Kames Ethical Equity - profit from your principles?

Dominic Rowles | Mon 11 March 2019

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• A fund manager with a long commitment to responsible investing
• A focus on small and medium-sized UK companies has boosted long-term performance
• Audrey Ryan is our favourite ethical investor and her fund features on the Wealth 50

Our view

Ethical investing isn’t easy. It means avoiding companies and sectors that don't meet certain ethical standards. Companies involved in tobacco or arms are usually excluded, for example. Ethical funds will therefore perform differently to the broader stock market and their peers.

Audrey Ryan is a fund manager we feel has handled the restrictions of an ethical fund well over the long term. She's been at the helm of the Kames Ethical Equity Fund for 20 years and is supported by an experienced and well-resourced team. The team screens the UK stock market for companies that meet a strict ethical criteria. That leaves the manager free to focus on picking the companies she believes have the best prospects.

We think this fund could be a good addition to a portfolio designed for growth over the long term in an ethical way. It's the only ethical fund to feature on the Wealth 50 list of our favourite funds in the major sectors.

Find out more about ethical investing

How is the fund invested?

Around half the UK’s largest companies are excluded from the fund's investment universe for ethical reasons. This means there’s a focus on higher-risk small and medium-sized companies. Our analysis suggests this has helped the fund deliver stronger performance than the broader UK stock market over the long term.

A portion of the fund is invested in companies that tend to do better or worse depending on how well the UK economy's doing. They've been overlooked by other investors and the manager thinks some have plenty of long-term growth potential. Companies in this section of the fund include banks RBS and Lloyds Banking Group, asset managers Rathbones and Brewin Dolphin, and insurer Aviva.

There are also a few property companies in the fund. This includes Derwent London, a company that rents office space to London-based businesses, and Unite, a student accommodation provider.

The manager also invests in a number of high-quality companies that have historically made consistent earnings, regardless of what's going on in the economy. This includes Gamma communications, which provides cloud-based communication services. She's a bit more cautious about the economy's prospects than she used to be, so she's increased this part of the fund over the past year.

Sector allocations

Source: Kames Capital. Correct as at 31 January 2019

Performance review

The fund's performed well for investors over the long run. An investment of £10,000 made ten years ago would be worth £28,016*. The broader UK stock market would've returned £26,368. Past performance isn’t a guide to the future though. Funds can fall as well as rise in value so you could get back less than you invest.

Past performance is not a guide to the future. Source: *Lipper IM to 31/01/2019

The fund had a tougher time over the past year though. A focus on small and medium-sized businesses, which didn’t perform as well as larger ones, was a drag. Companies whose prospects are reliant on the UK economy also suffered as concerns about Brexit intensified.

There were some company-specific issues too including Vodafone, which faced concerns over increasing costs and falling customer loyalty. The company's shares were later sold.

All funds go through weaker periods but Audrey Ryan's experience and long, successful track record gives us confidence her fund will perform well over the long run. There are no guarantees though.

Past performance is not a guide to the future. Source: Lipper IM to 31/01/2019

Find out more about the fund, including charges and how to invest

Key information document