The Stewardship income fund is 20 years old this year. It is the second-oldest of F&C’s ethical funds and after the Stewardship growth fund was one of the first ethical retail funds available.
Scott, who also runs the Stewardship growth fund as well as the non-ethical UK growth and income fund, says: “When we launched Stewardship in 1984, it was a very niche market and did not attract much in the way of money but now we are talking about a market worth several billion.”
He says there has recently been a sharp increase in popularity as ethical and particularly environmental issues have shot up the scale of public awareness.
“The inflows of new money are significantly more in percentage terms than mainstream funds because it is continuing to attract attention, with themes such as climate change and human rights exploitation which people want to avoid in their investment universe still being very current and very topical.”
Figures from the Ethical Investment Research Service show that at the end of last year, there was £7.2bn of retail investor money invested ethically compared with £6bn at the end of 2005.
With £915m in the Stewardship growth fund and £440m in the Stewardship income fund, Scott is responsible for a major chunk of the retail ethical investment market.
He has some strong performance figures for the fund. At the end of October, the income fund returned 125 per cent over five years compared with 110 per cent for the FTSE All share index, at an average return of 17.7 per cent a year.
Scott says performance of the Stewardship income fund has tailed off slightly this year due to the resurgence of large cap companies but the fund is still in the top quartile in the UK equity income sector.
“In 2006, we had a really good year. Smaller companies outperformed bigger companies and we tend to have more in smaller companies. We had very big positions in utilities last year and the utilities sector was one of the best-performing in the market and Scottish Power, which was one of our biggest holdings, got taken over. AWG got bid for as well. Also, we avoided some areas of the market that did badly. For example, BP and Shell underperformed and that helped our relative performance as well.
“This year, it has been the other way round. Commodities stocks have dominated markets this year and we can only get limited exposure to commodities. Other unethical sectors have also done well such as tobacco and aerospace, which we cannot get any exposure to, and small firms have tended to underperform.”
With these headwinds, Scott says the fund is doing well this year, helped by the performance of Vodafone, the biggest stock in the fund. “The underlying performance of the fund is quite good,” he says.
Scott says the ethical market has further scope for growth and while it will never be entirely mainstream, there is scope for significant growth in this area.
“It will never be 50 per cent of the market but there is no reason why it cannot go up to 5-10 per cent of the market, which is still a substantial growth from here.”
The increase in the size of the Stewardship funds is not without its challenges, Scott says: “In some ways, a bigger fund is more difficult to run because it becomes more unwieldy, especially as Stewardship has a restricted universe, and we cannot invest in quite a lot of the market. Anyway, a real big fund tends to be like a super-tanker. Trying to move it about the place is quite difficult.”
As a dark green fund – one that actively screens out ethically unsuitable funds – Scott recently took the decision to include financial companies in the universe of funds he can invest in. This has been a sector that has been beyond the scope of most ethical investors in the past due to the underlying investments on the big banks but Scott says the attitudes to engaging on ethical issues have changed recently.
“It is better corporate social responsibility. We have an SRI team here and they have found that over the last few years, they have been much more open and receptive to talking about these issues, whereas before they closed up a bit and this is one of the most important criteria in determining whether a company is ethical or not. There is nothing wrong with banking per se. It has always been one of those sectors where it was a bit more marginal, unlike tobacco or aerospace, where it is much more clear-cut.”
UK banks have been having a tough time in recent months as the fallout from the US sub-prime mortgages continues to take affect. Scott says he expects there will be further bad news from the banking sector and he expects the general market volatility to continue into next year. While not great news for investors, over the short term, he points out that these fluctuations are offering an opportunity for the Stewardship funds to build positions in financial companies if they become undervalued.
“We have been starting to buy some of the banks in the last couple of weeks as the share prices have fallen back a long way.”
Despite the fluctuation, Scott does not believe that conditions for UK equities will get much worse.
He says: “Going into 2008, the market will increasingly focus on whether the credit crisis will have a significant effect on the economy and whether it is likely to lead to recession and until the market makes up its mind either way, it will continue to tread water.
“There may be a bit of profit-taking in the short term but I do not see a significant downside. There is a lot of bad news priced in and it is not as if the market is highly priced. It is on about 12 times earnings so it is not like it was in 2000 when it was on 22 times earnings. When we come out the other side, the market could have a substantial rally again.”
Regardless of the market conditions, Scott says the performance of the Stewardship income fund over the last 20 years proves that ethical investors do not have to suffer poor returns to salve their consciences.
Lives: Otford, Kent
Education: Marlborough College and Exeter University
Career: 1984 to present: F&C Asset Management, director and head of Stewardship, manager of Stewardship income fund, Stewardship growth fund and F&C UK growth and income fund; 1981-84: stockbroker Schaverien & Co
Likes: Music, reading, tennis, golf, cricket, football, wildlife
Dislikes:Soap operas, cooking, motor racing, shooting, horse racing, DIY
Drives: Audi A6
Book: Les Miserables by Victor Hugo
Film: One Flew Over The Cuckoo’s Nest
Album: Station To Station by David Bowie
Career ambition: To achieve consistently good performance for my funds and enjoy what I am doing
Life ambition: Raise a happy and successful family
If I wasn’t doing this I would be… A tennis player