Cynics can be forgiven for assuming that ethical investing carries a cost to performance, on the basis that restrictions on the choice of stocks limits a fund manager’s freedom to invest. The managers at Stewart Investors, the Australian-owned but Scottish-based firm, have dedicated themselves to proving that assumption wrong.
They look for “companies run by managers who think like owners, have their wealth invested in the company, take a long-term perspective and have a track record of treating all shareholders fairly”. In the Asian markets where Stewart focuses, such good governance cannot be taken for granted.
Stewart supplements what it calls a Hippocratic oath for asset managers with a dedication to “sustainable development”, a term it prefers to the more subjective “green,” “clean tech” or “ethical investing”. This means that “we are unlikely to invest in gambling and tobacco”, while exposure to mining and conventional energy is zero. The proof of these principles is in the performance. Pacific Assets Trust (LSE: PAC) has returned 98% over five years, 25% ahead of the MSCI Asia ex Japan benchmark and among the best in the sector, while Scottish Oriental Smaller Companies Trust (LSE: SST), which focuses on smaller stocks, has returned 97%.
Still, “the last year has been disappointing; our philosophy is more suited to calmer than rapidly rising markets”, says Pacific Assets’ David Gait. The 16% return is barely half that of the benchmark, and less than half that of its main competitors – although Scottish Oriental has done better, returning 21%.
Pacific Assets has not been helped by a tendency in recent years to be cautious, with over 10% of the portfolio in cash at times. The cash level is now nearer 5%, but the trust has had a more severe handicap – low exposure to China. This accounts for just 2% of the portfolio, but 32% of the MSCI Asia (excluding Japan) index.
In particular, the trust doesn’t hold the Chinese internet companies, such as Tencent and Alibaba, which have done well. “They have convoluted corporate structures, poor corporate governance and a bad habit of dubious transactions with related parties,” says Gait. The trust also avoids state-controlled companies, which include the banking, insurance and property sectors, with serious corporate governance issues.
“We buy tortoises rather than hares,” he adds, although he accepts that if China comes unstuck, the rest of Asia will still have problems. Exposure to South Korea, at just 3%, is also way below benchmark, while 35% of the portfolio is invested in India and 8% in the Philippines.
Over 25% of the fund is in the consumer-staples sector, including Hong Kong’s Vitasoy and Marico in India, and another 25% in financials, notably the tech-savvy private-sector banks benefiting from local populations’ increasing access to finance. Despite avoiding the Chinese behemoths, nearly 20% is in information technology companies such as India’s Tech Mahindra and Taiwan Semiconductor.
Shares in the £300m Pacific Assets Trust trade close to asset value, while those of the £320m Scottish Oriental Trust are on an 11% discount. The latter may therefore look more attractive, but any hiccup in China could see Pacific Assets returning to pole position in the sector. In the end, tortoises often win the race.
In the news this week…
• The founders of fund supermarket Hargreaves Lansdown are separately backing two fund firms launching in the UK market, says Dylan Lobo on Citywire. Peter Hargreaves has backed a firm set up by Stephen Yiu, who made his name at asset managers Artemis and New Star. Few details are known about the firm, which is called Blue Whale Capital, but Yiu’s colleague Robert Hargreaves (“believed to be Peter’s son”) confirmed that Blue Whale plans to launch a fund. This will probably be “based on Yiu’s expertise in UK equities”, says Lobo. Meanwhile, Ravenscroft, a Channel Islands investment firm that is backed by Stephen Lansdown, has launched a fund of funds, investing in equities and bonds, and a global blue-chip equity fund.
• Some investment banks are asking asset managers to pay more than $1m per year for annual access to their research under new European rules that will force asset managers to split the cost of research and trading, says the Financial Times. It is likely that providers will adopt different models, with some asking for fees up-front, offering a “pay-as-you-go” model, or levying higher fees for access to star analysts. Some banks say they are concerned “that discounting too heavily could anger regulators if extremely low prices were considered an incentive” for funds to use their brokerages to execute trades.