Royal London Sustainable Leaders Trust, F&C Responsible UK Equity Growth and EdenTree Amity have made the best use of volatility over the past decade, data from FE Analytics suggests.
While ethical funds are often criticised for their perceived inability to keep pace with their more conventional peers, a number of well-established strategies have emerged over the years.
As such, FE Trustnet created a bespoke sector of more than 20 UK equity funds with an ethical or socially responsible investing (SRI) objective to consider how they compared with the FTSE All Share index.
The FTSE All Share rallied significantly in the decade since the financial crisis despite several headwinds, including the Brexit referendum.
The index has marginally outperformed the bespoke ethical sector over 10 years with a total return of 102.8 per cent compared to the sector average’s 100.93 per cent, as the chart below shows.
Performance of sector vs index over 10yrs
Source: FE Analytics
FE Trustnet decided to take a closer look at the UK ethical funds to find out which had made the best use of volatility over the past decade.
To do this, we considered funds that had generated a better Sortino ratio relative to the index with lower volatility than the benchmark.
The Sortino ratio measures risk-adjusted returns using downside risk as its denominator, differentiating between the fund’s use of ‘good’ volatility and ‘bad’ volatility. A large Sortino ratio indicates lower risk.
It should be noted, however, that not all funds are benchmarked against the FTSE All Share index.
Below, FE Trustnet considers the three funds that stacked up best in this respect.
Royal London Sustainable Leaders Trust
With a return of 124.98 per cent over 10 years to 31 December 2017, the Royal London Sustainable Leaders Trust outperformed the FTSE All Share’s return of 84.49 per cent with a higher Sortino ratio and lower volatility.
The five FE Crown-rated fund, managed by FE Alpha Manager Mike Fox, has a Sortino ratio of 0.35 over the past decade and annualised volatility of 13.79 per cent, the highest on the shortlist but lower than the index’s 14.04 per cent.
It also had the lowest maximum drawdown figure of the funds under review at 35.3 per cent.
Performance of fund vs index over 10yrs
Source: FE Analytics
In the £599.3m UK growth fund, Fox focuses on core themes of the environment, human welfare and sustainability.
The fund is included on the FE Invest Approved List, with analysts highlighting noting the managers “rigorous financial research and analysis”.
“Despite several periods of outperformance from cyclical sectors and natural resources companies, the fund continues to beat its peers over the long term,” FE Invest analysts noted. “Fox is very experienced manager who has shown great capacity to add returns through positive stock picking.”
Royal London Sustainable Leaders Trust has an ongoing charges figure (OCF) of 0.76 per cent.
EdenTree Amity UK
The only other fund to have outperformed the FTSE All Share over 10 years from our study is the £150.2m EdenTree Amity UK fund, managed by veteran investors Sue Round and Ketan Patel. The fund has returned 110.77 per cent over 10 years, with a Sortino ratio of 0.29 and annualised volatility of 13.32 per cent.
As well as delivering long-term capital growth, the fund aims to generate increasing income and this is targeted through investment principally in UK companies.
The fund seeks to invest in a portfolio of companies that make a positive contribution to society and the environment through sustainable and socially responsible practices.
“EdenTree believes there is a link between well-managed companies with good governance practices who have a clear understanding of their ethical, social and environmental impacts, and their financial returns,” noted FE Invest analysts.
“The fund has outperformed the sector and benchmark since 2010, except for in 2016. The manager’s ethical screening process excludes direct investment into mining and oil companies, both of which had a strong recovery post-Brexit, causing the fund to underperform in 2016.”
EdenTree Amity has a yield of 2.06 per cent and an OCF of 0.79 per cent.
F&C Responsible UK Equity Growth
Last in our study is the £424.1m F&C Responsible UK Equity Growth, managed by Catherine Stanley, head of UK small caps at BMO Asset Management. The fund has returned 82.15 per cent over 10 years, slightly below the FTSE All Share, with a Sortino ratio of 0.19 and annualised volatility of 12.72 per cent.
Performance of fund vs index over 10yrs
Source: FE Analytics
As well as delivering long-term capital growth, the fund aims to generate increasing income and is targeted at investors who “do not regard financial gain as the sole criterion for investment”. It invests in companies whose products and operations are considered of long-term benefit to the community at home and abroad.
The fund, which sits in the IA UK All Companies sector, was a top quartile performer in 2017, following a challenging 2016, returning 19.79 per cent, outperforming the 13.99 per cent return for the average fund in the sector.
Among the oldest strategies in the sector, F&C Responsible UK Equity Growthhas an OCF of 0.79 per cent.