Ethical portfolio: early outperformance from our ‘good’ line-up

We report on the fortunes of our new ethical portfolio in its first three months.

It has been three months since we presented our initial selections for the new Money Observer ethical portfolio, and the time has flown by. “May you live in interesting times,” goes the apocryphal Chinese curse; in this first update, we review market developments over a very ‘interesting’ period, explore what these have meant for returns from the portfolio, and assess how its performance compares with that of markets in general.

Let’s take a look at total returns first. All told, our selections have produced a £945 drop in the value of our theoretical £100,000 starting investment, so the total return over this initial period has been -0.9%. By way of comparison, the FTSE All-Share Total Return index returned -1.4% over the period and the FTSE All-World fared a little worse, returning -2.2%.

Fund industry introduces new ‘responsible investment’ definitions

Relatively robust

These are early days, but the selection has held up relatively well against a problematic backdrop, with stock markets perhaps taking their cue from the ‘damp squib’ summer we have endured. What trends might we divine from this initial set of performance data?

Well, love it or loathe it, the influence of the continuing Brexit saga can be seen in the first returns. Our four global funds with a sustainability angle all fell in value over the period. Among the three choices from the UK market, two funds fell modestly, while the renewable energy investment trust, Greencoat UK Wind, was the standout performer.

The better performance from our UK-focused names reflected a more positive take on the Brexit talks. Moreover, as the prospect of the UK leaving the EU without a deal receded as a result of parliamentary action, sterling responded by gaining ground in mid-October. The currency gained against the dollar by about 6.5% over the three-month period, lifting us away from the mid-summer nadir. With sterling generally strengthening against other currencies, returns earned by investments overseas are worth proportionately less when exchanged into sterling.

With such a headwind to performance now in play, it’s no surprise that the four globally diversified selections all retreated slightly in terms of the sterling share classes being tracked. For much of the time since the referendum on EU membership, sterling has been on a downward path, providing a tailwind for the performance of overseas investments. Given the continuing political uncertainty here in the UK, we can’t yet say whether the recent rally in the pound will continue, but pronounced moves in either direction will influence portfolio returns.

Setting aside currency factors for now though, let’s take a look at other factors affecting our selections, starting with Greencoat UK Wind, the leading performer over this period, with a total return of 4.3%. Early in October it announced the acquisition of the Glen Kyllachy Wind Farm, sited in the Scottish Highlands close to four of the company’s other assets.

One interesting point to note about this particular deal is that it will be a subsidy-free wind farm. Renewable energy technologies were until quite recently regularly criticised for relying on subsidies to make them competitive – despite the fact that fossil fuel industries continue to receive generous subsidies. The increasing cost-competitiveness of energy generated from renewable resources such as wind means managers such as Greencoat can now select subsidy-free projects such as this to add to their portfolios.

In our view this adds to the long-term attractiveness of the company; and the shares moved higher following the announcement of the Glen Kyllachy acquisition, which suggests that the wider investment community agrees.

At the end of October the trust provided an update on its quarterly interim dividend and its net asset value (NAV), as at the end at September. The dividend continues to increase in line with inflation and at the current share price should yield 4.7%. The NAV, meanwhile, was 122.9p, leaving the shares sitting at a premium to NAV of 19.6%. That’s quite punchy – if justified by achievements to date – but while we are not expecting much of an increase in that premium over the near term, we are comfortable that it can be maintained.

Performance has been respectable during a tough time for markets

  SEDOL Investment at launch (£) Current value (£) Total return
since last update (£)
Total return
since last update (%)
Total return
since inception (£)
Total return
since inception (%)
yield (%)
EQUITY   75,000 73,600          
Stewart Investors Worldwide Sustainability B8319S6 20,000 19,566 -434 -2.17 -434 -2.17 0.63
WHEB Sustainability B8HPRW4 15,000 14,132 -869 -5.79 -869 -5.79 0.00
Sarasin Food & Agriculture Opportunities B8GJCL1 10,000 9,530 -470 -4.70 -470 -4.70 1.09
Liontrust Sustainable Future Global Growth 3003006 7,500 7,217 -284 -3.78 -284 -3.78 0.28
Liontrust Sustainable Future UK Growth 3002876 7,500 7,376 -124 -1.65 -124 -1.65 1.62
Castlefield B.E.S.T Sustainable UK Smaller Companies B1XQNH9 5,000 4,993 -7 -0.14 -7 -0.14 0.56
Greencoat UK Wind IT B8SC6K5 10,000 10,787 787 7.87 787 7.87 4.73
FIXED INCOME   25,000 25,455          
Rathbone Ethical Bond B7FQJT3 12,500 12,773 273 2.18 273 2.18 4.08
Royal London Ethical Bond BJ4KSY8 12,500 12,683 183 1.46 183 1.46 3.35
Totals   100,000 99,055 -945 -0.94 -945 -0.94 1.83

Note: Inception of the portfolio is 1 August 2019. Source: Castlefield, as at 1 November 2019

Strong blend

The Castlefield BEST Sustainable UK Smaller Companies fund returned -0.1%. By virtue of its focus on smaller companies listed on the UK stock market, it has more of a bias to the UK’s domestic economy, rather than larger, more multinational companies that generate a substantial amount of sales and profits in foreign currencies.

Favourable currency moves will have enhanced its performance over this initial period. However, over the long term we are looking to demonstrate the benefits of a combination of the UK smaller companies and the sustainability themes. We can add some colour here by highlighting the recent strength of companies such as Tristel and GB Group, both key holdings for the fund. Tristel,which focuses on infection prevention and contamination control, has recently set attractive new revenue growth targets, while GB Group, an identity management specialist, is enjoying strong organic growth.

Rounding off the gainers in the equity selection is Liontrust Sustainable Future UK Growth. Recently, this fund has benefited greatly from its holding in the London Stock Exchange, which has been the subject of takeover bid and counter-bid. The LSE is seeking to acquire Refinitiv, a global provider of financial data, in a deal that was well-received by investors. Subsequently, the Hong Kong Stock Exchanges and Clearing company bid for the LSE on condition that the latter dropped its plan to buy Refinitiv. LSE management rejected the bid and the Refinitiv deal seems likely to go ahead.

Among the global equity offerings, the Stewart Investors Worldwide Sustainability fund fell the most, returning -2.3% over the three months. Its managers are prepared to invest in a way radically at odds with the regional weightings of the global index. In particular, the team has expertise in emerging market equities – it has been running specialist AsiaPacific and global emerging market sustainability funds for many years – and it leverages its knowledge via a healthy allocation to such markets in the fund.

Our three other fund choices all fared somewhat worse than the Stewart Investors fund. WHEB Sustainability lagged the most, returning -5.8%. Our investment case for the WHEB fund acknowledges that when markets sell off sharply it may well underperform in the short term. Its US investments are more mid-cap in nature – as larger companies rarely offer solutions to sustainability challenges – and US mid-caps underperformed their larger peers over the period, hitting short-term performance.

So, although we identify both the WHEB and the Stewart Investors funds as fitting a growth-focused, sustainable investment mandate,they each have their own ways of doing so. We feel this makes them interesting for investors, as it shows there are different ways (all valid) to align your assets to invest them ethically.

Bond bonus

Finally, turning to the two bond fund choices, Rathbone Ethical Bond returned 2.2%, while Royal London Ethical Bond gained a more modest 1.5%. Given the backdrop over the period in question, the outperformance of the equity funds is no real surprise.

Bond markets, and sovereign bonds in particular, experienced a flurry of volatility earlier in the summer, as fears about deteriorating global economic data and the speed with which the US Federal Reserve and other central banks were enacting interest rate cuts led investors to seek out so-called safe havens.

Reports highlighting the trillions of dollars of debt trading at negative yields have emphasised the topsy-turvy nature of these markets. With yields falling sharply (and prices therefore rising), our two choices gained value from these moves.

Turning to the outlook, with the first December general election since 1923 imminent, it is likely that by the time of our next update the picture in the UK may well have changed completely. Happy Christmas.

Simon Holman is a partner at Castlefield Investment Partners.


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