Ethical Growth Portfolio annual review: four funds in, four funds out
ii’s expanded ethical investment list allows for a wider set of themes to be include in the portfolio.
30th October 2020 11:21
by Andrew Pitts from interactive investor
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The expansion of our ethical investment list to the ACE 40 allows for a wider set of themes to be included in the Ethical Growth model portfolio.
The first anniversary of interactive investor’s Ethical Growth model portfolio heralded outstanding performance from several constituent funds, contributing to a pandemic-smashing gain to its followers of 13.5% in its first year to 30 September. That compared very favourably with the 5.4% and -16.1% returns from the MSCI All Country World and UK FTSE All-Share indices.
The portfolio’s anniversary also coincided with the annual review of ii’s ACE 30 range of recommended ethical investments, which has now become the ACE 40, with 42 funds, investment trusts and exchange traded funds that fit ii’s ACE (avoids, considers, embraces) ethical categories.
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Just as the number of top-performing funds pursuing ethical, ESG (environmental, social and governance) and other responsible investing themes has grown, prompting the expansion of the ACE list, a wider range of ACE strategies can also now be reflected in ii’s Ethical Growth Portfolio.
In all, four new funds are being introduced from 1 November, which means four of the portfolio’s 10 constituents need to make way for the new additions. ii’s portfolio working group* was faced with making some difficult choices, particularly as most of the constituents performed with credit but needing to be mindful that the model portfolio has an ideal limit of 10 holdings to provide the desired asset allocation. Broadly, the allocation is 80% equities (50% developed ex-UK, 20% UK, 10% emerging markets), 10% bonds (hedged to sterling) and 10% in “alternative” asset classes.
Best holding is ejected
Perhaps the most surprising ejection is that of the portfolio’s top performer. The iShares Global Clean Energy exchange traded fund (LSE:INRG) returned an astonishing 62.8% over the year, propelling it from a target 10% weighting in the portfolio to close to 15%. Its removal from the portfolio does not imply any repudiation of the fund’s strategy – to track the performance of the world’s 30 largest companies involved in the clean energy sector – but clean energy is also represented in a less concentrated form by Impax Environmental Markets investment trust (LSE:IEM), as well as in the portfolio’s new additions.
Directly taking the place of the ETF with a 10% portfolio weighting is Montanaro Better World fund. In the ACE 40 matrix, it is classified as “embraces” in the global equities category. The global smaller companies it targets had previously been somewhat under-represented in the portfolio. The fund pursues six core themes from 50 companies that are deemed to make a positive impact on society: environmental protection, green economy, healthcare, innovative technology, nutrition and well-being.
Since its launch in April 2018, those aims have mostly helped the fund to stay well ahead of both the average fund in the Investment Association’s Global sector as well as its benchmark, the MSCI World SMID (small and mid-cap) index.
Over that period (10 April 2018 to 17 October 2020), the fund has returned 56.9% compared with an average 28% return from its peers and roughly four times the return from the index.
Cleaner and greener energy is also one of four themes pursued by the second addition to the Ethical Growth Portfolio’s global equities allocation: Baillie Gifford Positive Change, which is introduced at the expense of Fundsmith Sustainable Equity. The latter fund has not performed as strongly as BMO Responsible Global Equity, (over the last year, and year to date to end September), which is rewarded with an increased portfolio weighting of 15% (up from 10% previously).
Introduced with a 10% weighting, Baillie Gifford Positive Change is also in the “embraces” ACE 40 category and it joins Impax Environmental Markets IT as an adventurous global equities fund.
It invests in high-quality growth companies that can deliver positive change in one of four areas: social inclusion and education, environment and resource needs, healthcare and quality of life; and “base of the pyramid”, which means addressing the needs of the world’s poorest populations. This results in a concentrated portfolio of holdings – the top 10, headed by electric auto manufacturer Tesla (NASDAQ:TSLA), account for 50% of the total – which are expected to number between 25 and 50.
Its very strong performance since launch in January 2017 – up 201% and 74.5% in the past year alone – means the fund has rapidly grown to more than £1.3 billion, as well as taking a top five spot among more than 240 funds in the IA Global sector over six months and one and three-year performance periods.
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UK holdings adjusted
The portfolio working group has also decided to replace Trojan Ethical Income with Liontrust UK Ethical, which has been classified as an adventurous UK equities option in the “considers” ACE 40 categorisation.
Although the Trojan fund has been among the most resilient UK equity income funds, but also with a focus on total return, the fund can invest up to 30% in overseas equity and it was decided that a more focused UK option would better suit the growth purposes of the portfolio.
Liontrust UK Ethical fund aims for long-term capital growth via a diverse portfolio of UK companies that have strong growth prospects and meet the fund’s ethical requirements as well as its rules regarding environmental and social responsibility. This fund, which has a solid performance track record, has a fairly concentrated portfolio with the top 10 of 41 holdings, led by London Stock Exchange (LSE:LSE), accounting for 41% of the total. It also has a smattering of exposure to European shares, which account for 9% of the fund. Irish packaging group Smurfit Kappa (LSE:SKG) is the largest of these, representing 4.4% of the fund’s investments.
Finally, the specialist exposure that Impact Healthcare REIT (LSE:IHR) provided with its portfolio of UK nursing and care homes, while serving the portfolio well, has been switched into the more diverse FP Foresight Global Real Infrastructure fund, which invests in companies that own or operate real infrastructure or renewable energy assets around the world.
To summarise, the changes to the portfolio that are being implemented following the annual review should give the portfolio exposure to a broader range of ethical, sustainable and environmental themes, without sacrificing its aims of providing investors with market-beating growth.
Summary
OUT: iShares Global Clean Energy ETF, Fundsmith Sustainable Equity, Trojan Ethical Income and Impact Healthcare REIT.
IN: Baillie Gifford Positive Change, Montanaro Better World, Liontrust UK Ethical, FP Foresight Global Real Infrastructure.
Ethical Growth Portfolio
| Investment | Portfolio weighting | Ongoing Charge (OCF) | Product cost | Allocation of £20,000 |
|---|---|---|---|---|
| Royal London Sustainable Leaders C Acc | 10% | 0.76% | 0.96% | £2,000 |
| Liontrust UK Ethical 2 Net Acc | 10% | 0.83% | 1.17% | £2,000 |
| BMO Responsible Global Equity 2 Acc | 15% | 0.79% | 0.90% | £3,000 |
| Baillie Gifford Positive Change B Acc | 10% | 0.53% | 0.69% | £2,000 |
| Impax Environmental Markets Ord | 15% | 1.04% | 1.30% | £3,000 |
| Montanaro Better World GBP | 10% | 0.99% | 1.33% | £2,000 |
| Stewart Investors Glbl EM Sust B Acc | 10% | 0.98% | 1.21% | £2,000 |
| Rathbone Ethical Bond I Acc | 10% | 0.67% | 0.72% | £2,000 |
| Syncona Ord | 5% | 1.40% | 2.10% | £1,000 |
| FP Foresight Global Real Infrastructure | 5% | 0.85% | 0.89% | £1,000 |
| Total / Weighted Average | 100% | 0.86% | 1.09% | £20,000 |
Changes effective from 1 November 2020.
*The author is a member of the portfolio working group.
Andrew Pitts is an independent consultant for interactive investor and was formerly editor of Money Observer magazine from 1998 until 2015.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
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Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.