What to look for in an ethical fund manager
Check which ethical priorities they favour
For example, are you looking for a fund that excludes only tobacco, arms and gambling? Or do you want to go further and perhaps exclude animal testing and intensive farming practices? Does the fund comply with your values?
What does the fund manager invest in? What are the fund’s goals?
Like any investment fund, ethical funds can invest in a range of assets, including fixed interest, UK equities and global equities. Equally, some funds may be more aggressive in the pursuit of returns and others more cautious. Where do you want to place your money? What is your appetite for risk?
Does the fund manager have a specialist ethical in-house research team or is the whole process contracted out?
Fund managers are often supported by in-house research teams but this is not always the case. It is worth investigating to find out whether socially responsible investing is a major focus for them or if the process is contracted out. Is ethical or responsible investment, as a principle, embedded in the culture of the organisation?
At Ecclesiastical Investment Management, research and analysis is conducted in-house and is at the heart of our ethical investment philosophy. Our investment approach is one of active management and we seek out companies with sound financials, respected management, good growth prospects and the potential to generate strong cash-flow. We, integrate environmental, social and governance (ESG) risk into our stock selection.
Is there a screening process? How does it work?
There are a wide range of screening processes in place for those wishing to invest ethically and investors need to decide what’s important for them..
Negative screening, the process of excluding companies based on their activities or behaviours, has been supplemented in recent times by positive ESG (Environmental, Social and Governance) (looking for companies who perform well in these areas). This benefits the responsible investor who is looking for the best investment methodology encompassing economic, strategic and sustainability perspectives. We use positive screening to help us identify those businesses we believe will perform well as investments over the long-term, and which offer good quality ethical investment opportunities..
What experience does the manager have in the ethical investment?
Clients should check how long a fund manager has been managing money responsibly and what resources they have. – Has the Manager received industry recognition for managing money responsibly?
Does the Fund Manager have to track a benchmark?
For example, a UK fund manager may be urged to ensure his fund is similar to the FTSE Allshare index. While this approach in any circumstance can hinder a fund manager delivering absolute returns, this restriction can be heightened when ethical screens are applied and companies or sectors are excluded.
An ethical manager following the UK stock market may be encouraged to have a reasonable weighting to oil and gas, but if the ethical screening only identifies one company in this sector as suitable the fund may be forced to hold a lot of money in one stock, which can increase risk.
What is performance like over the long term?
Of course, for all investors performance is key! At the time of launching our first ethical retail fund in the 1980s, investing ethically was criticised for offering poor diversification and lower performance, but this no longer holds true, with over 100 products on offer in the UK alone and many evidencing strong track records.
We believe that integrating key, environmental, social and governance risk into the investment process enhances long-term performance. The continued challenging economic climate in the UK, alongside the wide mistrust of financial institutions, has meant that those fund managers with genuine responsible investment credentials are flourishing. A good place for investors to start is to look online at sites such as FE Trustnet, Citywire and the Investment Management Association.
Neville White is head of SRI policy and research at Ecclesiastical Investment Management.