Ethical Performance
inside intelligence for responsible business


keeping it simple: exclusion pays off for Old Mutual

June 2007

Old Mutual Asset Managers’ Ethical Fund has outperformed the main index for the last three calendar years, despite having only around 400 UK companies in its investable universe with the remainder excluded on ethical grounds. Fund manager Anna Perriam talks to Mike Scott

Old Mutual Asset Managers’ Ethical Fund is unusual in not being managed by an ‘ethical’ fund manager. It is one of a suite of funds run by the group’s quantitative team, which has no ethical expertise in-house, says Anna Perriam, quantitative fund manager.

‘We manage anything considered slightly unusual or which needs the risks in its portfolio to be managed carefully, and that includes the ethical fund’, Perriam says. The fund, which invests in UK companies, gets its data from Ethical Investment Research Services – all the stocks in the fund’s universe are examined on a monthly basis for compliance with the fund’s investment criteria.  If they do not comply, then they are divested, although that is rare.

‘Our approach is very black and white,’ says Perriam. ‘If a company fails our criteria, then we sell. But it doesn’t happen very often. The only case I can remember was the reverse – Vodafone sold a business in Japan that had made it non-compliant because of some of its content. We could then buy into it, and Vodafone is now our top holding,’ says Perriam.

The seven-strong research team and eight portfolio managers, backed by academic advisers, then looks at company valuations, historic performance and momentum signals, among other factors, before choosing stocks to buy.

The fund started in 1998, when it was run by Gerrard, which was bought by Old Mutual in 2000, and it operates both positive and negative screening. On the positive side, the fund looks for companies ‘with a consistently positive environmental policy and record’, companies committed to recycling and reducing waste, public transport groups and those that offer alternatives to animal tested goods. Its exclusions include companies involved in alcohol, weapons and environmentally harmful chemicals and those that encourage ‘degrading or addictive activities’.

The fund, which has doubled in value since 2005, has a universe of about 400, but many of the largest stocks in the FTSE All-Share are excluded by the Eiris criteria. ‘There are no healthcare stocks, for example,’ Perriam says. ‘It is difficult to outperform the market within the fund’s restrictions, so we look for outperformance from a quantitative [financial analysis] point of view.’ The fund, chiefly sold through independent financial advisers, generally holds 40–50 stocks and outperformed the main index in 2004, 2005 and 2006.

Its top ten holdings include financial services groups such as Royal Bank of Scotland, HBOS and Prudential and energy companies such as Centrica and National Grid, but Perriam says it has also done well recently out of investments in housebuilders and water companies. ‘It is mainly a large- and mid-cap portfolio. We are careful to ensure that our holdings are liquid and that the cost of investment is not too high,’ Perriam adds.

The quantitative nature of the fund precludes a strategy of engagement. ‘We do not talk to management, generally.  If we are unhappy about a company, we exclude them. Everything is model-driven,’ Perriam says.

Expense ratio: 1.64%
Sector average: 1.58%
Number of stocks held: 41
Size of fund: £21m ($42m)


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