The 7IM ethical fund is managed using an institutional style core and overlay structure. The core investments, which comprise an equity portfolio and a fixed-interest portfolio, are managed by Sarasin Chiswell. The equity portfolio invests globally in 50?70 stocks, with the focus on bigger companies but mid?/small companies may be included. Up to 3 per cent of this part of the fund may be held in cash for trading purposes. Structured products and derivatives can also be used as long as they meet the fund’s ethical criteria.
The fixed interest portfolio will comprise mainly sterling denominated securities but up to 20 per cent can be invested in other major bond markets for the purpose of diversification. Forward foreign currency contracts may be used to limit or remove currency risk.
The remaining 10-15 per cent of the fund is managed by 7IM as a tactical overlay to complement the core investments. The overlay will allow the fund to invest in other asset classes and adapt quickly to cope with changing market conditions.
7IM manages its risk rated Oeic funds range using a tactical overlay but the investment universe for the ethical fund is likely to be smaller as each asset must meet Sarasin Chiswell’s sustainability criteria.
The fund will invest in companies or bond issuers that score well on social and environmental criteria of the Sarasin sustainability matrix. Companies from certain industries or that are significantly involved in some activities are excluded. Examples include tobacco, armaments, pornography, nuclear power generation, chlorine and chemicals used in agriculture.
The fund will aim to outperform its composite benchmark index, which comprises 50 per cent FT Actuaries All Gilts British Government Fixed Interest and 50 per cent FTSE All Share indices, within ethical and risk frameworks.
Inclusion of any stock or bond depends on its Sarasin sustainability matrix rating. The matrix is a grid of nine criteria, which address issues such as poverty and social exclusion within regions, the environmental impact of the consumption of resources, pollution and assessing how countries are using their natural resources. Social analysis will look at issues such as health and distribution of wealth.
Investors, companies and governments have become more aware of issues such as greenhouse gas emissions over the last few years and from an investment perspective, the emphasis has shifted towards solutions to environmental challenges rather than simply excluding companies that are not deemed ethical. While this fund could do well in these circumstances, a potential drawback is that some good investment opportunities could be ruled out as a result of their ratings on the sustainability matrix.