Asset allocation: Kames ethical duo dodge oil drop and target UK equities


Running an ethical fund used to be a decision between returns and sticking to morals, but recently that has all changed.

The Kames Ethical Cautious Managed fund is a clear example of that – a fund that has ethical guidelines but that has delivered strong returns recently.

It was highlighted by FE data as the top performing cautiously-focused fund in the year to date. The fund returned 3.96 per cent between 1 January and 15 September, during a period where just 19 cautious funds delivered more than 1 per cent.

But that solid performance won’t last forever, say fund managers Audrey Ryan and Iain Buckle, who jointly run the £387m fund.

“There will be times when there are headwinds for ethical investors. We’ve been running ethical money since the late 80s and have been through quite a lot of those periods, which may last six months, 12 months or 18 months. But our message is always that over the long-term we can offset those headwinds and deliver good performance,” says Ryan.

The fund makes up a decent chunk of Kames’ around £2bn in ethical strategies, having been launched in 2007. Over the past three years the fund has returned 38.9 per cent, compared to 18.1 per cent for the Investment Association Mixed Investment 20-60% Shares sector. Over one year it has delivered 7.6 per cent compared to 0.7 per cent for the sector average.

Avoiding the massive drop in oil prices over the past year has helped many ethical funds. Kames employs a ‘dark green’ negative screen to the ethical cautious fund, meaning its exposure to oil, gas, mining and resources in general has been limited, including having no exposure to giants such as BP, Shell, BHP Billiton and Glencore.

“One of the most material positions we have in the resources space is BG,” Ryan says, which takes a 1.45 per cent position in the portfolio. “It is subject to a bid from Royal Dutch Shell. That is the key only real material exposure to that resource-led space.”

The managers have not changed the overall asset allocation to the portfolio much over recent years, maintaining roughly 50 per cent in UK equities, around 40 per cent in corporate bonds and the balance in cash, says Buckle.


The bulk of the outperformance has come from the equity allocations, he says, where the managers have identified particular sectors they believe will outperform.

In particular, the ethical screen on the fund has limited its investments in the financial services space, which makes up 31 per cent of the portfolio. This means it is focused on life insurance and challenger banks, among others.

“Once we do the ethical screen what is left for me to select from is retail-type banks or mortgage backed vehicles — Lloyds and some of the more specialist lenders or challenger banks that have recently come to the market,” says Ryan.

Lloyds accounts for one of the largest positions in the fund, at 1.57 per cent, followed by Legal & General at 1.56 per cent, Aviva at 1.3 per cent and Prudential at 1.3 per cent.

“That’s been where we’ve been able to select and indeed we have, as a UK equity team, a positive outlook for businesses in this area both for growth opportunities and trading valuations wise. We have taken the opportunity to increase our exposure in the past 12 to 18 months.”

Media companies is another area within the UK equities space that the duo have seen opportunities, coming under the fund’s 25.6 per cent allocation to consumer services. Media firm Relx is the largest position in the portfolio at 1.68 per cent, while ITV is another of its largest positions at 1.46 per cent and are examples of the “real opportunities” Ryan finds in the media space.

However, Ryan acknowledges the fund is not for everyone, as it is more of an entry-level offering for those just moving into ethical investing, where more specialised funds are available that are better suited to seasoned ethical investors.

While there is “slow but steady growth” in the ethical specialists end of the market, he says, there is also growth “in the mainstream traditional wealth manager market where their ethical client base is growing and they are looking for a managed product to put clients into”.

However, the fund’s multi-asset approach across equities and fixed income allows them to dodge some of the headwinds to the ethical sector, says Buckle. “Investing across three asset classes helps with the natural headwind in ethical investing,” he says.

The fund is also starting to stand out from others as it has maintained its dark green, negative screening approach where other funds have moved to a positive-screening approach and relaxed their limits.

Some in the market believe the negative screening approach is outdated, but for Ryan that’s not going to shift the screen any time soon. “At least every three years we speak to existing and potential clients about the criteria and ask them the question of whether they feel it is still fit for purpose and relevant for the current marketplace,” she says, adding that clients “still feel it is very, very relevant”.