Ethical portfolio: nine funds to combine principle and performance

Our new model portfolio with an ethical mandate for Money Observer readers to follow is introduced by Simon Holman of ethical financial adviser Castlefield Investment Partners.

We are delighted to have been invited to create a model fund-based ‘ethical’ portfolio for readers to follow. But before we introduce you to our fund selection, let’s quickly establish our approach to the task in hand.

As self-appointed ‘thoughtful investors’, we manage a range of Castlefield-branded funds and usually blend these with third-party fund selections in our clients’ portfolios. We use a proprietary selection methodology called BEST, both to manage our own funds and to select third-party funds. We consider BEST factors – Business & Financial; Environmental; Social; and Transparency & Governance – when assessing investments in our responsible investment process. Our focus is therefore very much on responsible and sustainable investment themes – ‘ethical’ if you like, in old money.

Ethical portfolio weightings at launch

  SEDOL Investment at launch (£) Weighting (%)
EQUITY   75,000 75
Stewart Investors Worldwide Sustainability B8319S6 20,000 20
WHEB Sustainability B8HPRW4 15,000 15
Sarasin Food & Agriculture Opportunities B8GJCL1 10,000 10
Liontrust Sustainable Future Global Growth 3003006 7,500 7.5
Liontrust Sustainable Future UK Growth 3002876 7,500 7.5
Castlefield Best Sustainable UK Smaller Companies B1XQNH9 5,000 5
Greencoat UK Wind IT B8SC6K5 10,000 10
FIXED INCOME   25,000 25
Rathbone Ethical Bond B7FQJT3 12,500 12.5
Royal London Ethical Bond BJ4KSY8 12,500 12.5
Totals   100,000 100


Good for growth

Our theoretical fund selection has been designed to focus primarily on growth, so equities start with a weighting of 75% of the £100,000 starting portfolio. Most of the equity exposure comes from global funds, among which we typically find the most interesting and broad-based growth opportunities; the balance comes from some specialised offerings focused on the UK stockmarket. Finally, we round out the portfolio with a pair of ethical bond funds that should complement the equity strategies and add some balance.

The portfolio should have a medium risk exposure, by our own definition, but readers should bear in mind that such definitions vary between investment houses. We have tried to avoid taking on too many fund holdings and have resisted using our own fund range – with one notable exception.

Our philosophy calls for a long-term investment horizon, which is also something we expect from the managers of the funds we select. Good governance and engagement by fund managers – involving ongoing dialogue with investee companies through shareholder voting and conversations with management – are also integral parts of active management, and all the teams represented here take these responsibilities seriously.

This approach is balanced in terms of responsible investment considerations. There is an emphasis on sustainability in the selection process: positive-focused strategies that aim to support ‘doing good’ are to the fore. However, in addition, our selections exclude the types of sector many people are uncomfortable investing their savings in. Our aim is for readers to see how straightforward it can be to support forward-thinking investments without, for example, having to worry whether they are supporting the arms trade. Blending a positive focus with avoidance of businesses with unethical practices is central to that.

- Explore our ethical investing articles
- Money Observer Fund Awards 2019: Ethical/SRI winners

Fund choices

Starting with global equity funds, first up is the Stewart Investors Worldwide Sustainability fund. The Stewart team is well-known for its commitment to sustainability and, while there are other interesting geographically focused funds in its range, we’ve opted for the broader remit of its Worldwide strategy.

The fund has an environmental, social and governance (ESG) approach, enhanced by an emphasis on producing good returns through investment in companies that are well-positioned to benefit from and contribute to sustainable development in the countries they operate in. Positive selection and engagement is a key part of the process.

The second of our core global fund holdings is WHEB Sustainability, which aims to generate returns predominantly via growth, and only invests in companies that managers believe provide solutions to the sustainability challenges faced by the world.

As these long-term demographic, environmental and resource-related challenges reshape the global economy, they create significant investment opportunities the team aims to capture via its thematic investment approach. Themes include resource efficiency and cleaner energy.

The Sarasin Food & Agriculture Opportunities fund isn’t explicitly labelled an ethical or sustainable fund. However, from our research and meetings with its manager, we feel it addresses several concerns that investors looking to do good are focused on, and thus merits a place here.

It focuses on the long-term themes affecting the global food economy, and it invests across the spectrum, from production to consumption. Ideas such as micro-irrigation and aquaculture are represented here, addressing issues such as water management risk and pressure on wild fish stocks. These and other themes in the portfolio are sustainability issues in our view.

Our final global fund in the portfolio is the Liontrust Sustainable Future Global Growth fund. It aims for long-term capital growth and is mainly focused on four themes: climate change, resilience, quality of life and sustainable consumption.

The team’s investment philosophy is based on the premise that companies that improve people’s quality of life will survive and thrive. The team primarily looks for firms that do good, but it also employs some negative screens to exclude companies whose activities it deems inconsistent with sustainable value creation.

We have included the Liontrust Sustainable Future UK Growth fund, from the same team, as a UK-focused offering for the portfolio. It shares the same principles as its sibling fund:it aims to benefit from the long-term structural growth trends shaping the global economy while limiting or avoiding investment in companies that damage society and the environment.

The team also runs a UK ethical fund, which has stricter exclusions, but our aim in this portfolio is to emphasise the positive things investors can do with their money, so we have opted for the Sustainable Future iteration here.

The Castlefield Best Sustainable UK Smaller Companies fund is one of our own equity strategies.We have included it because we believe it to be a unique offering. A UK smaller companies mandate is specialist in itself, but the fund also adds a responsible and sustainable investment focus in the form of our Best methodology. As far as we are aware, no other fund explicitly combines these specialisms.

Our final UK selection is the Greencoat UK Wind investment trust, the first specialist renewable energy infrastructure fund to list (in 2013) and now with a solid track record. It manages a portfolio of onshore and offshore windfarms. Cash generated is used to pay inflation-linked dividends.

The recent extension to the trust’s expected asset lifetimes has provided an uplift to its net asset value (NAV).It currently trades at a premium to that NAV (of 14% in mid-August), but given our long-term time horizon, confidence in its management team and belief in the continued growth of wind power as part of the UK’s energy mix, we are happy to include it here.

Bond funds for balance

Bryn Jones manages our first bond fund selection in the portfolio, the Rathbone Ethical Bond fund. The fund follows a strategy of providing regular, above-average income by investing according to ethical criteria.It makes use of both negative and positive screening.

For a bond to be considered investable, the issuing company must pass the negative screens but also have an identifiably positive attribute – again highlighting the attractions of a blended approach. Positive attributes include corporate community investment, good employment practices and the management of environmental impacts.

The Royal London Ethical Bond fund, managed by Eric Holt, is our second pick for fixed-income exposure. The fund has performed well historically, and its broad ethical criteria and solid track record make it a worthwhile inclusion. Its exclusion policy covers the sectors and themes we look for, and it extends beyond the avoidance of gambling and armaments and the like: human rights and environmental protection are key selection issues. We are confident in the team’s ability both to select suitably filtered investments and to find value for investors in the corporate bond market.

Let’s see how we get on over the coming months.

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