Time to invest in a Greater Britain?

Written by Rebecca O'Connor on 21st Sep 2017

Theresa May’s major Brexit speech in Florence got us thinking about whether there is now an ethical case for investors to plough money into UK stocks, supporting the domestic economy as it passes through this tricky transition.

The UK is a weak spot for outright impact funds – only three of the 22 UK-focused equity funds with some sort of ethical tilt have a three-star or four-star rating in the latest Good Investment Review, from 3D Investing and Good With Money.

Many of the funds operate a “negative exclusion” approach, where they screen out certain activities, rather than seeking out companies offering solutions to social and environmental challenges – an “impact” approach. As a result, even those trying to make a bit of a difference to the environment and society receive an average score of two out of five stars.

The relatively new Colombia Threadneedle Ethical UK Equity (8.33 per cent one-year return) gets the top rating, with four out of five stars. Its top ten holdings include GlaxoSmithKline, Unilever and Prudential. Edentree Amity UK (64.12 per cent five-year return) and Henderson Global Care UK Income (77.63 per cent five-year return) get three out of five stars.

Download the guide for the full list, with impact ratings and performance data.

As John Fleetwood, of 3D Investing says: “Overall, the sector does not score highly on the 3D rating, due to the relatively low level of investment in solutions to social and environmental challenges and also, the level of ethical compromise evident in the funds. The average star rating is less than two, which reflects the focus on limited exclusion criteria.”

If looking further afield than the 3D impact universe of funds for UK opportunities, it’s important to bear in mind that the UK market is affected by international factors and can’t be viewed in isolation.

Jason Hollands, managing director of Tilney Bestinvest, says: “Whether you’re worried about current UK political uncertainties taking a toll on the domestic economy or believe those heralding Brexit doom and gloom are being unnecessarily pessimistic, it’s important not to mistake the UK stock market as some form of bellwether for the UK economy. In reality, the UK equity market is global in nature, dominated by companies which do business around the globe and therefore when it comes to UK equity funds it is possible to “Buy British, Get Global”.”

Mr Hollands gives the Evenlode Income fund, managed by Hugh Yarrow from a barn conversion in leafy Chipping Norton, as an example. This UK equity fund is currently invested 80.5 per cent in UK listed shares, 13.5 per cent in US firms and 2.9 per cent in European companies but when you look through the underlying portfolio of businesses and where they earn their revenues, the economic exposure is 32 per cent in the US, 19 per cent in Europe ex UK, just 17 per cent is exposed to the UK and 32 per cent to the rest of the world. That’s because the sorts of businesses the fund hold include consumer goods, software and healthcare companies with global reach such as Unilever, drinks giant Diageo, payroll software firm Sage and pharma group GlaxoSmithKline.

Another fund he singles out is the Liontrust Special Situations fund, which on a look-through basis it is estimated the companies in the portfolio make over 60 per cent of their earnings outside of the UK. Unlike most UK funds, which are predominantly invested in very large FTSE 100 companies however, this fund invests right across the UK stock markets including exposure to small and medium-sized businesses, although it does invest in BP and Shell.

Mr Holland says: “Another fund we hold in high regard is the CF Lindsell Train UK Equity fund which invests in a concentrated portfolio of businesses that manager, Nick Train, regards as exceptional businesses to hold over the long-term and which have a record of delivering a high return on capital. The portfolio also includes consumer brand firms Diageo and Unilever, as well as data firm RELX (formerly Reed Elsevier) as well as shares in the London Stock Exchange, fund manager Schroders and iconic fashion brand Burberry.”

Next week: How to support the UK economy by crowdfunding British companies.

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