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Two funds for avoiding ‘sin’ stocks

Dominic Rowles, Investment Analyst, looks at two exclusions-based funds, explains their approaches and shares our view on their prospects.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

If you want to invest, but don’t like the thought of your money supporting morally questionable companies, an exclusions-based fund could be for you. They won't invest in controversial industries like tobacco, alcohol and gambling, otherwise known as 'sin stocks'.

Morals are subjective though – what seems immoral to one person might seem like a necessary evil to another. Take animal testing in the pharmaceuticals sector. Some think animal testing can't be justified under any circumstances. Others argue animal testing can lead to medical discoveries that save and improve human lives, and are therefore willing to make the trade.

As such, different funds approach exclusions-based investing in different ways. So it's important to check you fully understand how your fund manager is investing your money.

Below we look at two exclusions-based funds, explain their approaches and share our view on their prospects.

This article is for your information only and shouldn’t be seen as personal advice or a recommendation to invest. All investments will fall as well as rise in value, so you could get back less than you invest.

Aegon Ethical Equity

Aegon Ethical Equity (formerly Kames Ethical Equity) is a fund focused on responsible investing. Manager Audrey Ryan aims to identify and understand the key environmental, social and governance risks of each company, industry and sector that she invests in. She believes companies that lead the way in governance and sustainability tend to outperform over the long run.

The fund uses a strict exclusions-based approach. It won’t invest in companies involved in activities deemed unethical, from tobacco and alcohol producers, to munitions manufacturers and companies that use animal testing.

More than two thirds of the UK’s largest companies are excluded from the fund's investment universe for ethical reasons. This means there’s a focus on higher-risk small and medium-sized companies. Our analysis suggests this has helped the fund deliver stronger performance than the broader UK stock market over the long term, although it can increase volatility. Past performance is not a guide to the future.

Aegon Ethical Equity - 10 year performance

Past performance is not a guide to the future. Source: Lipper IM to 31/08/2020.

We think Ryan is a dedicated, passionate fund manager and her fund has the potential to deliver good returns for ethical investors over the long run, although there are no guarantees.

This fund currently holds shares in Hargreaves Lansdown plc.

Annual percentage growth
Aug 15 -
Aug 16
Aug 16 -
Aug 17
Aug 17 -
Aug 18
Aug 18 -
Aug 19
Aug 19 -
Aug 20
Aegon Ethical Equity 5.5% 7.7% 6.4% -6.1% 3.0%
FTSE All-Share 11.7% 14.3% 4.7% 0.4% -12.6%

Past performance is not a guide to the future. Source: Lipper IM to 31/08/2020.

Find out more about Aegon Ethical Equity including charges

Aegon Ethical Equity Key investor information

BNY Mellon Sustainable Real Return

The team behind BNY Mellon Sustainable Real Return take a more conservative approach. They invest in a variety of assets – from shares and bonds to commodities and cash, and change the amount invested in each depending on their view of the world. The aim is to dampen volatility by providing some shelter during market wobbles, while also delivering long-term growth in a sustainable way.

Matthew Brown and Philip Shucksmith have been the fund's lead managers since launch in April 2018. They're both experienced investors and have served on the Real Return Team for well over a decade. However this fund is managed with an investment approach that's heavily reliant on the skills and experience of the wider Real Return Team, which we have long held in high regard.

Within the share and bond portfolio, the team invest in well-run businesses that have a set of advantages over the competition that can be sustained over the long-term. They must also manage the impacts of their products and operations on the environment and society.

The fund's sustainable 'red lines' rule out some companies right away. Those that violate the UN Global Compact Principles (a UN pact on human rights, labour, the environment and anti-corruption) and those incompatible with the aim of limiting global warming to 2°C aren’t considered for the fund. It also won't invest in any company that makes more than 10% of its revenues from tobacco.

The fund's done well since launch, beating both its London Inter-bank Offered Rate (LIBOR) +4% benchmark and its peers in the IA Targeted Absolute Return sector. That said, this is a short period over which to draw conclusions and past performance is not a guide to the future.

BNY Mellon Sustainable Real Return - performance since launch

Past performance is not a guide to the future. Source: Lipper IM to 31/08/2020.

The team's built up an impressive long-term track record on other funds. This, combined with their wealth of experience and tried-and-tested investment approach, means we think this fund has the potential to do well over the long-term. Remember though there are no guarantees.

The managers have the flexibility to invest in derivatives, emerging markets and high-yield bonds which, if used, adds risk.

Annual percentage growth
Aug 15 -
Aug 16
Aug 16 -
Aug 17
Aug 17 -
Aug 18
Aug 18 -
Aug 19
Aug 19 -
Aug 20
BNY Mellon Sustainable Real Return N/A N/A N/A 9.2% 5.7%
LIBOR + 4% 4.5% 4.3% 4.5% 4.7% 4.1%
IA Targeted Absolute Return 0.9% 3.7% -0.2% 1.4% 0.1%

Past performance is not a guide to the future. Source: Lipper IM to 31/08/2020.

N/A - full year performance is not available

Find out more about BNY Mellon Sustainable Real Return including charges

BNY Mellon Sustainable Real Return Key investor information


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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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