Fundwatch: Aegon Ethical expert tips

 

The greatest burden on ethical portfolios is that they typically underperform against their counterparts that do not have to cope with the same constraints.

Audrey Ryan, Aegon

Ryan: Ethical investing certainly can make investing harder

After all, ethical funds, at times labelled as being only suitable for tree-hugging hippies who have little to no interest in making money, have a far smaller universe of stocks from to choose from, and for those with a very strict criteria, most of the FTSE 100 - the index of the UK's biggest firms, is a no-go area.

'It certainly does make life harder, we are pretty close to being vegan,' admits Audrey Ryan who has been at the helm of the £195m Aegon Ethical Equity fund for the past nine years. Next month the fund celebrates its 19th anniversary.

And she should know, as she also been running the mainstream Aegon UK Opportunities fund since its launch last year.

She says: 'With the ethical portfolio, there's, for example, no Shell, no BP, and no Barclays.' But as far as ethical investing being unable to compete with 'normal' investing - Ryan has been bucking that trend. Over the past five years to March 24, the Aegon Ethical Equity fund has achieved growth of 131%.

Over the same period, her fund's peer group, the UK All-Companies sector, delivered an average return of 81%. And Ryan also beats the FTSE All-Share, which increased by 81% over the five-year term. The best performing UK All-Companies for the period was inevitably a portfolio unconstrained by ethical criteria - the Rensburg UK Mid-Cap Growth fund achieved 198%.

But over three years Ryan has still comfortably outperformed against both the market and her peer average. Over the past, much more difficult, 12 months she is more in line with the two.

The Aegon Ethical Equity fund is a 'dark green' fund – it operates within very strict criteria when it comes to what it can and more to the point what it cannot invest in. Ryan can invest only in some 33% of the FTSE All-Share and just 51 of the stocks listed in the FTSE 100.

'We do not apply any positive screening criteria like some other ethical or SRI funds,' she says. 'We may invest in themes which may be considered 'socially responsible', such as alternative energy or social housing companies, but only if these companies pass through the negative screens,' she adds.

So what types of stock are deemed unsuitable. Banks with exposure to large corporate and/or Third World debt, such as Standard Chartered and Barclays are out. 'We only hold Halifax Bank of Scotland in the UK domestic banking sector,' Ryan notes.

In addition gambling businesses are excluded, so that means no William Hill, Arena Leisure or Rank Group. And unsurprisingly groups that manufacture armaments or nuclear weapons or associated strategic products are excluded, so that means big names such as BAE Systems, Cobham and nuclear submarine engineering firms such as Rolls Royce, cannot be on Ryan's watch list.

Groups that provide animal testing services or manufacture or sell animal-tested cosmetics or pharmaceuticals are excluded, too. Ryan says: 'The investable universe and the fund portfolios are reviewed on a monthly basis. Sometimes a share that we hold may become unsuitable for investment – it may purchase a company or asset considered unsuitable for example. In these instances, the fund manager is required to sell the unsuitable security.'

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But how is she coping with the turbulence besieging markets since last year? She says: 'We tilted the fund towards companies with earnings resilience. The economic environment is going to be more challenging, certainly in the first half of this year.'

Recently Ryan has opted for healthcare and support services groups such as recruitment consultants and outsourcing firms such as Capita. In the case of the healthcare sector, this meant going for the likes of nursing homes or firms such as Caretech which provide support for people with disabilities. 'There is a massive undersupply in that particular space,' she says.

But there are oil and oil services firms that pass muster, which Ryan can and does invest in. BG is her preferred oil major, where she has 4.9% of the fund invested. The group has operations in 20 countries and over five continents. Recent progress has been seen it develop new gas and oil fields in the Caspian Sea and Middle East. She says: 'It is a growing business, I met the management a few weeks ago and the story still holds.'


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Over the past 12 months BG's share price has firmed by almost 50% to 1,091p. Another group she rates and holds is Tullow Oil, up 76% in the past 12 months to 646p. Wellstream, which manufactures flexible pipes for the oil industry only came to the market in the third week of April 2007. It started listed life at £3.20 a share but its worth has risen to 1230p.

'We also like Aquarius Platinum, which aside from the jewellery market is used for catalytic convertors, and as is the case with commodities in general there is strong demand and a limited supply.' Its share price has risen by more than 18% in the past year and is currently at 701½p.

In the financial sector, Ryan chooses Prudential, down 10.91% to 658p over the past 12 months. She says: 'It is looking at growing its business internationally. It has a big presence and very strong exposure to the Asian market.'

She also likes hedge fund firm Man Group, one of the world's largest futures brokers which employs more than 4,000 people in 16 countries. Man has proved an ever more popular choice with investors having made returns of more than 12% in the midst of the worst of the recent downturn. Ryan says: 'It has good quality earnings, a good valuation and should do well in current choppy markets.'

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Scottish & Southern Energy is her preferred utility stock and her third-largest holding with 3% of her fund invested. It has more than 7m customers and is one of the cleanest energy mixers in terms of carbon dioxide emissions and it is a big investor in renewable energy. She says: 'We still like the scope for earnings to grow and the price is favourable.'

But Vodafone is by far Ryan's largest holding with 7.6% invested. 'We like the telecommunications sector and Vodafone is our preferred stock,' she says. 'It was very overbought and as a result it became expensive but it has since come back a bit.'

Over the past year Vodafone's share price has risen by almost 8%. This month Goldman Sachs added the stock to its 'conviction buy' list with a 203p price target. The broker says it will continue to benefit from growth in wireless data. Its penetration into the emerging markets growth should also benefit investors.

Read our guide to ethical investing here.