Morningstar fund analysts have recently updated their ratings on Aberdeen World Equity and its ethical cousin Aberdeen Ethical World Equity, but the latter's conscientious slant means the difference between a Silver and a Bronze rating.
Aberdeen World Equity, which is suitable as a core holding for investors seeking global equity exposure, retains its Morningstar Analyst rating of Silver, thanks in part to the management team's excellent stock selection. Morningstar analyst Muna Abu-Hasa says the global team has demonstrated a strong ability to cherry-pick the better locally derived ideas. A unique feature of their approach is that there are no quantitative filters and the list stock ideas instead results from fundamental research. "Financials, for example, have had a tumultuous few years but the team correctly avoided Western banks in favour of insurers and Asian financials that were less affected by the credit crisis," Abu-Habsa writes in her recent research report. "This illustrates the contribution from comparative analysis made by the global team in Edinburgh."
Aberdeen Ethical World, meanwhile, which is also a suitable core holding for those seekng an ethical global equity mandate, has retained its Bronze rating. As with Aberdeen World Equity, this fund also relies on the same global team's stock picks, but companies that fall out on social, ethical or environmental grounds are replaced where a suitable alternative can be found. "The ethical mandate results in structural underweights in certain sectors that screen poorly," Abu-Habsa says, "the clearest example is healthcare, as companies involved with animal testing are completely excluded." Conversely, the healthcare sector represents more than 12% of the World Equity fund's portfolio (data as at January 31, 2012).
Interestingly, financials, which are often interpreted by some as falling into the 'unethical' camp, represent a greater portion of the ethical fund's portfolio than its 'less ethical' cousin. Aberdeen Ethical World has 21% of its assets in financial services versus a little under 18% at Aberdeen World Equity. Abu-Habsa explains that Aberdeen's stock screens are more lenient towards unethical practices such as weapons manufacturing, provided that only a small proportion of companies' revenues are derived from so-termed unethical activities.
In overall performance terms, the World Equity fund is in pole position, with 3 years annualised trailing returns of close to 19%, hence its 5-star Morningstar rating (risk-adjusted performance rating). The Ethical World fund has produced 3-year annualised trailing returns of just under 18%, and has outperformed the Morningstar category average of 3, 5 and 10 years, which is "particularly impressive" in the context of a fund with an ethical constraint, says Abu-Habsa. Investors should be mindful, however, that the ethical approach can lead to periods of benchmark-relative underperformance, as exemplified in 2011.
Want to know more about ethical investing? Read our previous articles Show Me the Meaning of Being Ethical and Ethical Funds: Caveat Emptor.
