A year ago I created an ethical portfolio for our clients at Thomas and Thomas Finance. I wanted to create a portfolio that focused solely on environmentally friendly investments funds.
When I joined Thomas and Thomas, I loved the fact that they had an ‘ethical’ proposition to offer to clients. On a journey to see a client in the Brecon Beacons last year, I explained to Darren (the firm’s managing director) that I was concerned that the natural beauty of the planet will disappear if we don’t start taking care of it. Darren could see that the thought of this generally upset me and offered the opportunity to create a portfolio that only invests into environmentally friendly funds. And so the ‘EKO’ (because of my initials) portfolio was born.
The strict screening process meant that my fund selection was very limited so I knew that both volatility and performance would be different from any of our other Thomas and Thomas portfolios. The result of my extensive research led to a careful blend of ten funds that invest in stocks which positively support the environment and climate change whilst also avoiding investment in non-sustainable timber, nuclear power and intensive farming.
Our other ethical range allows clients to create a bespoke portfolio that is ethical in their eyes only. The EKO portfolio is very much driven at supporting the environment.
I carried out quantitative and qualitative research to ensure that each fund matched the specific ethical criteria – this meant spending a lot of time on the phone to fund representatives. It was much harder than finding mainstream funds because I had to find out what each fund specifically invested into as part of the negative and positive screening process. The ethical market is also much more restricted than mainstream investing.
The research on these portfolios takes ages and is definitely a process of evolution not revolution. I was very lucky joining Thomas and Thomas because they already had over a decade of experience in building model ethical portfolios. This meant that the underlying asset allocations and much of the research reasoning had already been decided. We use the mainstream tools such as Financial Express, Trust Net, Morning Star, OBSR, Citywire etc. to back up our unique T&T ‘traffic light’ research system. We then speak with fund houses directly to find out more about the underlying holdings and we study publications by places such as the Ethical Investment Association and UKSIF. This took considerable time on our part.
It is near impossible to rule out every single link to mainstream or ‘non ethical’ holdings or interests, so it is important to keep that in mind and inform clients accordingly.
I think the reason that I like the EKO portfolio so much is that it tries its best to seek out positive ecological opportunities. We do spend a lot of time with our clients pointing out to them both verbally and in writing that we have done our best on a single layer level but that we can’t guarantee there won’t be some future proven link to something that wouldn’t necessarily fit the initial criteria. Our clients generally accept this point as they just want to know that they are at least consciously trying to support funds that make that extra effort in line with things that they really care about.
One company that the portfolio is invested in through one of Standard Life’s ethical ranges that I find really interesting is Mondi - a packaging company that have their own sustainable forestry policy acknowledging their responsibility to manage the forests they own and lease in an economically, environmentally and socially sustainable way, while meeting wood and fibre productivity challenges, now and in the future.
Another matter discussed between Darren and myself is that the ethical investment arena does not hold as many ‘tourist investors’. From our experience, investors who choose to invest into socially responsible investments, do so because of a desire to invest ethically. They are not so driven by performance. This means ethical investments are sometimes overlooked by mainstream investors.
In times of market uncertainty the mainstream funds can suffer when investors move their money around. Meanwhile ethical investors will often sit tight. This is usually due to the lack of socially responsible investments available within the market, they have nowhere to move their money to – resulting in smoother volatility and a more stable investment domain.
The primary purpose of the EKO portfolio is to help the environment and secondly to make good returns. I created the portfolio by selecting the funds first but by then using the right level of asset allocation I felt that this portfolio has the potential to make good gains.
We expected the volatility to be of a medium level three risk but over the last 12 months it has been less volatile than the FTSE 100 yet outperformed the FTSE 100 with a gain of 8.91% against 6.06%. Our mainstream level three portfolio has made a gain of 9.66% over the same time period but interestingly the returns for the EKO were much smoother throughout the year. I do not believe the performance of the EKO has been sacrificed, it has just done something different from the mainstream portfolios and I am very pleased with its journey.
We are very proud of how a portfolio created firstly to support the planet and secondly to make gains, could achieve so much in its first year. Proving that you should never forget the ‘investing’ in ‘socially responsible investing’.
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