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Who will follow in Virgin’s footprints?

GLG, which runs Virgin Money’s new climate change fund, has responded to adviser criticism of the product by claiming it is a progressive step in the market.

The fund, launched last month, differs from typical green funds as it can invest in
 any industry sector, choosing companies with a lighter than average environmental footprint for their sector.

Schroders and F&C have also set up climate change funds within the last six months. Research by Virgin Money found that up to 29 per cent of consumers have favoured products and services from environmentally aware companies in the past year.

However, Virgin’s lighterfootprint strategy, coupled with a performance fee of 20 per cent if the portfolio beats the Bank of England base rate, has hit a nerve in some quarters. The fund also has an annual management fee of 1.75 per cent.

Hargreaves Lansdown head of socially-responsible investment Alex Davies says: “This goal is hardly demanding in most markets. You also have to look at the list of possible stock options in the GLG environmental fund – a similar vehicle run by the firm – with Renault, Xstrata and BG Group included. Car, mining and gas companies are not exactly traits of climate change.”

Seventy-five per cent of the fund targets companies with lighter than average environmental footprints for their sector, with research firm Trucost providing environmental data.

Virgin says the fund is ideal for someone who wants a position in European equities with environ-mental benefit and no pick-up in volatility.

Fund manager Ben Funnell says the fund focuses on all companies looking at making environmental change rather than just highly volatile providers of renewable energy and clean technology solutions.

He says: “This fund is about companies that are offering all types of change, not just those companies that provide a solution. Second, we feel that the logic of just branding an oil company a bad company, despite making changes to clean up its output, is not a constructive way to make progress. We feel investors are entitled to performance from the fund they invest in.”

Funnell says this process is the next logical step in environmental investing but takes away much of the volatility associated with climate change vehicles. He points to the fact that between January and December 2007, the GLG environmental fund returned 7.02 per cent net of fees compared with the MSCI Europe index return of 1.62 per cent for the same period.

He says: “The only difference between that fund and this new launch is that this one does not currently have the ability to use puts and futures, something which Virgin Money is working on by getting Ucits III status for the vehicle.”

He claims that a 20 per cent performance fee is acceptable, given the fact that the fund has to outperform a benchmark that will not go into negative territory.

Funnell says: “We are here to preserve capital and do not want to offer a performance fee for something that will ultimately lose investors money. If it fails to perform, then there is no fee. The same applies to the highwater mark. The scenario of the market going down by 20 per cent and the fund down by 15 per cent, meaning we get a fee, is not a route we wanted to adopt.”

Chelsea Financial Services managing director Darius McDermott says: “Virgin will point to the track record of the GLG environmental fund in the US but we just feel that this fund needs a long track record in the UK before we would even consider recommending the fund.”

He says the fund is unattractive to his firm’s investors, given the combination of an excessive pricing structure, the fact that it is not ethical and that it has a strong pan-European theme. He says: “If you look at all three variables, you could see more attractive options in the market. We just think it does not fit with what we look to offer our clients.

“It has shown some good performance operating a similar strategy in the US investing in European companies but the expertise comes at a premium, effectively hedge fund charges.”

The Ethical Partnership director Jeremy Newbegin believes the fund will be a success in terms of picking up assets but says it may not be the ideal investment for most of his clients.

He says: “Most clients would prefer a fund that offers a negative screening option but the idea that an oil company that is looking to use renewable energy should be viewed favourably in the market is a forwardthinking idea. Clients these days realise that being purely ethical does mean a restriction on returns. We have questionnaires that determine their level of avoidance and for a vast majority it is likely that this fund will fall out of their remit but I still think it will be a success.”

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