Reader: ‘I am a smallish scale investor looking to maintain income in retirement, using easily understandable income funds and investment trusts, which I usually hold long-term. I also aim to limit investment in environment trashing sources (especially fossil fuels, most mining, grossly polluting pesticides and intensive farming, armaments etc. plus tobacco) as far as reasonably practicable.
‘It would be very helpful to those of us who try to invest at least a bit ethically if your articles on income funds were to mention those which include significant percentages of holdings generally considered unethical and/or particularly environmentally damaging. I seem to spend a lot of time in the pre-Isa season looking up promising-sounding funds, only to find such companies are high in the list of holdings.’
HG via email
Marina Gerner responds:
Sadly, we don’t have the space or resources to provide an environmental breakdown of all the funds we cover.
But in terms of income funds, there are a few options: you could look at Thesis Climate Assets, Castlefield BEST Income, Rathbone Ethical Bond or Liontrust Sustainable Future Cautious Managed or Liontrust Sustainable Future Corporate Bond – all of them have decent income yields and are likely to meet your environmental test.
But beware – some ethical funds act unethically. The F&C Responsible UK Income fund, for instance, has miner BHP Billiton as a holding.
Further, those with looser ethical criteria could consider funds like Lindsell Train UK Equity Income that aren’t explicitly ethical but still tend to avoid miners, because they prefer consumer brands and tech companies instead.
Matt Coppin, manager of financial advice at ethical IFA Castlefield, argues that income for an investor can be derived from both income and growth funds, depending on their attitude to risk.
‘Producing a withdrawal dependent on capital growth is potentially riskier, if there is no or limited growth, down to market conditions, then capital will start to be eroded or withdrawals missed and it won’t meet the objectives.’
He continues: ‘Income derived naturally in the form of natural income yields, dividend or interest, could be more secure but will likely only be able to sustain a small-ish level of natural draw off, usually a maximum of 3 per cent say in a balanced portfolio (again risk dependent).’
Therefore, he argues, income could be derived from both natural income and withdrawals of growth. ‘Producing an “income” from a portfolio of assets is a complex task and investors would do well to utilise their capital gains tax exemption as well as focusing on assets with a strong yield. As it’s always important to maintain a diverse mix of investments.’
Commenting on the aforementioned funds, Coppin says: ‘Thesis is really the stand out one over all I think. It has had good capital growth and a decent income yield considering exposure and is environmentally screened.’
‘Liontrust have been excellent, with top quartile recently across whole range. And they have good environmental credentials, dispelling the myth that sustainable investment doesn’t make returns.’
For growth in particular, investors could consider the Impax Environmental Markets trust and FP WHEB Sustainability.
John Ditchfield, partner of financial advice at Castlefield, adds: ‘It is worth noting here the rise of the “yield-Co” these are renewable energy infrastructure businesses (available to investors as investment trusts) with installed energy generation capacity generating strong dividends.
‘A popular example of this would be Greencoat UK Wind, which given the UK is required under UK law (Climate Change Act) to move away from fossil fuel has a very strong market for its end product which is renewable energy.’ Greencoat currently yields 5.5 per cent.
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