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Ecclesiastical screens

Rob Hepworth has plenty to be positive about. A senior fund manager at ethical investment house Ecclesiastical Investment Management, he has been one of the few fund managers to have benefited from the economic storm that has wrought havoc through the industry and wider economy over the last two years.

Despite many investment managers seeing substantial outflows from their fund, Hepworth reports that inflows the some ethical funds have, in fact, been positive over the last year.

He says: “My feeling is the money flows into ethical funds have been relatively robust, holding up better than non-socially responsible investment funds. Inflows into the ethical arena continue to be positive while other sectors have seen net outflows.”

In addition, Hepworth says the screened approach for ethical investment has helped ethical funds produce comparatively good investment performance as they have avoided some of the worst- performing financial stocks.

He says: “There is a case to be made that avoiding these companies that have caused some of the problems of the last 18 months is likely to be a factor behind the success of ethical funds.”

Interest in and opportunities for ethical funds should grow in the next few years. As a worldwide consensus emerges on how to tackle climate change and the global economy, reeling from the credit crunch, seeks a new path to riches, sustainable investment is fast gaining interest from investors, governments and business.

Billions of pounds have been promised by world leaders to be ploughed into eco-friendly projects in a bid to rein in global carbon emissions.

Hepworth runs two ethically screened funds – the Amity sterling bond fund in the strategic bond IMA sector and the Amity international fund in the global growth IMA sector.

The global equity fund is placed 11th in its sector over one year and is the top-performing fund out of 144 funds over the last three years, returning 24.8 per cent.

The Amity sterling bond fund, launched on April 11 last year, is seventh out of 53 funds.

Hepworth says the firm has a particular investment philosophy that stands them out from its peers.

Ecclesiastical adopts an active management approach that doesn’t track the index, has low levels of turnover, and is overweight in small to medium stocks.

Hepworth says he buys stocks that are good quality, cheap and for the long term.

He says: “It is important to be contrarian and counter-cyclical and to go against the crowd. This can lead to some uncomfortable performance but can give good results. Basically, we do the opposite of what the experts are saying. Not that the experts are wrong but that it is already built into the price.”

Hepworth says Ecclesiastical benefits from being a relatively small player – an average fund size of £30m to £60m – which helps it get into small-cap stocks without having an impact on price.

He also says experience plays a central role in the firm’s investment philosophy. Hepworth has been at Ecclesiastical for 21 years, head of investment Sue Round has worked there for 25 years and deputy group chief executive George Prescott has racked up 29 years in the job.

Hepworth says: “It is important to have the same people running the same funds for a consistent period of time.”

He does his best not to show how happy he is with his long-standing decision to steer clear of banking stocks but admits it was “a major factor” in boosting fund performance.

He adds: “We have always been underweight in financials because of the high levels of debt developing and became increasingly underweight in 2007. We were proven wrong in 2003 and 2004 but we kept with our knitting and it has come good in the end.”

Hepworth gets more animated when talking about Asia. He has been investing in Asia for the last 10 years and describes the region as “the bright spot for the world economy”, with as much as one-third of his portfolio in the region.

He says: “Asia is second to none. While the developed world is drowning in debt, Asia has great savings. The companies are far less geared compared with Western counterparts. They own their factories and machineries and they have net cash on their balance sheets, which is almost unheard of in the West.

“For countries that will survive the downturn, Asia, and particularly China, win hands down.”

He takes a very defensive approach in terms of sectors, with 19 per cent invested in healthcare and an overweight position in telecoms.

The firm applies a two-pronged screening process that firstly avoids companies that earn more than 10 per cent of turnover from alcohol, gambling, pornographic industry,and arms.

Second, Ecclesiastical adopts a nine-point positive screening that looks for companies with factors such as good governance, ethical business practices, environmental prowess and community relations.

He says: “We think it is beneficial on investment grounds, it is a benefit for society as a whole, it is the right thing to do and it is good for business.”

But he maintains that the investment case has to match the ethical aspect of any prospective investment. He also runs one of Ecclesiastical’s non-ethical funds and says his priority is to find good companies to invest in, then to apply the screening to those companies, if required.

For this reason, the firm has never invested in wind power, solar or forestry because he thinks there has yet to be a long-term investment case for these sectors.

But he says, as good governance continues to spread in corporate culture, the prospects for ethical investing look good.

He says: “Ethical practices will continue to prosper. The future remains very bright. We are expecting great things.”

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