Friends Provident Stewardship Income

Despite its ethical constraints the Stewardship Income fund has outperformed its category average over three and five years while maintaining a low volatility of returns.

Morningstar.co.uk Editors 9 June, 2003 | 4:02PM
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Launched in 1987 the fund was revamped about five years ago when Ted Scott took over as manager. Before 1998 the fund, looking for high yielding firms that met the right ethical criteria, had invested primarily in small companies. The fund’s returns were hampered as many of the holdings were illiquid – because of their size – and cyclical – moving up and down along with the economy.

The fund switched to a more flexible so-called barbell approach that allows the manager to invest in a variety of shares as well as up to 20% in corporate bonds. For example, at one end of the barbell large growth shares offer higher risk but lower yields while at the other end bonds offer more yield and lower risk.

Currently the fund has about 55% in small and medium firms, about 16% in utilities, 9% in corporate bonds and the remainder in large growth firms.

To be considered as a potential investment for this fund a company must adhere to strict – “dark green” – ethical criteria. Mr Scott said that this rules out about 75% of the UK stockmarket in terms of market capitalisation. A committee at the fund group meets quarterly to draw up a list of about 200- 300 companies that meet its criteria from which Mr Scott picks the holdings for the fund.

Generally the fund cannot invest in financial companies, oil and resource firms and pharmaceuticals as well as businesses with exposure to oppressive regimes, pollution, tobacco and so on. In addition the committee favours firms with positive principles such as good human rights records and good labour relations.

This strict screening process limits the scope of the fund’s investments which may affect the performance. Also the strong small and mid cap bias of the fund can increase risk.

Yet the returns of the fund over the past three years have been quite consistent. Its volatility is low in both absolute terms and relative to the average of its category – UK Equity Mid Cap.

The strategic overview – the fund group’s predicted economic outlook – is the main driver behind both purchases and sales of assets and determines the asset allocation along the barbell. With this top down approach company valuations are important but play a secondary role.

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