- The fund’s bias to domestically-focused small and medium-sized companies held back recent performance
- Audrey Ryan is one of the few ethical managers to deliver longer-term outperformance
- We continue to view the fund as a good choice for ethical exposure to the UK stock market
Kames Capital is a leader in ethical investing. Audrey Ryan has been at the helm of their flagship Ethical Equity Fund for more than 17 years and, in our view, she is one of the few managers who has handled the constraints of managing an ethical fund well over the long term.
Ethical criteria impose restrictions that can sometimes prove a challenge. Tobacco and pharmaceutical companies are excluded from Audrey Ryan’s investment universe, and the fund also has limited exposure to mining and oil & gas companies. These sectors, which tend to derive a significant portion of their earnings overseas and comprise a large part of the FTSE 100 Index of the UK’s largest companies, have performed well over the course of the year so far. They proved particularly resilient in the aftermath of the UK’s vote to leave the European Union and the fund’s limited exposure to these areas proved a strain on performance.
On the other hand, domestically-focused higher-risk small and medium-sized companies, to which the fund is biased, have struggled. Furthermore, significant exposure to the financials sector, including property-related and life insurance companies, and consumer-services businesses, including retailers and travel & leisure operators, dragged on returns. This includes Legal & General, Virgin Money, Dixons Carphone, Taylor Wimpey and Howden Joinery.
Audrey Ryan has made a number of changes to the fund since the unexpected result of the vote. The manager added to a number of investments in globally-exposed businesses, including building materials supplier Wolseley, packaging business RPC Group and Berendsen, which provides industrial laundry services. Elsewhere, she reduced exposure to financials and domestic consumer-related companies, including Legal & General, Dixons Carphone, ITV, and Whitbread. An investment in Standard Life was sold.
Going forwards, against a backdrop of low economic growth and interest rates, Audrey Ryan continues to focus on companies she believes can deliver modest yet dependable levels of growth over the longer term. She favours those with strong cash flows, with the ability to either return cash to shareholders (via dividends), reinvest in the business for future growth, or acquire or merge with other businesses. Pricing power (the ability to pass on cost increases to the consumer) is also an important company characteristic.
Our view on this fund
Audrey Ryan has demonstrated a long-term commitment to ethical investing. At Kames she also has the support of a well-established ethical team who provide help with the ethical screening process, allowing Audrey Ryan to focus on individual stock analysis.
The fund’s ethical constraints means it has a natural bias to small and medium-sized companies. Our analysis suggests this positioning has aided long-term performance, although it means the fund can at times lag its benchmark when smaller businesses underperform their larger counterparts. Longer-term performance has been impressive; over the past ten years, the fund has grown 120.3%* compared with 73.6% for the benchmark, although please remember past performance is not a guide to future returns.
In our view this fund remains a good choice for ethical exposure to the UK market and it maintains its place on the Wealth 150 list of our favourite funds across the major sectors.
Please note this fund invests in Hargreaves Lansdown plc shares.
|Annual percentage growth|
| August 11 -
| August 12 -
| August 13 -
| August 14 -
| August 15 -
|Kames Ethical Equity||-1.5%||35.2%||4.7%||19.5%||-2.0%|
Past performance is not a guide to future returns.
Source: Lipper IM to *01/08/2016