From an ethical standpoint, the external committee which decides on the policy and stock universe takes a hard-line approach to ethical issues, particularly when compared to other socially screened funds. For example, Reed Elsevier, the FTSE 100 publishing company
, had contributed in organising an arms exhibition and so had to be sold from the portfolio, even though the exhibition wasn’t an example of its core business, and only a small percentage of its overall revenue. This uncompromising nature of the investment policy leaves the managers with a universe of just 500 stocks; investment opportunities in many large cap companies and industries such as industrial materials are limited as a result, while the portfolio tends to always have heavily overweight exposure to consumer services and media stocks. This concentration in certain sectors makes the portfolio more susceptible to drawdowns should an event occur that specifically affects those sectors, like an economic slowdown or a fall in advertising revenue.
Indeed, the investment constraints are borne out in the fund’s track record. The fund ranked in the bottom half of the Morningstar UK Mid-Cap Equity category over 1-, 3-, 5-, 10 year periods to 30 September 2007. This is partly due to the large-cap influence in the portfolio that has given a leg-up to others in the category that focus purely on mid-cap stocks, which has been a hotter part of the market. But the underweight exposure to strongly performing materials and energy stocks has also been a key reason for the underperformance, a result of the structural bias that this ethical process creates. This highlights the downside of such an approach from an investment perspective.
For investors looking for a strict socially responsible fund and who aren’t primarily concerned about performance, we feel this is a worthy choice. However, investors should be aware that due to its limited investment universe, the odds of this fund outperforming its peer group are stacked firmly against it.
