We explain why we have removed two top performers from the ready-made portfolio.
- OUT: iShares Global Clean Energy ETF (LSE:INRG), Fundsmith Sustainable Equity, Trojan Ethical Income Fund and Impact Healthcare REIT (LSE:IHR)
- IN: Baillie Gifford Positive Change, Montanaro Better World, Liontrust UK Ethical, FP Foresight Global Real Infrastructure
Just weeks after expanding its ethical rated list (growing from ACE 30 to ACE 40), interactive investor, the UK’s second largest DIY investment platform, has reshaped its ethical growth portfolio. Some of the changes may seem harsh, with two top performers booted out to maintain balance.
This ready-made, balanced, multi-asset portfolio run within a socially responsible investing framework includes ten funds, ETFs and investment trusts, taken from ii’s ethical ACE 40 rated list. To view the methodology, view here.
Whilst ii does the heavy lifting, with research and recommendations, and advise when rebalancing is required, the underlying holdings have to be bought individually – so it may not be a low-cost strategy for investors with smaller amounts, unless you are a monthly investor. Since ii scrapped its regular investing charge, investors who elect for the selections to be bought automatically each month can buy each of the 10 portfolio constituents for free.
Pandemic busting gains over year to date
Whilst it is early days for this new strategy, which was launched towards the end of last year, over the year to date to 31 October, the ethical growth portfolio has produced a pandemic-smashing gain to its followers of 12.5%. That compares very favourably with the 1% and -22.98% returns from the MSCI All Country World and UK FTSE All-Share indices.
But some changes to the line-up have been necessary.
Moira O’Neill, Head of Personal Finance, interactive investor, says: “Ethical investing is personal and subjective, so building a ready-made multi asset portfolio within this sort of a framework isn’t easy – but it is worthwhile. We have tried to help investors check whether it fits their needs by categorising each selection into one of our three ii ethical styles: Avoids, Considers, Embraces.
“Perhaps the most surprising ejection is the portfolio’s top performer, the iShares Global Clean Energy ETF. Harsh as it may seem, the global equity element of the portfolio is also highly exposed to the clean energy theme, so radical action was required to maintain balance. We still like this fund, and it retains its place in our ACE 40 ethical rated list. But when taking a multi asset strategy, discipline is required and sometimes you have to be brutal.”
Dzmitry Lipski, Head of Fund Selection, interactive investor, adds: “We decided to seek a more diversified exposure to wider ESG themes via Montanaro Better World – especially given the incumbent Impax Environmental Markets (LSE:IEM) also offers less concentrated exposure to the clean energy theme. In the ACE 40 matrix, Montanaro Better World is classified as ‘embraces’, pursuing 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.
“There were other difficult ejections. We replaced Trojan Ethical Income (which is also still on our ACE 40 list) with Liontrust UK Ethical. Although the Trojan fund has been among the most resilient UK equity income funds, its freedom to invest up to 30% in overseas equity prompted us to look for a more focused UK option, again for portfolio balance. Liontrust UK Ethical fund makes the cut having built up a solid performance track record with a concentrated portfolio of 41 holdings. Its top 10 holdings, led by London Stock Exchange, account for 41% of the total.”
“We replaced Fundsmith Sustainable Equity Fund which has underperformed it’s ii ethical growth portfolio constituent BMO Responsible Global Equity fund over 12 months and year to date to the end of September. It was replaced with Baillie Gifford Positive Change Fund. Already highly popular with our customers, and a recent entrant to our ACE 40 rated list, this is a concentrated impact portfolio of 25-50 global high quality growth companies which 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 (addressing the needs of the world's poorest populations). It is a strategy that feels more pertinent than ever as the ravages of Covid-19 rage on, revealing deepening inequalities in society.
“Within alternatives, we decided to replace Impact Healthcare REIT (which was the only constituent not on our ACE 40 list) with FP Foresight Global Real Infrastructure Fund. While there are strong demographic drivers supporting the care home sector, there is also significant operational and regulatory risk – and over the pandemic we have lost conviction in this specialist strategy in the context of a concentrated growth portfolio. In contrast, FP Foresight Global Real Infrastructure Fund provides more broader exposure by investing in companies that own or operate real infrastructure or renewable energy assets anywhere in the world.
“We have also decided to increase allocation to BMO Responsible Global Equity Fund from 10% to 15%. The fund focuses on focus on quality, growth companies that are demonstrating a clear commitment to sustainability.”
The interactive investor ethical growth portfolio
|Name||ii ACE ethical style||Portfolio Weighting||Ongoing Charge (OCF)||Product Cost||Allocation of £20,000|
|Royal London Sustainable Leaders C Acc||Considers||10%||0.76%||0.96%||£2,000|
|Liontrust UK Ethical 2 Net Acc||Considers||10%||0.83%||1.17%||£2,000|
|BMO Responsible Global Equity 2 Acc||Considers||15%||0.79%||0.90%||£3,000|
|Baillie Gifford Positive Change B Acc||Embraces||10%||0.53%||0.69%||£2,000|
|Impax Environmental Markets Ord||Embraces||15%||1.04%||1.30%||£3,000|
|Montanaro Better World GBP||Embraces||10%||0.99%||1.33%||£2,000|
|Stewart Investors Global Emerging Markets Sustainability||Considers||10%||0.98%||1.21%||£2,000|
|Rathbone Ethical Bond I Acc||Considers||10%||0.67%||0.72%||£2,000|
|FP Foresight Global Real Infrastructure||Embraces||5%||0.85%||0.89%||£1,000|
* This is the combined figure for the portfolio, based on the current portfolio weighting. Data Correct as at end October 2020.
These are not personal recommendations and past performance is no guide to the future. The value of investments, and the income from them, can go down as well as up and you may not get back the full amount invested.
The ii ACE styles: Avoids, Embraces, Considers can be viewed in the ii methodology but a shortened version is below.
|Interactive investor ACE investment style**||Definition|
|Avoids||Funds that focus on simply excluding companies, sectors or specific business practices|
|Considers||Funds that carefully consider an often-wide range of ethical and/ or environmental, social and governance (ESG) issues or themes when balancing positive or negative factors.|
|Embraces||Funds that focus on companies delivering positive social and/ or environmental outcomes|
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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.