- For ethical investors, this exclusions-based fund avoids companies such as tobacco and alcohol producers
- Audrey Ryan is an experienced fund manager who is passionate about ethical investing
- We think she's one of few fund managers who have handled the constraints of an ethical fund well over the long term
- This fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential
How it fits in a portfolio
We think Kames Ethical Equity could be a good addition to the UK section of an ethical portfolio, designed to limit or exclude investments in industries some find immoral, such as tobacco or alcohol. It could also be used to add an ethical element to a broader investment portfolio. Ethics are personal though, so make sure you’re happy with the fund’s approach before investing.
Audrey Ryan started her career as a UK smaller companies portfolio manager at General Accident, before moving to Kames in 1997. She began managing the Kames Ethical Equity Fund in 1999 and is a passionate ethical investor. We think she's one of few fund managers who have handled the constraints of an ethical fund well over the long run.
Ryan's experience and longevity at Kames mean she's co-manager on some other funds including the Kames Ethical Cautious Managed Fund, Kames UK Opportunities Fund and an ethical pooled pension fund. She also supports the managers of the Kames Global Sustainable Equity Fund and is the dedicated back-up manager for the Kames UK Smaller Companies Fund. We think this workload is manageable for someone of her calibre. She's also got the support of the broader Kames UK Equity team, including the fund's back-up manager Elaine Morgan.
This fund invests in UK companies using a 'negative screening' approach, so it doesn’t invest in companies involved in activities deemed unethical. From tobacco and alcohol producers to munitions manufacturers and companies that use animal testing.
The UK stock market is filtered for these 'sin stocks' by Kames' ESG Research Team. The screening process is kept separate from Ryan and the rest of her team, leaving them free to focus on stock selection and portfolio construction.
ESG is also key to the fund's investment process. Ryan and her team aim to identify and understand the main environmental, social and governance risks of each company, industry and sector they invest in. They believe companies that lead the way in governance and sustainability tend to outperform over the long run.
Another important part of the fund's investment process is meeting with company managers. These meetings allow Ryan and her team to build a deep understanding of each business, and the challenges and opportunities it has ahead.
Recent investments include IntegraFin, a UK investment platform focused on the growing adviser market. Ryan and her team rate the company's cutting-edge technology, high levels of repeat business and robust financial position. She also added to an existing investment in Just Eat Takeaway believing the company could see increased demand as a result of restaurant closures and an increase in people work from home. In contrast, the manager sold her holding in investment company M&G following a trading statement that highlighted some weaknesses in its asset management business.
Below is a more detailed list of the type of companies that the fund won't invest in:
- Animal welfare - companies that provide animal testing services, make or sell animal-tested products, are involved in intensive farming, operate abattoirs or slaughterhouses or sell meat, poultry, fish or dairy
- Military - companies that make armaments, nuclear weapons or similar strategic products
- Nuclear power - companies that provide important services to, or own or operate, nuclear facilities
- Environment - companies that excessively damage the environment, in breach of internationally recognised conventions on biodiversity or not tackling climate change
- Political donations - companies that have made political donations of more than £25,000 in the last year
- Genetic engineering - Companies that have patented genes
- Gambling - companies with investments in betting shops, casinos or amusement arcades which account for more than 10% of their total business
- Alcohol - companies where more than 10% of their total business involves brewing, distillation or sale of alcohol
- Tobacco - companies where more than 10% of their business involves growing, processing or selling tobacco
- Pornography - companies that provide adult entertainment services
- Debt - banks with exposure to large amounts of corporate or Developing World debt
- Oppressive regimes - companies operating in countries with poor human rights records or with no established policies on human rights issues
Please note the fund has a holding in Hargreaves Lansdown plc.
Kames has heritage managing ethical and sustainable funds – they've been doing it for more than 30 years. They see it as their responsibility to encourage companies to maximise investment returns through good governance practices and respect for the environment and society.
In February 2020, Kames Capital began an integration process with parent company Aegon Asset Management. It's thought greater integration will allow the Kames team to leverage the expertise and research capabilities of the broader Aegon group. However there will be no changes to the way money is managed within the fund, or to the investment teams. The Kames Capital brand will be retired later in 2020.
We typically treat corporate changes with caution, but are encouraged there will be a limited number of changes that impact the UK Equity Team.
We're also mindful that there have been some significant departures from the company in recent times, including global equity fund managers Craig Bonthron and Neil Goddin, and Head of ESG Research Ryan Smith. It's always disappointing to see experienced people leave, but we're confident these departures won't significantly impact the UK Equity team, which has remained stable in recent years. That said, we continue to monitor the situation closely and will write to investors if our views change.
This fund has an ongoing annual fund charge of 0.78%, but a discount of 0.15% is available for HL investors, which reduces the charge to 0.63%. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.
69% of the UK's largest companies are excluded from the fund's investment universe for ethical reasons. The fund therefore has a long-term bias towards higher-risk small and medium-sized companies. This, combined with the fund's lack of exposure to industries like oil & gas and tobacco, mean its performance can differ to that of more conventional UK equity funds.
A focus on small and medium-sized companies can cause more volatility, and this has been the case in recent years. Small and medium-sized companies tend to rely more heavily on the health of the UK economy. Their performance therefore struggled in recent years amid Brexit negotiations and other political uncertainty.
Performance was better over the past year though. Although the fund lost a small amount of money*, it sheltered investors from a much greater fall in the broader UK stock market. The manager's investments in the technology and industrials sectors performed particularly well, according to our analysis. The fund also benefited from a lack of exposure to the oil & gas sector, which performed poorly.
Overall Ryan has done a good job for investors over the long term and we think this has the potential to continue, although there are no guarantees.
|Annual percentage growth|
| July 15 -
| July 16 -
| July 17 -
| July 18 -
| July 19 -
|Kames Ethical Equity||-1.9%||10.6%||7.0%||-3.8%||-3.4%|
Past performance is not a guide to the future. Source: Lipper IM* to 31/07/2020.