If the idea of investing in sin stocks sounds devilish to you, the Aegon Ethical Equity fund might be the heaven-sent solution you’ve been searching for.
Managed by Audrey Ryan since the last millennium, it has some of the strictest exclusions criteria across the investment industry. Companies involved in unethical areas from alcohol and gambling to tobacco, pornography and weaponry are excluded. The fund also observes strict criteria around animal welfare, genetic engineering, and oppressive regimes.
The UK stockmarket is filtered for these ‘sin stocks’ by Aegon’s ESG research team. Having a separate team to take care of the ethical screens means Ryan is free to concentrate on picking the best stocks within the universe available to her.
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The ethical screens undergo a comprehensive review every two years, shaped by investor feedback. In the past, investor feedback has influenced the team to change its stance on oil and gas, removing the sector entirely from the fund. The most recent results in 2023 indicate strong support for the current approach.
After the screening has taken place, around half of the companies in the FTSE 100 index remain investable. The fund therefore has a long-term bias towards small and medium-sized companies. This, combined with the fund’s lack of exposure to industries like oil and gas and tobacco, mean its performance can differ greatly compared to that of more conventional UK equity funds, and the broader UK stock market.
An 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. They will also consider how the stock’s valuation compares to what their analysis suggests it’s worth, and how it’s been valued in the past.
Ryan (pictured right) also carries out detailed analysis on the ESG risks of each company she invests in, and the industry it sits in. She believes companies that lead the way in these areas have a greater chance of outperforming over the long run.
Current investments include residential and commercial ventilation firm Volution Group. The company’s products are designed to improve air quality and be more efficient than their competitors. The manager believes this could help to boost demand over the coming years as environmental and air quality regulations tighten.
The fund has a good long term track record, outperforming both the broader UK stockmarket and its peers in the IA UK All Companies sector over the long term. However it’s underperformed in more recent years. A lack of exposure to the oil & gas sector, which performed extremely well, hampered returns, as did the fund’s focus on small and medium-sized businesses, which underperformed their larger peers. Given the way the fund invests though, its recent performance is in line with what I would expect.
I continue to have a high level of conviction in the manager and her team and expect this fund to perform well over the long term. It could be a good addition to the UK section of an ethical portfolio, designed to limit or exclude investments in industries some find immoral. It could also be used by investors who want to add an ethical element to their broader investment portfolio.
Aegon Ethical Equity fund v FTSE All Share and IA UK All Companies
Source: Lipper IM to 31/01/2024
