One year on: how nine ethical fund choices fared

Twelve months ago, ethical financial adviser Castlefield Investment Partners drew up a selection of funds. Here’s how they have performed.

A year ago, we were invited to draw up a theoretical ethical portfolio for Money Observer, allowing readers to follow how our picks fared in the markets from their starting value of £100,000. Primarily focusing on growth, we set it up with 75% invested in equities.

• This marks the final column of the ethical portfolio that featured in Money Observer. For those looking for ethical fund ideas, explore interactive investor’s Ethical Growth Portfolio.

We use a proprietary selection methodology called “B.E.S.T” to manage both our own funds and to select third-party funds. B.E.S.T stands for the Business & Financial, Environmental, Social and Transparency & Governance factors we consider for all the investments in our responsible investment process. All the selections here are the result of applying this methodology.

It has been a good year for the picks. Focusing on total returns, our selections have combined to produce an increase in value of £3,599 on our theoretical £100,000 investment, so a total return over the previous year of 3.6% (with figures up to the end of July 2020). By way of comparison, the IA Mixed Investment 40-85% Shares sector returned -2.8%. For the first year, that’s a solid sign of the performance that ethical investing can achieve. Since the end of April, the selection returned 8.3% against the benchmark (the sector) at 6.6%, outpacing the recovery seen in recent months.

Of course, when we drew up this selection initially, none of us had an inkling of the year we had in store! In what has been a very challenging year for markets, we’re pleased to see that our picks have recovered strongly, continuing to outpace the benchmark to deliver a positive return over the preceding 12 months.

Amid the turbulence of the market reaction to the coronavirus pandemic, we’ve seen increasing interest in the performance of environmental, social and governance (ESG) and sustainability-led funds, which appear on average to have outperformed their peers over the long-term as well as during this recent crisis. We have a strong belief that investors should not have to sacrifice performance while investing in a way that reflects their personal values and it has been positive to see wider acceptance of this in the mainstream financial press.

The leading performer over both the most recent quarter and our first year has been the Liontrust Sustainable Future Global Growth Fund, returning 16.25% since we started and 14% since the end of April. The team attributes the continuation of their run of form to their process, focusing on the structural shifts towards a more sustainable, cleaner economy instead of any concerted effort to time the market, and citing holdings such as PayPal (NASDAQ:PYPL), Cellnex (XMAD:CLNX) and Adobe (NASDAQ:ADBE) as key contributors to performance.

The second-largest gain has come from our investment trust pick, Greencoat UK Wind, returning 11.37% over the year and 8.66% over the past quarter. The shares were caught up in the March volatility, yet the fall seemed irrational and they’ve subsequently recovered strongly. Renewable energy is becoming an ever-greater part of the energy mix and the managers continue to expand the portfolio of assets, while its dividend stream has become increasingly attractive against the backdrop of Covid-related distribution cuts across large swathes of the market.

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The tale of the coronavirus tape can also be seen in the fact that our two bond fund picks come next in the annual return pecking order, with the Rathbone Ethical Bond Fundreturning6.19% and the Royal London Ethical Bond Fund 5.38%. The emergency interest rate cuts seen around the world in response to the pandemic led to yield compression and consequently the asset class held up well. With coupon defaults not prevalent, the apparent security of the interest streams is again a prized attraction. We retain our confidence in these two funds having suitable diversification and solid credit analysis underpinning their holdings.

Following closely behind were two further global funds, the WHEB Sustainabilityand Stewart Investors Worldwide Sustainabilityofferings. Both showed a strong recovery over the most recent quarter, returning 12.21% and 9.83%, respectively. Their fund construction methods differ materially yet with the common underpin of identifying those companies best placed to meet and solve sustainability challenges for an evolving world, while also taking a robust approach to challenging management teams to demonstrate good governance practices.

Completing the set of global equity picks was the overall laggard, the Sarasin Food & Agriculture Opportunities Fund. It has returned -13.43% since inception of the portfolio and although it has recovered some lost ground, it still lags the rest of our selections by some margin. Coming off a run of strong performance into 2019, it was left more exposed to the impact of coronavirus as non-consumer focused companies struggled with workforce and logistical issues in addition to fluctuating commodity prices. For now, we continue to see long-term structural drivers for the theme and retain conviction in the team’s ability to adapt to the disruption.

That leaves our two UK picks to review. Albeit still recovering, UK equities have lagged global equities over the period. The likely culprit for this seems political in nature in that the twin elements of a delayed response to the pandemic spread and the spectre of failing to agree a trade deal with the EU by the end of the year have given rise to macro-economic concerns.

Returns from our selected funds did, however, continue to outperform materially the wider UK market, with the Liontrust Sustainable Future UK Growth Fund and our own Castlefield B.E.S.T Sustainable UK Smaller Companies Fund returning -5.76% and -2.79% since inception respectively, and 5.97% and 4.04% over the past quarter.

The team at Liontrust pointed to strong performance from holdings such as Oxford BioMedica (LSE:OXB), which was supported by a share placing and a move into the FTSE 250 index in June, and other healthcare names. The pandemic has proven the importance that these companies have in health and well-being as a key theme across many ESG and sustainability focused funds. The Liontrust team also added a new holding in the form of Oxford Instruments (LSE:OXIG), which is a technology business providing services to world-leading industrial firms and scientific research communities.

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Our own Castlefield B.E.S.T Sustainable UK Smaller Companies Fund also continued to see the benefit of its own healthcare and technology exposure, with the new holdings in these sectors mentioned in our previous update all performing well. We introduced an additional healthcare name during the period in Inspiration Healthcare (LSE:IHC), a medical technology company focusing on neonatal intensive care. Most of its products are used in the first few days of a premature or unwell baby’s life, helping to incubate, resuscitate or provide breathing support.

What then of the future? The economic effects of the coronavirus are still being played out and we wait to see if governments can hold their nerve in extending support schemes for longer periods in order to provide a continuing cushion. There will, of course, be costs to doing so, but in a world of ultra-cheap finance the ability to maintain those schemes is perhaps as affordable as it ever will be.

Investors seem to be signalling a preference for taking that course rather than risking the impact of mass lay-offs becoming permanent with, for example, the ending of furlough schemes. There’s the US presidential election in November, of course, where a Trump re-election will be a renewed shot in the arm for fossil fuel companies, whereas a Joe Biden victory might trigger a “Green New Deal”, so there’s a lot at stake for sustainability investing. Either way, the long-term path seems to be moving inexorably to greater use of renewable energy and a greater focus on fairer social outcomes. That trend should afford the funds in our portfolio plenty of opportunity to continue finding the winners of the future. Let’s see what the next few months brings them.

Source: FE Analytics and Castlefield. *Inception of the portfolio is 1 August 2019.

Simon Holman is a partner at Castlefield Investment Partners and not a direct employee of interactive investor.

Remember that each fund is unique and hence exposed to different levels of risk. Some are relatively low risk, whilst others can be very risky and those will only be appropriate for more sophisticated investors.

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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.