Kames Ethical Equity: April 2020 fund update

Dominic Rowles | Wed 29 April 2020

The links in this article will take you to Hargreaves Lansdown’s main website for more information. Please be aware that if you wish to join any of the benefits in your company Plan you must return to this website to apply.

• For ethical investors, this exclusions-based fund avoids companies such as tobacco and alcohol producers
• Audrey Ryan is an experienced fund manager who is passionate about ethical investing
• We think she's one of few fund managers who have handled the constraints of an ethical fund well over the long term

How it fits in a portfolio

We think this fund could be a good addition to the UK section of an ethical portfolio, designed to limit or exclude investments in industries some find immoral, such as tobacco or alcohol. It could also be used by investors who want to add an ethical element to their broader investment portfolio. Ethics are personal though, so make sure you’re happy with the fund’s approach before investing.

Manager

Audrey Ryan joined Kames in 1997 from General Accident, where she was a UK smaller companies portfolio manager. She's managed the Kames Ethical Equity Fund since 1999 and is passionate about ethical investing. We believe she's one of few fund managers who have handled the constraints of an ethical fund well over the long run.

Aside from the Kames Ethical Equity Fund, Ryan co-manages the Kames Ethical Cautious Managed Fund, Kames UK Opportunity Fund and an ethical pooled pension fund. She's also the dedicated back-up manager for the Kames UK Smaller Companies Fund. We think this workload is manageable for someone of her calibre. She also benefits from the support of the broader Kames UK Equity team, including back-up manager Elaine Morgan.

Process

This fund invests in the shares of UK businesses using a 'negative screening' approach. That means it won't invest in any companies involved in any activities deemed unethical. From tobacco and alcohol producers to munitions manufacturers and companies that use animal testing.

The investment universe is filtered for these 'sin stocks' by Kames' ESG Research Team. The screening process is kept separate from Ryan and the rest of her team, leaving them free to focus on stock selection and portfolio construction.

ESG is also key to the fund's investment process. Ryan and her team aim to identify and understand the main environmental, social and governance risks of each company, industry and sector they invest in. They believe companies that lead the way in governance and sustainability tend to outperform over the long run.

Meeting with company managers is another important part of the fund's investment process. The meetings allow Ryan and her team to build a deep understanding of the business and the challenges and opportunities it has ahead.

Below is a more detailed list of the type of companies that the fund won't invest in.

• Animal welfare - companies that provide animal testing services, make or sell animal-tested products, are involved in intensive farming, operate abattoirs or slaughterhouses or sell meat, poultry, fish or dairy
• Military - companies that make armaments, nuclear weapons or similar strategic products
• Nuclear power - companies that provide important services to, or own or operate, nuclear facilities
• Environment - companies that excessively damage the environment, in breach of internationally recognised conventions on biodiversity or not tackling climate change
• Political donations - companies that have made political donations of more than £25,000 in the last year
• Genetic engineering - Companies that have patented genes
• Gambling - companies with investments in betting shops, casinos or amusement arcades which account for more than 10% of their total business
• Alcohol - companies where more than 10% of their total business involves brewing, distillation or sale of alcohol
• Tobacco - companies where more than 10% of their business involves growing, processing or selling tobacco
• Pornography - companies that provide adult entertainment services
• Debt - banks with exposure to large amounts of corporate or Developing World debt
• Oppressive regimes - companies operating in countries with poor human rights records or with no established policies on human rights issues

Please note the fund has a holding in Hargreaves Lansdown plc.

Culture

Kames has a great deal of heritage in managing ethical and sustainable funds – they've been doing it for more than 30 years. They see it as their responsibility to encourage companies to maximise investment returns through good governance practices and respect for the environment and society.

In February 2020, Kames Capital began an integration process with its parent company Aegon Asset Management. It's thought that greater integration will allow the Kames team to leverage the expertise and research capabilities of the broader Aegon group. However there will be no changes to the way money is managed within the fund, or to the investment teams. The Kames Capital brand will be retired in the second half of 2020.

We typically treat corporate changes with caution and, while we are encouraged there will be a limited number of changes that impact the UK Equity Team, we will continue to monitor the situation closely.

We're also mindful that there have been some significant departures from the Kames Fixed Income Team in recent years. That said, the UK Equity team has remained stable and many members of the team have been there for decades.

Cost

This fund is available at an annual ongoing fund charge of 0.63%, after a 0.15% discount available through the HL platform. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Performance

69% of the UK's largest companies are excluded from the fund's investment universe on ethical grounds. The fund therefore has a long-term bias towards higher-risk small and medium-sized companies. This, combined with the fund's lack of exposure to industries like oil & gas and tobacco, mean its performance can differ to that of more conventional UK equity funds.

The fund's focus on smaller and medium-sized companies can cause more volatility, and this has been the case in more recent years. Small and medium-sized companies have tended to be more reliant on the health of the UK economy. Their performance therefore struggled in recent years amid Brexit negotiations and other political uncertainty. Some of the political uncertainty was lifted at the end of 2019 when the Conservative party won a parliamentary majority. This helped boost the fund's performance.

The UK stock market has been volatile so far this year and ultimately lost money*. The fund's lack of investments in oil & gas companies helped performance after Saudi Arabia and Russia failed to reach an agreement about global oil supply, resulting in Saudi Arabia upping production and a collapse in the oil price. The fund's focus on UK-centric businesses once again held back returns though, leaving the fund only slightly ahead of the broader UK stock market so far this year.

Ryan's overall record remains strong and we think she will do a good job over the long term, although there are no guarantees.

Past performance is not a guide to the future. Source: *Lipper IM to 31/03/2020.

Find out more about this fund including charges

Key investor information