncan follows a strict ethical approach which involves applying both negative and positive criteria,” said Lowcock. “Avoiding companies that harm the environment or are involved in alcohol, gambling, tobacco and weapons amongst other items.”
ASI’s ‘Focus on Change’ philosophy lead them to make investment decisions based upon current market conditions. This philosophy avoids the normal value or growth styles, or size biases and focuses resources on securing and analysing new information identifying change at both micro and macroeconomic levels, according to Rayner Spencer Mills Research.
“The team look to invest in environmental technology and pollution control companies, companies that promote equal opportunities and those that are strongly involved in the community,” Lowcock added.
“We believe the fund is a good choice for anyone who wants to embrace a socially responsible approach to investing in the UK.”
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
Over three years, the fund has made a total return of 10.75 per cent, compared with 10.66 per cent for the average fund in the IA UK All Companies sector and 6.74 per cent for the FTSE All Share. It has an ongoing charges figure (OCF) of 0.90 per cent.
Royal London Sustainable Leaders Trust
Second is the £2.4bn Royal London Sustainable Leaders Trust, managed by FE fundinfo Alpha Manager, Mike Fox.
“Mike Fox and the team at Royal London have been evolving their sustainability strategy since 2003, and the fund looks to provide above-average capital growth by investing in companies that have a positive effect on the environment, human welfare and quality of life,” said Lowcock.
According to the team at FE Investments, the fund is distinguishable from its ethical peers, who focus predominantly on negative screening whilst Fox and his team go a step further and screen all ‘ethical’ companies.
This is done to isolate those that are actively engaging in sustainable areas as well as those which operate in socially neutral areas, such as alcohol production, but which utilise responsible methods of production.
The analysts at FE Investments said it makes a very good candidate for investors who specifically want exposure to companies that are making a positive impact for society or operating in a sustainable manner.
Performance of fund vs sector over 3yrs
Source: FE Analytics
Over three years, the five FE fundinfo Crown-rated fund has made a total return of 39.12 per cent, compared to 10.66 per cent for the IA UK All Companies sector peer. It has an OCF of 0.76 per cent.
Stewart Investors Worldwide Sustainability
Lowcock’s final pick is the Stewart Investors Worldwide Sustainability fund, managed by Nick Edgerton and Alpha Manager David Gait.
“The process behind this fund has been in place since the 1990s,” he said. “Fundamental analysis of companies with a heavy focus on the sustainability of their earnings and business models is core to stock selection.
“There is preference for high-calibre management and healthy balance sheets leading to a bias towards defensive growth shares.”
The fund invests in shares of companies around the world and has the option to invest in both developed and emerging market countries.
It includes Unilever, Coloplast and US cybersecurity company, Fortinet within its top holdings.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
Over three years, the £653.3m fund has made a total return of 48.29 per cent, compared to 45.12 per cent for the average fund in the IA Global sector and 43.49 per cent for its MSCI ACWI benchmark. It has an OCF of 0.67 per cent.