Sustainable investing an advice accompaniment

Ethical investing is more than just about having green credentials or being socially aware, but is about high convictions when investing. However, as Jason Spits writes, this approach has paid off for one manager and its investors.

In a competitive market, fund managers have always had to promote themselves and their unique offerings to advisers and their clients.

However, Phil Vernon and David Macri of Australian Ethical Investment (AEI) believe they have an edge over many of their contemporaries in that they have a consistent track record, low correlation with other asset classes and a very unique offering.

And it appears all three of these factors have come together in recent years to give AEI a boost, with inflows at their highest levels, driven by investors seeking returns with low volatility drawn from investments they can be certain match their social and ethical views.

Macri, who holds the role of chief investment officer at AEI, said these issues have resonated strongly with investors since the group launched in 1986 and "that around 60 per cent of our investors have high ethical and social convictions".

He said the solid performance of the group, with its Australian Shares Fund returning an average of 10.1 per cent per annum since inception, attracted other investors.

In fact 70 per cent of all investors with AEI are self-directed, with a solid proportion holding self-managed superannuation funds, with the remainder accessing AEI's funds through a financial adviser.

Vernon, AEI's managing director, said the group is investing in sales and adviser-focused resources so it can promote its funds further to advisers.

At the time of going to press, it announced the launch of a new emerging companies fund.

This will sit alongside its Australian equities, international equities, fixed income, diversified and balanced fund offerings, which have had their minimum investment amounts reduced to $1000.

According to Vernon, the increased interest in the group is a result of little differentiation in mainstream ethical funds offerings, and AEI has been able to fill that market gap.

"The issues in ethical investing are complex and are much more than just accounting for ESG (environmental, social and governance) factors, which is not the same type of screening we apply, and which has become a point of differentiation for us and our investors," Vernon said.

"For instance, climate change is a hot topic with advisers and there are questions as to whether we invest in the banks because they in turn have investments in fossil fuels. At the same time, energy generation and human rights issues have also come to fore in recent years and they are not simple issues to consider."

As a result of this complexity, AEI has hired former head of practice at St James Ethics Centre, Dr Stuart Palmer, as its head of ethics with input and oversight of its research analysis.

"We apply our charter to all the asset classes in which we invest but we also focus on how we balance the positive and negative of each investment," Macri said.

"People may feel very strongly on an issue but how do we balance out the other interests that may be involved? Animal testing is an example where some tests may lead to a greater health benefit for people."

Vernon states this approach is easy to defend against critics who claim that applying positive and negative screens across investments affects the performance outcomes and points to the track record of the manager.

This track record has been recognised, with its Australian Shares Fund (previously the Smaller Companies Trust) winning the Responsible Investments category at the 2015 Money Management/Lonsec Fund Manager of the Year awards.

However, Macri stresses that performance has not come at great risk and that AEI's funds are attractive within client portfolios because of their lower correlation and lower risk and volatility.

"Traditional managers follow the index and so have struggled but we see ourselves as experts in the under-researched sections of the market," Macri said.

"Yet we also have an extra layer with our analysis of the ethics of the market so we tend to identify themes before others do, such as the aging population and climate change, and have been addressing hose themes since our inception."

Vernon says this has equipped AEI with the ability to educate advisers on how to respond to clients who are interested in ethical investing, which for some advisers is their first encounter with the issue.

"Demand is often bottom up — from investors or clients to their advisers — and we are equipped to answer the questions advisers will receive," Vernon said.

"We see the current social demand as a fantastic opportunity for us and for planners as well, and some are making ethical investing the core of their business."

"The difficult in speaking with advisers in the past has been busting the myths around both ethics and performance but that has now happened and we are beginning to move from a core network of ‘ethical advisers' to a wider penetration of the advice market."

Australian Ethical Investment

Year manager was founded: 1986

Number of Employees:  34

Key Personnel

• Managing Director – Phillip Vernon
• Chief Investment Officer – David Macri

Asset Classes covered

• Domestic equities
• Small/micro caps
• International Equities
• Fixed Interest  and short term fixed interest
• Diversified funds
• Retail superannuation

Leading Fund: Australian Ethical Australian Shares Fund

Minimum investment amount:  $1,000 (or $500 with a regular savings plan)

Fees/MER: 2.50 per cent - Retail Class, 0.95 per cent - Wholesale Class

Last 12 months performance of fund: 24.3 per cent

Research house ratings for fund: Lonsec

Major platforms through which fund is available: BT, Asgard, Macquarie, Netwealth, MLC/Navigator, AMP/North, IOOF/Plan B/Spectrum, Freedom of Choice

Funds Under Management

Managed Funds Retail (Direct, Non-Advised): $200 million

Managed Funds Retail (Advised): $200 million

Managed Funds Wholesale (Institutional): $3 million

Retail Superannuation: $780 million

Total: $1,183 million