ii ACE 40 investments

The ACE 40 Annual Review has officially been completed. Following a comprehensive review of sustainable fund options conducted by Morningstar's Management Selection Group, we have made the following changes:

Inclusion of Janus Henderson Global Sustainable Equity Fund as a Core option

Hamish Chamberlayne has managed this fund since 2014 and is supported by a four-person Global Sustainable Equity team. Since 2017, when the Janus and Henderson investment groups merged, the broader resources available to this team increased to an impressive level, with a central team of over 30 analysts and numerous regional management groups. Research from all of these sources provides input into this strategy.

The fund’s investment universe is reduced by ethical criteria that exclude parts of the market, while eligible companies need at least 50% of their revenues to align with the team’s 10 positive impact themes, which are mapped to UN Sustainable Development Goals. Financial resilience is assessed by looking for durable business models, predictable revenues, consistency of margins and cash flows, and strong balance sheets. Discounted cash flow modelling is used for valuations. This approach results in a subset of companies with long-term compounding characteristics and support from structural growth drivers.

The fund is expected to show persistent biases to growth and mid-cap stocks relative to mainstream indices, and, at the sector level, to favour technology and industrials.

Our positive view of the fund is based upon the experienced lead manager, the significant resources supporting him, and the robust environmental, social and governance (ESG) approach that is fully integrated into the investment process.

Inclusion of iShares MSCI Europe SRI ETFas a Low Cost option 

The fund tracks the MSCI Europe SRI Select Reduced Fossil Fuels Index which consists of c.110 European stocks that are consistent with specific values and climate change-based criteria, as well as a high minimum level of ESG performance. The index is designed for investors seeking a diversified SRI (Socially Responsible Investment) benchmark of companies with strong sustainability profiles, while avoiding companies that are incompatible with its values screen or having exposure to fossil fuel extraction, production, power generation or reserves ownership.

The constituents of the index are float-adjusted market cap weighted and are based on the MSCI Europe Index which includes large and mid-cap securities. The index also reduces concentration by capping individual positions to a maximum weight of 5%.

A soundly constructed and reasonably representative portfolio with a low fee makes this fund well positioned to achieve superior risk-adjusted returns relative to its Morningstar Category peers over the long term.

Removalof CT Responsible Global Equity Fund from Core category

Although we continue to believe the fund has some merit, there are more compelling environmental, social and governance (ESG) products available that offer global equity exposure with a growth bias, and we therefore no longer view this fund as one of our highest conviction ideas.

Removal  of CT Responsible UK Income Fund from Core category

Columbia Threadneedle has announced that Catherine Stanley, the lead manager on CT Responsible UK Income fund and the co-head of UK equities, has left the firm. Stanley successfully managed both strategies since 2009, making her one of the longer-tenured managers in the UK sustainable space. In our view, her loss is significant for this product, and we therefore no longer view this fund as one of our highest conviction ideas.

Removalof Liontrust UK Ethical Fund from Adventurous category

This fund is actively managed and has clear growth and small/mid-cap biases versus mainstream benchmarks. These style biases have caused some understandable relative weakness over recent years, but there have also been errors in execution that have exacerbated this. The fund has not performed in line with our expectations, and we therefore no longer view the fund as one of our highest conviction ideas.

Removal of Liontrust Sustainable Future Europe Growth Fund from Core category

This fund is actively managed and has clear growth and small/mid-cap biases versus mainstream benchmarks. These style biases have caused some understandable relative weakness over recent years, but there have also been errors in execution that have exacerbated this. The fund has not performed in line with our expectations, and we therefore no longer view the fund as one of our highest conviction ideas.

Removalof Vanguard ESG Developed Europe Index Fund from Low Cost category

This fund is passively managed and tracks the FTSE Developed Europe Choice Index which employs a number of exclusions to provide an ESG solution at a low cost. Although this is a valid approach, passive products are available in the market that, in addition to negative screening, employ more significant elements of positive screening. In our view, such products offer more compelling ESG solutions for many investors. We therefore no longer view this fund as one of our highest conviction ideas.

Removal of CT Sustainable Universal MAP Cautious Fund from Low Cost category

Removal of CT Sustainable Universal MAP Balanced Fund from Low Cost category

Removal of CT Sustainable Universal MAP Growth Fund from Low Cost category

Following the Annual Review of the ACE 40 fund list we are removing the CT Sustainable Universal MAP Growth, Balanced and Cautious funds. Although these funds remain competitively priced, we no longer feel the overall investment propositions represent our highest conviction ideas at this time.

Inclusion of Royal London Sustainable Managed Growth as a Core Mixed Asset option

The team is led by Mike Fox who has been part of the sustainable team since its formation in 2003. George Crowdy and Sebastian Beguelin joined the team in 2020 before becoming co-managers in April 2021, working alongside Fox on the equity side. Shalin Shah, who has been with the bonds team since 2008, took over from Richard Nelson on the fixed income side in October 2020 when he stepped away from the sustainable range.

Fox looks to invest in companies that deliver a net benefit to society in terms of the products and services they provide, or which show leadership in environmental, social, and governance (ESG) management. Although the manager can invest across the market, since 2009 he had a consistent large-cap bias. Equities typically range from 0% to 35%, and in recent years there has been a concerted move to becoming more global in nature.

For bonds, Shah looks for similar ESG characteristics and makes use of the team's in-depth credit research and expertise in secured bonds. The bonds part of the portfolio is mainly populated with sterling denominated, higher-rated corporate bonds. There is no allocation to government bonds. Given its sustainability remit, the strategy has had a consistent bias towards bond issuers from the social housing sector, retail banks and insurers, while green bonds are also a feature.

Opinion

The funds is a strong choice for investors looking for modest income and capital growth from a portfolio centred around bonds, with some exposure to equities, using a sustainability approach that has been used in a disciplined manner over time. Fox and Shah are experienced investors and are supported by an experienced and respected team that is well-versed in the sustainable process employed here.

Due to changes to the methodology we use to define the sustainable universe that underpins the ACE 40 in light of the FCA’s Sustainability Disclosure Requirements (SDR) regime, two funds have been removed from the list. Further detail can be found in our updated methodology and FAQs

Removal of Trojan Ethical Income Fund

Removal of Royal London Ethical Bond Fund

The ACE 40 Annual Review has officially been completed. Following a comprehensive review of sustainable fund options conducted by Morningstar's Management Selection Group, we have made the following changes:

Inclusion of Fidelity Sustainable Asia Equity Fund as a Core Asian Equities option

The fund is managed by Dhananjay Phadnis who has worked at Fidelity since 2004 and has managed this fund since 2013. Support is provided by an extensive 62-member Asia –Pacific ex-Japan analyst team.

The manager favours quality firms run by strong management teams that can demonstrate consistent value creation and potential for environmental, social and governance (ESG) practice improvement, as well as low ESG risk. In addition to focusing on competitive advantages attention is also paid to valuations. The core of the portfolio will show quality growth characteristics but there will also be exposure to turnaround situations where a catalyst is evident.

Our positive view of the fund is based upon the experienced and savvy lead manager, the well-resourced analyst team, and a highly robust investment process.

Inclusion of EdenTree Responsible and Sustainable European Equity Fund as an Adventurous European Equities option

The fund is managed by Chris Hiorns, who has been at the helm since 2007. He also has responsibility for multi-asset funds at the group. Support is provided by co-manager David Osfield and Tommy Kristoffersen, plus a five-strong responsible investment team.

Hiorns’ approach is value and contrarian, meaning he goes against the crowd. Ethical and liquidity screens are followed by valuation screens, with the aim of highlighting stocks that are currently out of favour, are more cyclical by nature, or are undergoing what are deemed to be temporary difficulties. Positive environmental, social, and governance screening is also employed; current themes for this are education, health and wellbeing, social infrastructure, and sustainable solutions.

Our positive view of the fund is based upon the differentiated value and sustainable approach which continues to be well implemented.

Inclusion of Royal London Sustainable Growth Fund as a Core Mixed Asset option

The team is led by Mike Fox who has been part of the sustainable team since its formation in 2003. Supported by Shalin Shah, on the fixed income side since October 2020, and George Crowdy and Sebastian Beguelin as co-managers since April 2021. Typically 65%-75% of the portfolio will be invested in shares and 25%-35% will be held in bonds.

Fox is head of sustainability and looks to invest in companies that deliver a net benefit to society in terms of the products and services they provide, or which show leadership in environmental, social, and governance management on the equities side. On the fixed-income side, Shah looks for similar characteristics, but secured bonds make up the core and are complemented by issuers that are currently out of favour but where he can see clear credit migration catalysts.

The fund is a strong choice for investors looking for modest income and capital growth from a portfolio centred around bonds, with some exposure to equities, using a sustainability approach that has been used in a disciplined manner over time.

Inclusion of Wellington Global Stewards Fund as a Core Global Equities option

The fund is managed by Mark Mandel and Yolanda Courtines who have been in place since inception in 2019. Both are experienced analysts with over 20 years’ experience and supported by a team of over 50 global industry analysts plus a 40-person sustainable investment team.

The managers aim to hold stocks that combine a high relative return on capital with good stewardship, which they believe can lower capital costs over time. On the fundamental side, they focus on the sustainability of a company's returns on equity and the skill of its management at allocating capital. On the stewardship side, they look at each company's environmental, social and governance (ESG) priorities and willingness to engage.

The size of the analytical resource supporting the managers and the experience levels within it are a key positive for this fund, while there is an equally impressive level of resource available on the sustainability side. The managers both have long tenures at the firm and are well placed to continue to take advantage of these resources.

Inclusion of Polar Capital Smart Energy Fund as an Adventurous Specialist option

The fund is managed by Thiemo Lang who moved from Robeco to Polar Capital in 2021 and was accompanied by three colleagues. Lang has more than two decades of relevant experience and is one of the most seasoned managers in the alternative energy category.

The investment process is similar to that which Lang operated for 14 years at his previous employer. It focuses on bottom-up selection of quality-growth companies that trade at reasonable valuations and provide solutions that enable the decarbonisation and electrification of the global energy sector. A thematic framework is used to identify the investable universe, which is then narrowed to approximately 150 stocks based on identified technology changes, sustainability trends and a first valuation screening. Further fundamental analysis is performed on roughly 80 stocks, which is a very manageable number given the size of this team and allows in-depth research.

The fund benefits from a proven investment approach and a well-staffed and cohesive team led by one of the most seasoned investors in the alternative energy field. The manager, Lang, achieved a very strong long-term track record with this strategy at his previous employer and we expect that to be repeated here.

Removal of Impax Asian Environmental Markets Fund

After the unfortunate passing of longstanding co-manager, David Li, in late 2022, Impax moved the experienced Kirsteen Morrison from her role as part of the strategy team to temporary co-portfolio manager. She was replaced in 2023 by Manish Bishnoi who was hired from Macquarie Asset Management with experience in Asian thematic investments. Although there are elements of continuity in the team and approach, the relatively untested nature of the current management duo results in our view that the fund does not represents one of our highest conviction ideas at this time.

Removal of Montanaro European Income Fund

This Montanaro fund is a small and mid-cap product with a dividend yield and dividend growth focus. Although there are elements of environmental, social and governance (ESG) consideration in the approach, in a peer group context we no longer feel these are sufficient for them to be deemed a central part of the strategy and objective, and therefore the fund is no longer appropriate for the ACE 40 list.

Removal of Montanaro Better World Fund

This Montanaro fund is a small and mid-cap product with a clear growth style bias. There are funds with similar biases on the ACE 40 list where we have higher conviction, and we are therefore removing this fund to allow the introduction of new high conviction ideas with less extreme biases relative to mainstream indices.

Removal of Baillie Gifford Positive Change Fund

This fund follows a higher risk version of the house approach which is focused on growth investing. However, the combination of the high conviction approach and a team which has seen some change over time and variable execution leads us to believe that there are better options available to investors at this time. We therefore no longer view this fund as one of our highest conviction ideas.

Removal of Climate Assets Balanced Fund

This fund has relatively high fees and is a standalone product in the multi-asset space in providing a solution for investors with a balanced risk profile. We prefer products with broader appeal through offering a range of funds that are suitable for different risk profiles. As a result, we have removed the Climate Assets Balanced fund from the list to allow the full range of high-conviction, multi-asset funds from Royal London to be included on the ACE 40.

Removal of FP Foresight Global Real Infrastructure Fund

This fund has an unusual structure which focuses on the renewables (via utilities) and real estate sectors. This has resulted in a performance profile that doesn’t follow the broader infrastructure sector and tends to show higher volatility due to the alternative energy exposure. We therefore no longer view this fund as one of our highest conviction ideas.

Removal of Unicorn UK Ethical Income Fund

This is a small and mid-cap product with a dividend yield focus. Although there are negative environmental, social and governance (ESG) screening elements in the approach, in a peer group context we no longer feel these are sufficient for them to be deemed a central part of the strategy and objective, and therefore the fund is no longer appropriate for the ACE 40 list

Removal of Aegon Ethical Equity Fund

A recent review of the fund resulted in reduced conviction in the investment process. Specific concerns have been raised over stock selection and the ability of the team to overcome the strict environmental, social and governance (ESG) screening approach which is seen as restrictive in terms of defining the investment universe. Many peers have moved to a more integrated, positive screening process over time that has afforded them greater flexibility. We therefore no longer view the fund as leading within the peer group and one of our highest conviction ideas.

Inclusion of Schroder Global Sustainable Value Equity Fund

The fund is managed by three managers, Simon Adler, Liam Nunn and Roberta Barr, part of the highly regarded Schroder Value team.  The strategy takes the Global Value team’s distinctive and repeatable value process and adds a sustainability objective. It will only invest in those companies that the team identify as undervalued ESG (environmental, social and governance) leaders. This strategy offers customers a value approach that invests in companies that have a positive impact on society and are industry leading. As such, the fund would complement other growth oriented, global equity options on the ACE 40 list.  

Removal of Baillie Gifford Global Stewardship Fund

The ACE 40 currently features three global equity funds managed by Baillie Gifford. While there are distinct differences between the funds and their mandates differ, the funds all have a distinct growth style bias and have some overlap in respect of their company characteristics they favour in respect of stock selection. Their return profiles have similar characteristics too, particularly when comparing the Baillie Gifford Positive Change fund and the Baillie Gifford Global Stewardship fund. In considering all three, we would suggest that the two funds which merit retention on the ACE 40 are the Baillie Gifford Global Responsible Equity Income fund and the Baillie Gifford Positive Change fund and that the Global Stewardship fund be removed to broaden the list to include a fund with a value style bias - Schroder Global Sustainable Value Equity. 

Removal of Fundsmith Sustainable Equity Fund

The fund was included on ACE 40 for customers who wanted to access the Fundsmith strategy through a sustainable lens. But Morningstar want to take a broader approach, which means the ejection of Fundsmith Sustainable Equity Fund. Moreover, as the ACE 40 list already contains a large number of global equity funds with a growth style bias, we recommend removing the Fundsmith Sustainable Equity fund from the ACE 40 and retaining Fundsmith Equity on the Super 60.

CT UK Social Bond Fund - Retained

The CT UK Social Bond fund was placed Under Review in May 2022 following the announcement that Simon Bond, the manager and architect of the fund will be retiring in March 2023.
Tammie Tang assumed responsibility for the fund at the end of June 2022 ahead of the planned retirement of Simon Bond in March 2023. Bond was the original architect of the fund and hired Tang to work alongside him 10 years ago, appointing her as the fund’s deputy manager in October 2017. Following his retirement, Bond will continue as a member of the fund’s established social advisory committee. Tang will be supported by a further two deputy managers as well as the wider well-resourced team of investment grade analysts and the responsible investment analyst team.

While Bond’s departure is a loss to the fund, his continued involvement via the social advisory committee is a positive and Tang’s long tenure, involvement and commitment to the fund, should provide continuity that helps mitigate this loss.

Tang will also benefit from the direct support of two experienced deputy managers and the well-resourced experienced team of investment analysts, as well as the additional support of the responsible investment team.

The fund offers a unique approach to sustainable investing, and a key part of the approach is through engagement, both in terms of evidence gathering and influencing how the issuers can do more. We believe the new lead manager is capable of implementing the investment approach, and as such we are removing it from Under Review and reinstating it as a recommendation on the ACE 40.

Removal of abrdn Europe ex UK Ethical Equity

Iain Hewitt and Sarah Norris assumed responsibility for this fund in April 2018 and were joined by Roseanna Ivory in June 2020 and by Sasha Kachanova in February 2021. Compared to peers however their fund management experience remains limited. The fund has typically displayed a growth style bias and a market cap that is slightly lower than that of peers and the index. Despite the fund's growth style, which should have until recently been a tailwind to performance, performance over their tenure has been lacklustre with the fund only managing to deliver strong relative outperformance in 2020. Overall we believe that there are stronger fund options available in this sector and have therefore recommended the removal of this fund from the ACE 40 fund list.

Removal of Syncona Limited

We feel that the level of risk the Trust displays is elevated relative to the benefits. Given the niche nature of the Trust it makes it hard to discern if the team and structure are the best available options to access this area of the market. Investor returns are also heavily reliant on sentiment rather than NAV performance, with big swings in both the premium and discount in recent times. The risk in the underlying investments is also significant, with a highly concentrated portfolio of companies involved in an area where outcomes of clinical trials can swing performance heavily one way or another. It is our recommendation that the Trust be removed from the ACE 40 fund list.

CT UK Social Bond Fund - Under Review

Following the news that Simon Bond, manager of the CT UK Social Bond Fund Z Gross Accumulation GBP fund will retire in 2023, we are placing the fund Under Review. Bond has been at Columbia Threadneedle for more than 19 years and has been in the investment industry for more than 37 years. As part of his transition to retirement he is stepping back from fund management responsibilities on 30th June 2022, but will remain with the business until March 2023 to help oversee the handover of management responsibilities. He will also continue as a member of the fund’s established social advisory committees. Tammie Tang, who currently works alongside Bond as the fund’s deputy manager, will take over as lead manager. She has been with the Group for 10 years and been deputy on the fund for the last four. We will meet with the managers in due course to review these changes.

Syncona Limited - Retained

We have decided to remove Syncona from under formal review and retain its rating on our ACE 40 list following an extensive review of the trust’s approach and performance.

The trust was typically trading on relatively high premium and since addition to the ACE 40 in Autumn 2019 its share price has been volatile and premium almost eroded, which was disappointing and triggered our under review process.

We have conducted a careful review of the risks associated with the trust, including the approach of the manager and portfolio composition as well as assessment of the sector.

Syncona has a strong sense of social purpose through the companies it builds and finances to provide transformational treatments for patients with a goal to extend and enhance human life.

Managed by a highly scientific and experienced management team, the trust aims to achieve superior long-term capital appreciation by focusing on founding, building and funding a portfolio of global leaders in life sciences.

As companies go through various stages of clinical trials to product approval, the managers investment horizon is very long term and relies on building a high-conviction portfolio of high growth companies diversified across therapeutic areas and the development cycle.

But investors should note that as the portfolio is invested mainly in unquoted companies with significant exposure to three public holdings, the returns are likely to be volatile and substantially deviate from market indices.

We remain positive on the trust outlook and see it a strong choice for adventurous investors prepared to tolerate high volatility in the short term but potentially reap rewards over the longer term.

Given its high portfolio concentration, exposure to unquoted companies and absence of a formal premium/discount control mechanism the trust should form only a small, satellite holding in a well-diversified portfolio. This trust has always been classed as an ‘Adventurous’ ACE 40 option, and will very much continue to be so.

Syncona Limited - Under Review

In line with our stated methodology Syncona, a member of the ii ACE 40 list, has been put under review due to concerns regarding the trust’s performance. The investment trust, which aims to achieve superior long-term capital appreciation from investing in life science companies, has been very volatile in share price terms and posted negative returns year to date which has damaged its long-term track record. As a result of the pandemic, two of the trusts listed holdings’ (Freeline and Autolus) drug trials have been pushed back which has contributed to the portfolio underperformance. We will be investigating its performance and assess whether the trust continues to be appropriate for our investors and be included in the ii ACE 40 best ideas list.

iShares Global Clean Energy ETF - Retained

We have decided to remove iShares Global Clean Energy ETF from under formal review and retain its rating on our ACE 40 list following an extensive review of changes to its methodology. The exchange-traded fund (ETF) has increased the number of holdings of its clean energy index from 30 to 82, in a move designed to reduce constituent concentration, address liquidity risk and improve index replication.

We view the recent changes to the index as positive as they add diversification and improve the liquidity profile of the index portfolio. However, we note the index now includes companies which are not pure play clean energy stocks meaning there is a potential for exposure to be diluted. We reviewed other clean energy ETFs and concluded that iShares Global Clean Energy ETF remains the best option due to its broad, diversified exposure to the clean energy theme, improved underlying liquidity and its proven track record.

Rathbone Ethical Bond Fund - Reclassified

We changed the category of Rathbone Ethical Bond Fund on the ACE 40 from ‘income’ to ‘adventurous’. The fund’s objective is to deliver a greater total return than the IA Sterling Corporate Bond sector, after fees, over any 5 year rolling period. Although the fund delivers reasonable level of income, this is not its primary objective and in certain circumstances it could be sacrificed to support total returns, meaning it is not truly align with our criteria for income strategies. Given its total return objective and risk characteristics, we believe the fund is more suitable to our adventurous category.

Removal of L&G Ethical Trust Fund

We have decided to remove L&G Ethical Trust from our ACE 40 sustainable rated list because the fund’s mandate that sets out how the money is to be invested is changing. Until now, the fund has tracked the FTSE 350 Index and is a UK Equity, Low Cost option within the ACE 40. On the 28 January 2021 changes will take effect for the fund to have a global mandate, track the MSCI World SRI Index and be renamed Legal & General MSCI World Socially Responsible Investment (SRI) Index Fund. Following these changes the fund will no longer be appropriate for its current category within the ACE 40 and therefore removal from the list is appropriate.

Removal of AXA Ethical Distribution Fund

Following our annual review, we have decided to remove the fund from our ACE 40 List. The fund has had a disappointing period of performance relative to its peers and we, unfortunately, have lost conviction in its ability to meet its long-term performance objective. The portfolio only allocates between UK Gilts and UK equities with a bias to mid and small-cap stocks, which will significantly impact the fund’s absolute and relative performance.

Removal of EdenTree Amity European Fund

While we continue to have a high regard for the firm and the team, the fund has been struggling to achieve its performance objectives in recent years, and we have therefore decided to remove it from our ACE 40 List. The contrarian and value style of the fund has contributed to the fund’s comparatively disappointing performance against peers. We are also conscious of the possibility of longer recovery periods for value investing.

Impax Environmental Markets Trust - Reclassified

The decision to reclassify Impax Environmental Markets Trust from Global Equity/Smaller Company to Global Equity/Adventurous is in-line with our stated methodology. We have conducted a careful review of the risks associated with the trust, including the style of the manager and portfolio positioning as well as assessment of the sector. We maintain our conviction in the manager and his approach focusing on companies delivering environmental solutions but due to the specialist nature of the strategy Adventurous risk category is more appropriate.

Syncona Limited - Reclassified

The decision to reclassify Syncona Limited from Specialist/Smaller Company to Specialist /Adventurous is in-line with our stated methodology. We have conducted a careful review of the risks associated with the trust, including the style of the manager and portfolio positioning as well as assessment of the sector. We maintain our conviction in the manager and his approach focusing on life science companies but due to the specialist nature of the strategy Adventurous risk category is more appropriate.