A number of investors are not solely interested in making money, but also in making a difference with their investments. Although there is a smaller choice of ethical or environmental investments, if you look in the right places you can find funds that are not simply good because of their returns. Increasing government regulation and interest in investments with this focus could help the returns of funds in these areas going ahead.
If you are interested in this area, also see Royal London Ethical Bond and Rathbone Ethical Bond under bonds, Hermes Global Emerging Markets under emerging markets, and Renewables Infrastructure Group and John Laing Environmental Assets Group under alternative assets.
Impax Environmental Markets (IEM)
Impax Environmental Markets aims for growth by investing in 60 mainly quoted companies involved in cleaner or more efficient delivery of energy, water and waste.
The trust has a good record of beating environmental benchmarks such as FTSE ET Index, but also beats broad global equity benchmarks such as FTSE World and MSCI AC World Index over longer periods. The trust’s returns can be fairly volatile from year to year – like many equity growth portfolios with a bias to small and mid-caps.
“We view the fund as a higher-risk, potentially higher-return vehicle, which will perform differently to global equity markets due to the natural concentration in sectors such as industrials, technology and utilities,” comment analysts at Winterflood Securities. “However, its managers’ focus on diversification should alleviate volatility to an extent.”
The trust is largely focused on developed markets, with 43 per cent of its assets in North America and 35 per cent in Europe. Its largest sector exposure is energy efficiency, which accounts for 36 per cent of its assets, followed by water infrastructure and technologies, which accounts for 19 per cent.
Standard Life Investments UK Ethical (GB00B6Y80X40)
Standard Life Investments UK Ethical beats the FTSE All-Share Index over one and five years, and the IA UK All Companies sector average over, one, three and five years, in line with its aim of long-term growth. It is in the first quartile of its sector in terms of performance over one and five years – beating many funds that don’t have an ethical focus.
The fund invests in UK-listed companies that meet strict ethical criteria agreed with the Standard Life Ethical Funds Advisory Group. About half of the fund’s assets are in FTSE 250 shares, which could at times increase volatility. At the end of July it had 77 investments, about a quarter of which by value were in industrial sector companies and 22 per cent in consumer services.
Unicorn UK Ethical Income(GB00BYP2Y515)
Unicorn UK Ethical Income is relatively new, but is run by Fraser Mackersie and Simon Moon, who have a longer track record with Unicorn UK Income Fund (GB00B00Z1R87). They favour companies that pay dividends and have the potential to grow, as well as meeting their ethical guidelines.
At time of writing, the fund had a yield of about 4.4 per cent, in line with its aim of a historic yield in excess of 110 per cent of the FTSE All-Share index’s yield over a three-year period.
The fund had 39 holdings at the end of July and has a small to mid-cap bias. This means it can be more volatile than a conventional income fund focused on larger companies, for example in 2017 it made a strong return of about 17 per cent, but over the first eight months of 2018 a slight loss.
Stewart Investors Worldwide Sustainability (GB00B7W30613)
Stewart Investors Worldwide Sustainability is run by Nick Edgerton and highly regarded Asia investor David Gait, who has made strong returns with other funds, including Pacific Assets Trust (PAC) and Stewart Investors Asia Pacific Sustainability (GB00B0TY6V50). They invest in companies they think are positioned to benefit from and contribute to the sustainable development of the countries in which they operate.
Stewart Investors Worldwide Sustainability’s recent performance has not been good relative to MSCI AC World Index or the IA Global sector, although has made consistent positive returns. Mr Gait tends to invest in quality sustainable companies over a long period with a strong valuation discipline, so typically outperforms in a falling market and can lag rising markets.
“We hold Stewart Investors’ equity team in high regard and believe sustainable investing is part of their fabric rather than just an adjunct to their investment approach,” says Rob Morgan at Charles Stanley. “This fund offers varied global exposure that is difficult to replicate passively. Stewart Investors believes that sustainable companies have a natural long-term tailwind that should enable valuation creation over time. Investors in the fund should share this long-term horizon.”
Europe accounted for about 47 per cent of the fund’s assets at the end of July, North America 20 per cent and Japan 10 per cent. Consumer staples companies accounted for about a third of its assets, and healthcare around a quarter.