FUND FOCUS: The Kames Ethical Cautious Managed Fund
Medical Money Management (MMM) operate a series of risk-targeted Investment Portfolios with a bias towards Ethical, Environmental and / or Sustainability themes, each incorporating a number of outstanding investment funds, selected after significant research and fund manger interviews. We regularly provide an insight into some of the funds that we are currently using.
Why is the Fund held in the Portfolios?
The Kames Ethical Cautious Managed Fund is an actively-managed multi-asset fund which provides income and long-term capital growth through investment in a diversified portfolio of equities, bonds and cash. The Fund is designed to meet the needs of investors who wish to make investment decisions based on strong ethical principles. These are often referred to as ‘dark green’ funds, with ethical screening criteria which are as clear and unambiguous as possible.
The Fund’s primary performance benchmark is the Investment Association “Mixed Investments – 20 to 60% Shares” peer group median. The performance target is to return second-quartile performance over rolling 12-month periods and top-quartile performance over rolling 3-year periods. As the performance section later in this article shows, the Fund has delivered consistent outperformance of its peers, most of which are managed without any ethical restrictions.
What makes it different from other funds in its sector?
Kames Capital also manages ethical funds which invest exclusively in equities and bonds. However, for investors seeking a balanced portfolio where the allocation between equities, bonds and cash is actively managed, this Fund offers a proven solution.
Kames Capital’s ethical research and corporate governance team is responsible for the analysis of relevant environmental, social and governance issues. The team uses both external screening databases and in-house research to ensure the companies in its ethical universe are suitable for investment. They screens-out companies out if they engage in certain activities across 12 categories:
- Animal welfare
- Nuclear power
- Political donations
- Genetic engineering
- Oppressive regimes
A more detailed summary of the ethical screening criteria used for the Fund can be found at www.kamescapital.com/uk_responsible.aspx
- Each holding in the Fund must meet the fund’s pre-defined ethical criteria. From an equity perspective, the portfolio typically has a bias to small and mid-cap companies, due to its ethical restrictions. At the end of February 2016, over 55% of the Fund (ex-Fixed Income and cash), was invested in FTSE 100 companies. As the investment universe is reduced due to ethical screening there are no sector-level restrictions.
- The Fund must invest no less than 30% in bonds, of which at least 75% must be sterling investment grade bonds. High yield bond holdings are limited to 10% of the Fund. The Fund’s ethical restrictions mean there are no sector, country, duration or additional credit ratings limits on the bond portfolio.
- The Fund may hold up to 20% cash, which provides the flexibility to become more defensive on a tactical basis during periods of extreme market volatility.
The outlook for the Fund
- At 29 February 2015, the Fund held 230 individual holdings, with 49% of its portfolio in equities, 39% in bonds and 12% in cash.
- The Fund’s equity weighting is in line with its long-term average. In an environment of modest economic growth and a low interest rate backdrop, equities continue to offer relative value. While in aggregate UK earnings are still being downgraded, companies delivering on earnings forecasts are being rewarded, which creates opportunities for active stock-pickers, such as Kames Capital.
- The Fund’s bond weighting is below its long-term average, reflecting the risks to the asset class. Bond yields remain exceptionally low on a historical basis, although there is no sign of a UK interest rate rise which would threaten bond market returns. The valuations of investment grade corporate bonds are attractive, although the asset class is not without its risks, not least through companies re-leveraging, mergers and acquisitions, and of course the threat of a potential ‘Brexit’ ahead of the referendum in June.
The fund managers
Audrey Ryan is an investment manager in Kames Capital’s 25-strong equities team, where she is responsible for managing several funds, including the Kames Ethical Equity Fund and Kames UK Opportunities Fund. Audrey also analyses the travel and leisure sector, and is a small-cap specialist. Audrey studied Accounting at Napier University, is a qualified chartered accountant and has an MSc in Investment Analysis. She has 21 years’ industry experience.
Iain Buckle is an investment manager in Kames Capital’s 29-strong fixed income team, with responsibility for credit analysis, particularly securitised and structured finance assets. He is the co-manager of several funds, including the Kames Sterling Corporate Bond Fund, Kames Ethical Corporate Bond Fund and the Kames Ethical Cautious Managed Fund. Iain, who has 19 years’ industry experience, studied Economics at Heriot Watt University and is a CFA charter holder.
Fund performance, ratings and awards
The Fund was launched on 1 March 2007 and, having grown in size to £492m by 29 February 2016, is among the largest and most popular ethical multi-asset funds available to UK investors.
The graph below shows the Fund’s performance against its own benchmark, being the IA Mixed Investment (20% – 60% Equities) sector.
MMM tends not to consider external endorsements when selecting suitable investment funds, preferring to rely on internal research and interviews with the Fund Management teams. However we do note the positive independent ratings that the Fund has received.
In December 2015 Kames Capital was named Best Ethical Investment Group at the 2015 Sustainable Investment Awards, hosted by Investment Week. Now in their seventh year, the awards recognise excellence in sustainable investment, including ethical, environmental and social impact investing.
Since 2013 the Kames Ethical Cautious Managed Fund has won seven major fund awards, including Mixed Asset Fund of the Year in 2013 and 2015.
MMM would like to thank Kames Capital for its assistance in the compilation of this Fund Focus article.
Please note that past performance is no guarantee of future performance and that the value of units held, and any income derived from them, may fall as well as rise. Where a fund holds assets outside of the UK, fluctuations in exchange rates will affect the value of the investment.
This article should not be taken as advice or as a recommendation to invest in the Fund. The Fund is selected by MMM’s Investment Committee as a constituent of a series of risk-targeted portfolios. The Fund has particular characteristics that enable it to blend with other funds within the portfolios. Advice should be sought before investing in the Fund. The Fund will not be suitable for all investors, particularly if held in isolation.