Many of the UK’s biggest dividend payers are so-called “sin stocks” – companies that make money from activities that cross some ethical boundaries. These include tobacco companies and oil producers.
The £180m Henderson Global Care UK Income is one of a number of “ethical” funds that do not invest in such stocks. It aims to invest only in companies making “wise use of the natural environment”.
The fund yields 3.9pc, more than many of its “non-ethical” rivals, and has returned 30 percentage points more than the FTSE All Share index over the past five years.
Telegraph Money spoke to manager Andrew Jones about what happens if a company falls foul of the fund’s ethical rules, why he is buying domestic-focused British businesses, and his worst ever investment.
How is the fund put together?
We use a screening service to take out stocks we’re not allowed to own, and then construct a portfolio from the refined list.
We don’t own many stocks yielding less than 1.5pc and don’t like stocks yielding much more than 6pc, as it’s a sign something is wrong.
There are various sectors that are off limits – we can’t hold oil, mining, tobacco, alcohol or defence stocks, many of which are traditional sources of income. The ethical screen is run monthly.
If a stock we own is flagged as a problem, we’ll review it and if it’s falling foul of the criteria then we’ll sell out. Examples include a business acquiring a company that breaches our ethical mandate.
How do you replace the traditional income payers that are excluded?
We have exposure to pharmaceutical stocks including AstraZeneca, utility companies such as National Grid and telecom stocks including BT.
Big dividend stocks such as BP and Shell are excluded, but we make up for it by looking at a greater range of company sizes.
We have around 70pc in FTSE 100 stocks, although we are very underweight the 15 biggest stocks. Around 17pc is in the FTSE 250 and the rest is in smaller stocks and a couple of overseas holdings.
The biggest risk to the fund’s performance is if commodities and the oil price rally, as we can’t mimic that exposure. Tobacco companies doing well is another drag, if you’ll pardon the pun.
What changes have you made over the past year?
Recently we bought Dixons Carphone, as it has been weak since the Brexit vote due to its domestic focus and the valuation is now attractive.
We’ve also bought domestic drinks companies Britvic and A.G. Barr, which makes Irn-Bru.
Vodafone is a major holding, but is its dividend secure?
Vodafone has spent a lot of money over the past few years, investing to keep its network up to date.
We expect that spending to come down, so think the dividend will be covered. As the yield is high at 6pc we don’t expect a lot of growth – the majority of the return will come from the dividend.
What has been your best and worst investment?
The best has been private equity firm 3i Group. When I took over the portfolio it was very mistrusted, but a new chief executive refocused the business and has invested wisely.
The worst performer is education company Pearson. Although it provides a good service, unfortunately there have been more structural changes in the market than I had anticipated. Earnings have been disappointing and the dividend was cut earlier this year.
How are you paid?
I get a base salary and an annual bonus, which depends on the fund’s performance. A significant proportion of the bonus goes into Henderson shares and the funds I run.
Do you have your own money in the fund?
Yes, I buy the fund regularly outside of my bonus. My wife and daughter own it too.
What would you have done if you hadn’t become a fund manager?
My dad was a lecturer, my mum was a teacher and my wife is a nursery schoolteacher. So I suspect I would have become a teacher.
John Monaghan, senior investment analyst at fund research company Square Mile
Ethical, or as they are more commonly known, socially responsible investment (SRI), strategies are a broad church, as the ethical standards that each fund runs to can vary hugely.
However, all tend to follow the basic principle of investing in companies that meet a specified set of criteria.
These criteria can be designed to both inclusive and exclusive. For example, favouring companies that actively aspire to reduce their carbon footprint or excluding companies with poor safety records.
Henderson Global Investors has a strong pedigree in SRI going back around 40 years. This fund follows what we would view as a stringent set of criteria.
Manager Andrew Jones and his team base their company selections or exclusions on three main areas: a company’s impact on people, its impact on the environment, and its treatment of animals.
These guide the fund away from large segments of the UK market, such as oil and gas, materials, and tobacco and alcohol stocks.
This results in higher allocations to health care and service-driven companies. This means performance can look markedly different from the index over short time frames.
The fund has a decent track record delivering 87.1pc against the FTSE All Share index’s 58.6pc over the past five years.
However, returns relative to the index will be affected by the fund not holding certain stocks.
For example, mining stocks like Anglo American rallied in 2016 and this fund does not invest in that sector. The ongoing charge figure of 0.85pc is average among its peers.