Investors who have previously shunned ethical funds in search of better returns elsewhere may have missed out this year as the ‘good’ funds outperformed their conventional peers.
Data from asset manager trade body the Investment Association showed that ethical funds under management reached £13.7bn at the end of June, just a touch under the previous month’s record of £13.8bn.
While the sector represents just 1.2 per cent of the total industry funds under management, it has seen retail inflows for each of the previous 12 months, according to the Investment Association.
With the funds seemingly becoming more popular among investors, FE Trustnet took a closer look at what has made the funds more compelling this year.
Indeed, a bespoke sector created by FE Trustnet collecting the IA UK All Companies funds with an ethical/SRI mandate had outperformed the sector with all those funds removed.
Performance of ethical funds vs conventional peers in 2017
20170904_Ethical_YTD_1
As seen above, the average UK ethical fund has returned 11.32 per cent in the year to 1 September while the average conventional IA UK All Companies fund has returned just 9.61 per cent. In comparison, the FTSE All Share index is up by 8.29 per cent.
A sector constructed of IA UK Equity Income funds minus three ethical strategies also failed to beat the FTSE All Share, delivering a total return of just 8.22 per cent.
Below FE Trustnet considers some of the top performing ethical UK equity funds for the year to 1 September.
Standard Life Investments UK Ethical
The best performer year-to-date is the £278.8m Standard Life Investments UK Ethical fund, which has returned 19.74 per cent.
Overseen by Lesley Duncan since 2004, the fund invests in a portfolio of UK equities that meet strict ethical criteria.
“The fund manager will exclude companies which fail to meet the ethical criteria whilst seeking to include companies whose business activities are regarded as making a positive contribution to society,” the firm noted.
The biggest holding for the fund is soft drinks manufacturer Fever-Tree, which represents 4 per cent of the portfolio. Other top holdings include Bellway, Boohoo.com, Prudential and NMC Healthcare.
While it neither returned a profit or recorded a loss in 2016, it is a top-quartile performer over other time periods.
Over three years the fund has delivered a top-quartile performance of 41.21 per cent, compared with a gain of 26.29 per cent from the average sector fund. The fund is also in the top quartile over five years, generating a total return of 101.68 per cent compared with a 71.3 per cent gain from the average sector fund.
Performance of fund vs sector & benchmark YTD
Source: FE Trustnet
In its most recent report, Rayner Spencer Mills wrote: “This fund combines the strong stock selection process of Standard Life’s UK equity team with a balance of positive and negative ethical/SRI criteria.
“The ‘Focus on Change’ approach has been successful in identifying long-term stock winners with no particular bias towards value or growth investing and the ethical/SRI overlay looks to highlight companies making a positive contribution to society and the environment.”
The fund has an ongoing charges figure (OCF) of 0.9 per cent.
Liontrust UK Ethical & Liontrust Sustainable Future UK Growth
Liontrust has two top-performing funds, both acquired as part of the deal that brought the Alliance Trust Investments team to the asset manager earlier this year.
With a respectable 17.48 per cent return during 2017 is the £361.6m Liontrust UK Ethical fund, co-managed by Peter Michaelis and Neil Brown, another long-term growth fund investing along ethical criteria.
The fund’s largest holding is London Stock Exchange Group, which represents a 5.8 per cent holding in the portfolio.
Indeed, the fund has an overweight exposure to financial stocks, which make up 30 per cent of the portfolio and includes companies such as Prudential, Legal & General and challenger bank Paragon.
Another overweight sector for the fund is industrials, which represent 22.5 per cent of the portfolio compared with 7.7 per cent of the benchmark MSCI United Kingdom index.
The fund is also a strong performer over the medium term, returning 41.81 per cent over three years and 97.34 over five, both of which are top-quartile performances.
Michaelis and Brown also manage the four FE Crown-rated Liontrust Sustainable Future UK Growth fund, which has risen by 17.04 per cent YTD.
Performance of funds vs sector YTD
Source: FE Trustnet
Liontrust UK Ethical has an OCF of 0.81 per cent, while Liontrust Sustainable Future UK Growth has an OCF of 0.85 per cent.
Unicorn UK Ethical Income
The final fund is a top performer in the IA UK Equity Income sector and a recently-launched strategy.
The Unicorn UK Ethical Income fund has returned 15.62 per cent year-to-date. In comparison, the average conventional UK equity income fund rose by 8.22 per cent.
The £10.9m fund was launched in April 2016 and aims to deliver a yield of 110 per cent of the FTSE All Share’s yield over a three-year period.
Co-managed by FE Alpha Manager Fraser Mackersie and Simon Moon, the fund invests in a portfolio of UK companies based on ethical and socially responsible criteria reviewed at the point of investment and quarterly thereafter.
It invests in a concentrated, but diversified, portfolio of 50 stocks with small-to-mid cap bias and with potential to grow dividends.
The fund’s biggest holding is IT professional services firm FDM Group, which represents 3.6 per cent of the portfolio.
Top sector exposures include financial services at 19.5 per cent and construction & materials making up 10.2 per cent of the fund.
The fund has an OCF of 0.81 per cent.