ACE 40 ethical rated list: ii completes annual review

Two new additions and Impax Environmental Markets the top performer over one year.

• UBS MSCI UK IMI SRI ETF added as a ‘Low-Cost UK Equity’ option
• Montanaro European Income Fund added as a ‘European Equity Income’ option

interactive investor, the UK’s second-largest DIY investment platform, has completed its annual review of its ACE 40 ethical rated list.

In performance terms, 48% of active funds on ACE 40 are in 1st and 2nd quartile versus peers over one year to end September 2021, with 79% in 1st/ 2nd quartile over three years and 91% over five years.

Dzmitry Lipski, Head of Funds Research, interactive investor, says: “Our ethical rated list is now two years old and on its second annual review weigh in. There are now far more ethical funds to play with - the original ACE 30 list was drawn from a universe of just 116 funds to 157 today. And that means more choice for investors – and an ii rated list that has expanded to become ACE 40.

“This is a list of best ideas, and while the majority of our ACE list followed the growth trajectory we would have expected, there’s always going to be some bumps along the way. The last year has been tough for the bonds-focused element of ACE 40 due to investors’ concerns about higher inflation, while the performance of Syncona (LSE:SYNC) Investment Trust prompted a formal review, and we have since satisfied ourselvesthat it deserves to keep its place on our list.

“In other words, this list is no substitute for doing your own research, and this includes making sure that the options match your own ethical credentials, since ethical investing is personal and subjective. There’s still room to grow for this sector – we have added an income option, the Montanaro European Income Fund, but we would like to see more choice for income investors in the ethical space.”

Following the annual review in October 2021, ii has made two new additions to ACE 40:

UBS MSCI UK IMI SRI ETF as a Low Cost UK Equity option. This index-tracking exchange traded fund (ETF) has closely tracked the performance of the MSCI UK IMI Extended SRI Low Carbon Select 5% Issuer Capped Index, which captures large, mid and small-cap stocks of the UK equity markets.

The index is designed to represent the performance of companies that have lower carbon exposure than that of the broad market and have high Environmental, Social and Governance (ESG) performance.

The fund is reasonably priced: The ‘A’ distributing share class levies annual ongoing charges of 0.28%.ii ACE ethical style: Avoids. This means the ETF simply screens out specific sectors considered to be unethical, or stocks whose environmental, social and governance (ESG) scores are below a certain threshold.

Montanaro European Income Fund as a European Equity Income option. The fund has astrong and successful investment process that Montanaro Asset Management have been following long before the launch of the fund in November 2015. It has an above market level of income with an experienced and well-resourced management. It is competitively priced: The ‘A’ share class levies annual ongoing charges of 0.8%.ii ACE ethical style: Considers. This means the fund carefully considers an often-wide range of ethical and/ or environmental, social and governance (ESG) issues or themes when balancing positive and negative factors.

interactive investor made these additions following a comprehensive review of ethical fund options. 

ii’s process begins with our ii Ethical Investments Long List. This is a list of all ‘ethical’ funds, investment trusts and ETFs available to buy on our platform. It is updated and maintained with help from SRI Services. We use ‘ethical’ to encompass a wide range of investment criteria, including socially responsible, sustainable and environmental concerns.

Moira O’Neill, Head of Personal Finance, interactive investor, says: “When we launched our ethical list in 2019, rated lists were rightly going through a period of intense scrutiny. But that didn’t stop us helping customers navigate a little-understood area with greater confidence. Two years on, ethical investing remains shrouded in mystery and few others have stepped up to the plate.

“Our rated lists will only be as good as our business model and governance – which we take very seriously at board level through our Investment Governance standing committee. Not all of our teams’ selections will be winners, and they are certainly no substitute for doing your own research. But our rated lists are important tools to help investors get started.”

Source: Morningstar Direct as of 30 September 2021. Returns in GBP.

What we look for 

interactive investor conduct regular performance monitoring of our ACE 40, against general stock market and industry sector trends. We also check our ACE 40 for investment strategy-specific events. 

But we also perform an annual review of the whole list. This makes sure our selections are best in class and have the potential to deliver consistently against their targets. 

We explore the entire ethical universe and consider a wide range of quantitative and qualitative factors. These include performance, risk and risk-adjusted metrics. We also consider value for money, the manager’s experience and the fund manager’s resource.

We put a strong focus on managers’ ESG philosophy, process and implementation. Investments that win a place on our ACE 40 list are then put into one of the following buckets, subject to approach:

Avoids - funds that exclude specific companies, sectors or business practices, such as tobacco.

Considers - funds that take into account strict environmental, social and governance (ESG) criteria, such as pollution levels.

Embraces - funds that focus on companies that deliver positive social and/or environmental outcomes, such as renewable energy.

The ACE 40 list includes 10 funds in the Avoids bucket, 23 funds – Considers and 10 funds – Embraces.

Ethical funds remain a limited universe, despite increasing levels of investor demand over the past couple of years. A lot of funds have launched recently, so they are relatively small with short track records. 

There is a still lack of ethical choices in some fund sectors such as equity income. Many ethical funds tend to have high weightings to healthcare and technology, so-called growth sectors. But they have low weightings to the energy and industrials sectors, which are good sectors for dividends.

We aim to select a range of investments that capture a diverse group of investment styles and approaches. The investment styles and approaches include core vs adventurous, value vs growth, and large cap vs smaller companies. Our ACE 40 contains funds, investment trusts and exchange-traded funds (ETFs). 

Our robust criteria and assessment process are designed to help us make the best possible decisions. We have no conflicts of interest and focus on the best outcome for our customers at all times.