Spotlight on Aegon Ethical Equity fund

2009 is shaping up to be a big one for the Aegon Ethical Equity fund. Earlier this year, the fund celebrated its 20th anniversary, while Audrey Ryan celebrated managing the fund for a decade.

Also of importance was  Ryan's success in January at edging out Liontrust's Jeremy Lang as  premier fund manager in the UK all companies sector in Moneywise's sister publication, Money Observer's, awards.

Rough ride

At the end of 2008, experienced fund mangers such as Lang and Neptune's Robin Geffen were knocked sideways by horrendous stockmarket conditions. Despite running one of the strictest ethical funds in the UK (it can invest in less than half of the FTSE 100 companies), Ryan was our surprise replacement for Lang as she came up trumps in the sector and gained a place in Money Observer's premier league, which she still holds.

So how is the fund looking now? It has recorded some decent long-term performance, giving investors a 58% return over the past seven years and putting it in the top quartile. However, the recession has caused a lot of misery for the £185 million fund.

It has plummeted to the bottom quartile over the past month, six months and year. In the six months to 1 August, it delivered just 11%, while the top performing fund in the sector posted a whopping 60% return.

Funds that invest in environmental projects and are proactive in talking to companies about their corporate governance are in demand from investors wanting to do their bit for the planet and make the corporate baddies behave more responsibly.

But the same can't be said for the so-called dark green funds, that screen out everything from drinks companies such as Diageo to supermarkets such as Tesco.

And Ryan's fund is incredibly dark green. If a fund is light green, it means it does some light screening, but can still invest in a fairly wide universe. Dark green funds have stricter criteria and screen out more companies.

Ryan even thinks her fund is darker green than the F&C Stewardship range - the UK's first ethical funds, set up by Friends Provident, which has its roots as a Quaker company.

A company called Ethical Investment Research Service first screens out unsuitable stocks for the Aegon ethical team, and then Ryan's colleagues apply their own screen over the top. The fund is banned from investing in companies that meet any of their 12 criteria, which includes banks, environmentally unsound companies (such as those producing hazardous pesticides) and nuclear power firms.

Narrow choice

Ryan's job is to then pick companies to invest in from the rather short list her colleagues present her with. Five people work on the ethical team, and Ryan proudly notes that they have all been at Aegon for at least eight years.

From the list, Ryan looks for companies with strong balance sheets and earnings resilience. Because a lot of big companies are ruled out, Ryan often heads into the realm of small and medium-sized stocks to find value - indeed, 45% of the portfolio is invested here.
Mother-of-two Ryan is not the vegan hippy you might expect her to be. Yes, she has some of her money invested in the fund, but she also confesses to enjoying a glass of wine, driving a car and travelling by plane.

She also runs Aegon's UK Opportunities fund, so is fully aware of how frustrating her trimmed-down list of ethical stocks can be.

"I've been penalised by not having large banks or miners in the fund," she says. "A lot of the returns over the past 12 months have come from those sectors, so I've really missed out.

"On the other hand, having no exposure to pharmaceuticals has been good for the fund. It's swings and roundabouts."

Ryan says the most difficult time for the fund is when the "big caps and defensives" are doing well: "I have to think: can I capture that performance in other companies? Sometimes I can, by investing in healthcare and the support sector, for example. But I never quite catch up on all that performance."

Recovery mission

At the moment Ryan is reinvesting some cash (last year the fund's cash position hit 13%, it's now 5%) by dipping her toes in some recovery stocks, such as in the household and consumer sectors. She also likes recruitment firms Robert Walters and Michael Page International. "We are very mindful of unemployment though," she says.

Despite not being able to hold banks, Aegon Ethical Equity is very overweight in general financials. Brewin Dolphin, Hargreaves Lansdown and Schroder are all held in the fund.

Ryan's peers at F&C Stewardship recently decided to allow banks into their fund. Is she ever tempted to tinker with Aegon Ethical Equity's stringent criteria to help plump up performance?

Ryan admits to discussing this with her team, but she says banks will not be permitted because "our clients won't like that and we don't want to change what we do".

This article was originally published in Money Observer - Moneywise's sister publication - in October 2009.