Interactive Investor

Fund Awards 2013: Ethical/Socially Responsible Investment

21st June 2013 16:48

Helen Pridham from interactive investor


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Best Socially Responsible UK Equity Fund: F&C Stewardship

Not only did our winning UK equity fund excel against other socially responsible UK funds, it was also a contender for the mainstream larger UK income growth fund award. The £297 million F&C Stewardship fund has a policy based on investing in companies that make a positive contribution to society, avoiding companies that do harm and endeavouring to improve companies' polices.

Otherwise, manager Catherine Stanley takes a mainstream approach. She says: "We apply the same criteria to stock selection and portfolio construction as if running a non-ethical portfolio." This means she looks for shares that can deliver both growth and income, if possible. This reduces risk in the portfolio, as she does not then have to balance low-growth income plays with pure capital gains plays, which can be higher risk, to get growth.

Stanley comments: "[Selecting the right companies is] not complicated. We look for companies with attractive and sustainable business positions, financial structure appropriate for the strategy and management with good track records. We look at recovery plays/special situations, as they can often be bought on attractive yields, and we can then get capital growth from re-rating. However, we need to see evidence of something changing at a management level."

This approach means the fund has had a relatively high weighting in medium and small companies, as Stanley has found more stocks there with attractive income and growth. She says this part of the market has provided most of the fund's performance and is likely to continue to.

Best Socially Responsible Mixed-asset Fund: Kames Ethical Cautious Managed

The £60 million Kames Ethical Cautious Managed fund is a classic mixed-asset fund consisting of equities and bonds. Kames also offers stand-alone socially responsible equity and bond funds positioned at the "darker green" end of the spectrum with strong negative investment criteria.

Managers Audrey Ryan and Iain Buckle are responsible for the equity and bond elements respectively. The split between the two asset classes is actively managed taking into account the house view, subject to an upper limit on either one of 60%. Over the past two to three years, the equity side has dominated while exposure to fixed interest has been at the lower end of the scale.

Buckle says: "On the fixed-income side we have focused on corporate bonds, primarily investment grade, so we have kept our credit risk low." He says sometimes bonds are used to gain exposure to privately-held businesses that meet the fund's ethical criteria, such as Center Parcs.

The general tilt towards equities has benefited the fund and stock selection has helped. Ryan says not being able to invest in areas such as banks and mining have been good for the fund, but being excluded from some defensive sectors, such as tobacco and pharmaceuticals, has been a headwind of late.

However, she points out: "I have been able to gain exposure to the financial sector through life insurance and financial services companies such as Hargreaves Lansdown." She says particular contributors in the small- and mid-cap areas have been stocks from the electronics, media, chemicals and support services sectors. There has been a re-rating in the UK equity market, but she does not believe valuations are extended.

Best Socially Responsible Bond Fund: Ecclesiastical Amity Sterling Bond

Bond funds have become integral to most investors' portfolios. Fortunately, a growing number are managed along socially responsible lines. Our winner, the £57 million Ecclesiastical Amity Sterling Bond fund, comes from a group that specialises in socially responsible investment.

The fund is managed by Robin Hepworth and Chris Hiorns, who say its consistent performance has been achieved by taking a contrarian yet conservative approach. Hiorns explains: "Over the past three years we have minimised our exposure to the gilt market, which we consider overvalued. Consequently, much of our investment focus has been on corporate bonds. However, we have avoided the retail banks and investment bank sectors."

At the start of the period the focus was primarily on high-quality non-financial names, but as spreads on these tightened, they increasingly focused on niche financials that offered a large pick-up in yield, despite having significantly de-risked their businesses since the credit crisis. These niche areas included building society PIBS and preference shares.

The managers plan to maintain the low weighting to the gilt market and continue to seek value in corporate issues. Hepworth explains: "The market is vulnerable to a cessation in gilt purchases or unwinding of the Bank of England's position. The index-linked market also offers little protection, as real yields have moved negative. We therefore continue to seek value in the higher-yielding areas of the market."

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