Three ethical funds for income investors

interactive investor has named three ethical funds offering investors a diversified income stream


Natalie Kenway

interactive investor has named three ethical funds offering investors a diversified income stream amid a spat of dividend suspensions and cancellations in UK corporates

The UK investment platform said finding ethical dividends was becoming even more challenging for investors as dividend titans such as tobacco stocks are ruled out, the ethical investing space is still maturing and many companies have been forced to review and stop income payouts as a result of the economic slump induced by covid-19.

Related: The ethical funds outperforming their in-house peers

Additionally, there are also questions marks around some stocks’ ethical credentials. For example, the FTSE4Good UK 50 tracks the performance of the largest 50 companies from the FTSE 100 index using a ‘best in class’ approach, selecting companies that score better on ESG issues when compared with their sector peers, and while all constituents currently pay a dividend, there are inclusions that many investors would not consider ethical.

Myron Jobson, personal finance campaigner at interactive investor, explained: “It used to be the case where ethical investing was as simple as omitting traditional sin stocks like oil, tobacco and arms firms from your investment universe. But the world has moved on and companies can earn their ethical strips by promoting environment, social and governance factors – ranging from renewable energy and cracking down on plastic waste – for the betterment of the wold we live in.

“The inclusion of companies like Shell in the FTSE4Good UK 50 index may raise an eyebrow, but some investors argue that the company boost ‘green’ credentials because of its renewable energy division as part of plans to become a net-zero emissions energy business by 2050 – and the FTSE Russell Group clearly subscribe to this school of thought. It goes to show that investors need to look under the bonnet of each proposition marked ethical to ensure it marries up to their ethical stance before committing their cash.”

In light of this, the platform’s fund analyst Teodor Dilov has highlighted three of his favourite ethical funds for income:

1. BMO Responsible UK Income Fund

Dilov said: “[This] at present offers a healthy yield in excess of 4%. The fund, managed by Catherine Stanley, targets long-term income and growth by investing mainly in UK shares.

“The fund applies both positive and negative screens to promote ESG themes like climate change while weeding out businesses that derive turnover from activities such as the production of alcoholic beverages and involved in the manufacture of genetically modified seeds or crops (among other) from its investment universe. As a result, the fund usually has a large exposure to mid and small cap companies.

“What constitutes as ethical is determined by BMO’s responsible investing team, who also draw on an independent responsible investment advisory council which is presided over by Justin Welby, Archbishop of Canterbury.”

2. Unicorn UK Ethical Income Fund

“[This fund] currently has an impressive yield of over 5%. The fund is an ethically screened version of the Unicorn UK Income Fund, and fund’s universe of stocks is sourced directly from its sister fund.

“An external service is used to screen out companies that generate revenues from prohibited sectors or those with environmental, social or governance concerns.  This translated to a zero-tolerance policy towards companies involved with tobacco, gambling, genetic engineering, animal testing and pornography. For alcohol, defence & weapons and nuclear power, a 5% maximum revenue derived from such activities is applied.

“The portfolio is skewed to small and mid-cap stocks and as such can demonstrate greater level of volatility compared to some peers.”

3. Rathbone Ethical Bond Fund

Dilov said: “Finally, investing predominately in UK bonds, this fund is a good diversifier to an income portfolio. The fund, which offers a decent yield of 3.7%, has significantly outperformed the average return of funds in the Investment Association’s Sterling Corporate Bond sector in the medium to long-term.

“The fund excludes bonds issued by organisations wholly or materially involved in a number of activities including the manufacturing of alcoholic beverages, tobacco and fur as well as companies involved in the production or sale of pornographic material.”

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