As the ISA season approaches What Investment begins a series of features looking at how you can populate your ISA portfolio according to your needs for income or capital growth, whether you have a passive or aggressive attitude to risk and, in this article, ethical investments.
We also look at what sort of funds might attract different investors depending on their age, occupation and interests. For example, doctors are twice as likely to invest ethically as their non-medical counterparts, according to IFAs Chase de Vere.
Chase de Vere Medical, the division of the IFA that offers specialist independent financial advice to medical professionals analysed investments into 1,508 client portfolios since June 2018 and found that 19.5% of doctors chose to invest in ethical portfolios compared with just 9.7% of non-medical professionals.
Ethical investing, with the rise of Environmental, Social and Governance (ESG), sustainable investing and impact investing is becoming more popular. Ethical funds saw a net retail inflow of £274m in September 2019 according to the Investment Association. Ethical funds under management stood at £21bn as of the end of September. However their overall share of industry funds under management was 1.6%.
Andrea Sproates, Head of Chase de Vere Medical, says: “We have provided financial advice services to medical professionals for 13 years and have advised over 12,000 doctors. During that time it has been clear that many doctors have been keen to invest ethically.
“This is because, in our experience, most doctors have a strong social conscience and have seen at first-hand the damage that can be caused by tobacco, alcohol and other ‘harmful’ sectors which are excluded in ethical funds.
“There is a view that ethical investing is favoured by millennials and will become more popular as they get older and acquire more wealth. What our research shows is that, with doctors more than twice as likely to invest ethically, there is already a strong demand for investments that can produce solid returns and are less harmful to our wider society.”
Patrick Connolly, head of communications at Chase de Vere explains that their clients won’t pick ethical funds as such: “They’ll decide to invest ethically and we construct portfolios for them,” he says. Within those portfolios Connolly has highlighted five top fund picks for investors looking for ESG focus.
Top five ESG funds
BMO’s are the longest established ethical fund managers and their ‘Responsible’ funds invest in quality growth companies that are demonstrating a clear commitment to sustainability. They are long-term stock picking investors with a high active share and engagement with companies is an integral part of their investment philosophy. This engagement includes topics such as board independence, executive pay and labour standards. This fund is looking for businesses with strong management and governance. It will always have some exposure to the top 20 dividend payers that it’s allowed to hold, although there are many that it can’t including Shell, BP, Rio Tinto, Diageo and British American Tobacco. The fund has a current yield of 4.5%.
Fund manager Mike Fox joined Royal London when they acquired Co-operative Asset Management in 2003 and as a result gained the Co-op’s ethical management expertise. This fund invests predominantly across US, European and UK stocks and also has some UK fixed interest exposure. It is focused on positive screening, with the only negative screens ruling out nuclear power, tobacco and armaments stocks. It then looks for companies which have positive societal benefits. Current themes the fund manager likes including data management, AI and cloud computing, electric and autonomous vehicles and next generation medicine. He believes that sustainable companies are more innovative, less cyclical and give better long-term returns. The performance of this fund back up his arguments.
This fund invests in UK shares and has a good record of out-performing when markets are rising and falling. It invests in a concentrated portfolio of quality growth stocks with a bias towards mid-caps. The fund doesn’t invest in controversial industries and then looks at big trends such as better resource efficiency, improved health and greater safety and resilience in areas such as finances and digital security and identifies companies with strong and dependable growth prospects which are aligned to these themes. They are then involved in active engagement with companies and disclose how they vote on all issues including on executive pay, independence of the Board and diversity.
This is Janus Henderson’s flagship ethical fund and invests in companies which have a positive social or environmental impact. This includes those which can benefit from the challenges posed by climate change, population growth, resource constraints and ageing populations. The fund manager believes that sustainable companies can add real shareholder value. He aims to outperform non-ethical global funds and he is doing a really good job of achieving this, as the fund is one of the best performers in its sector.
This is an excellent fund in its own right, with a good quality investment team and strong and consistent risk adjusted performance. It invests in investment grade bonds and goes through thorough research analysis before conducting ethical screening. The screening is done last as the managers don’t want it to drive the investment process. The fund won’t invest in areas such as armaments, animal testing, tobacco, nuclear power and predatory lending and looks for companies which have a positive impact on areas such as the environment, human rights, community investments and employment opportunities. Interesting holdings include employing ex-offenders in Glasgow to build and refurbish homes, financing residential social housing, a charity that gives advice and information to disabled people and their families and a sports centre in a deprived area of South Bristol.
Further reading: ESG investing trends are flourishing and this is a good thing