Far from being narrowly focused, the thriving Standard Life UK Ethical trust has an investable universe of half the FTSE 100 and FTSE 250 and holds stocks in all the major sectors.
Good news for woolly liberals everywhere (myself included). Hurrah! An ethical fund is at the top of the UK All Companies performance tables. Well, nearly.
Standard Life’s UK Ethical trust is top quartile over both one and three years, and is touching on top decile for both periods, too. It is run by Andrew Millington and Lesley Duncan, who I feel come to the fund first as investment managers and secondly as ethical enthusiasts – which is probably the right way to approach the business.
Standard Life Investment Management has an interesting approach to outsourcing when it comes to ethical criteria. It surveys its unitholders regularly, to ask what does and does not meet their ethical standards. Two years ago, the answer to the second was airlines, so Standard Life dutifully dumped its airline holdings in line with unitholder wishes.
Oddly enough, having its hands tied in this way hasn’t harmed the fund’s performance. Most of the screening process is done by Standard’s SRI team, and the upshot is that Millington and Duncan (although she’s on maternity leave) have an investable universe of about half the FTSE 100 (by market cap) and a bit more than that in the FTSE 250. (Collinson continues below)
The screening process creates some interesting portfolio construction dynamics. For example, while oil, gas and mining are largely excluded, three out of the fund’s four biggest holdings are – wait for it – oil, gas and mining groups: Xstrata, BG Group and Tullow Oil. As Millington explains, screening is on a stock-by-stock basis. Because most of the big groups, such as Shell, are excluded, he balances his portfolio by ensuring that the ones he can own, he does.
Most professional investors regard ethical funds as having too narrow an investment perspective. Not with this one, though. Millington has about 80 stocks in the portfolio and positions in every major sector.
During 2011 many of the stocks the fund can’t own – such as BAT and Imperial, two tobacco giants, as well as Diageo and GlaxoSmithKline – outperformed the market in a risk-averse year. Yet despite this, Standard Life Ethical still outperformed its peers.
Millington selflessly attributes many of the stock-picks to Standard Life’s small and mid cap team, led by Harry Nimmo, as well as name-checking the guys running large caps.
“You wouldn’t screen banking out as a sector. But if you want to screen out individual banks, the problem is getting precise information about what the bank is doing”
Evidently, at the heart of this fund are Standard Life’s best ideas from across its UK equities capability.
“I accept that people will regard ethical funds as more cyclical than conventional funds,” says Millington. “But I have the benefit of Harry identifying good-quality growth companies with long-term potential, which are typically more resilient across the cycle.”
Many of his favourites are stocks he reckons will make progress in earnings irrespective of the headwinds facing the British economy. He cites a range of companies: Imagination Technologies, a microchip intellectual property and digital radios business; Ashtead, a technology equipment rental firm; and Booker Group, a food wholesaler.
Ashtead was a new purchase in the second half of 2011. Its shares rose significantly on the back of stronger pricing in its American construction equipment rental business.
Asos, an online fashion group, was a top contributor in 2011, when it was the largest single overweight in the fund. The fund reduced its weighting before the big falls, but Asos is still viewed as a long-term winner.
Today Millington’s most significant overweight is in fixed line telecoms, once such an unloved sector. He was enthusing to me about BT even before the news about the company getting to grips with its pension deficit, which saw its shares turn into Friday’s best performer in the FTSE.
The long-term price deflation and regulatory pressure on BT is beginning to turn, says Millington. “The world is changing in the UK fixed line business. What has been a deflationary market has turned inflationary, and we think that’s sustainable. The regulator is more concerned about making sure BT puts fibre into the ground rather than cutting prices. And meanwhile, consumers are more willing to pay extra for superfast broadband.”
Other sector overweights include support services, industrial engineering and software, although Millington points out that sector positions arise principally out of bottom-up stock ideas. Little about this fund is top-down.
Financials, the third-largest holding, are perplexing for unitholders and Millington alike. The banks are probably the most hated sector, if you ask the general public. Should an ethical fund hold financials? At present there are no British-listed banks that the fund is prohibited from holding.
“It’s a difficult one,” says Millington. “You need a functioning banking system. It is a business that needs to exist, unlike, say, tobacco. So you wouldn’t screen it out as a sector. But if you want to screen out individual banks, the problem is getting precise information about what the bank is doing.”
Millington is cautiously optimistic. “Equities are still attractively valued absolutely and relatively. On a bottom-up basis, we are still positive about the market’s prospects. On a p/e [price/earnings] basis, we are only just into double digits, while at a macro level there are indications that we are in a recovery phase – in the US definitely, if less so in the UK.”
In Britain, balance sheets have been repaired. America is in better shape, and Europe is sorting out its problems. With signs of policy easing in China, the outlook for global economic growth is not that gloomy. “The direction of travel is improving,” says Millington. And, ethical fund manager that he is, let’s assume he’s travelling in an electric car.
Patrick Collinson is the Guardian’s personal finance editor.