Chris Wright’s Premier Ethical hasn’t just performed well versus other ethical funds, it sits in the top fifth of all funds investing in UK shares as well.
Putting money into “sin” stocks, such as tobacco companies, has been incredibly rewarding for long-term investors. In fact, a study last year by the London Business School found that, since 1900, the tobacco industry returned more for investors than any other.
Premier Ethical has achieved its returns despite avoiding such shares. Instead it looks to buy businesses that are not hurting society or the environment and that “have an emphasis on improving individuals’ basic standard of living”.
Many worry that investing ethically can result in lower returns and this is one of the main reasons why ethical funds seldom appear in brokers’ best-seller lists.
In the case of Premier Ethical, picking from a smaller pool of shares has not handicapped the fund’s performance. It has returned 74pc since 2011, ahead of 32pc for the average ethical rival and 30pc for the average UK fund.
Below Mr Wright explains his latest portfolio moves, and why bombed-out miners are a “value trap”.
How do you select shares?
We have an ethical committee who lay out all the rules, outlining what types of investments are excluded. These include businesses that produce goods or services for weapons, tobacco businesses and gambling firms.
Ultimately we just look to exclude the really bad ones. The FTSE ALL Share has about 700 companies and the last time I checked I could not invest in 85 of these names.
This does not bother me, there are plenty of good companies out there. Unfortunately there are fund managers out there that stick closely to the index, but this a fund that by definition has to be different.
I have been an investor for 32 years, so have seen a few market cycles. I firmly believe that to make money you need to have a mixture of three investment styles in your portfolio; value, momentum and quality. I tend to favour one style at a particular time, depending on where we are in the market cycle.
How is the portfolio positioned at the moment?
After the financial crisis in 2009 it was a great time to be a value investor as share prices were incredibly cheap.
But at this moment in time, with the world economy slowing and earnings forecasts for British business looking pretty weak, it is prudent to focus on quality businesses that can continue to grow their earnings regardless of the economic backdrop.
The hope is that the market will reward these names, with quality outperforming. I am investing in a similar way to Terry Smith and Nick Train, looking to buy businesses that have already won.
What shares have you been buying recently?
I have been adding to Unilever, a fine example of a quality business with a dominant market position. Another business that ticks the quality boxes, albeit a lesser known name, is Micro Focus, a UK software business. Its products are used in telephony and transport systems, such as railway signals, so it is a business that possesses high barriers to entry.
Return to quality: Chris Wright is looking for companies that have "already won".
There are three other shares I have recently bought. One is Equiniti, the share registration business. I bought because the shares were cheap, on a price to earnings ratio (p/e) of 11. I like the fact that the business has long contracts on the various pension schemes it administers.
Another buy has been NCC, the cyber security business. It generates plenty of cash.
EMIS, a software business that holds millions of patients’ medical records, is the other share I have been buying. Again, it has longstanding contracts and is a dominant player in what it does.
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Mining shares look cheap – is it time to buy?
Unlike some other ethical funds I am able to invest in miners, but I have so far resisted and will continue to steer clear. They are cheap, but this was also the case nine months ago and look at how far their share prices have fallen since.
I just think with global growth slowing there could be more pain, so the high yields on offer look to me more of a value trap than a buying opportunity. I cannot see what the catalyst will be at the moment for the oil price to recover.
Do you invest in the fund?
I do and I also invest in the other fund that I manage - Premier Optimum Income.
What would you have done if you had not become a fund manager?
If I had the talent, an opera singer sounds like a fantastic job to have.
Our verdict
With hundreds of UK funds to choose from, most of which have no restraints on how they invest, ethical funds are often overlooked.
But Premier Ethical’s performance, as shown in the chart above, has not been restrained.
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It is unusual that mining shares can be held but, in the end, this has not mattered. Mr Wright’s decision to shun the sector has worked out well, helping the fund outperform rivals.
But Darius McDermott of Fund Calibre, a fund ratings agency, said two other ethical funds stood out - Standard Life UK Ethical and Edentree Amity UK.
“We met Chris in September last year. He comes across as a good fund manager and has had good performance on the fund. However, he has more of a pragmatic than 'rules based' approach, and we prefer a bit more structure when it comes to funds with an ethical 'badge'. It's certainly not one for the more puritan investor, but he has embraced the product and done well since taking it on in 2009.”
It is possible to invest ethically more cheaply using a fund that tracks the FTSE4Good index. L&G Ethical will do this for an ongoing charge of 0.31pc.
Funds without an ethical mandate that invest in a similar manner, looking for hidden gems outside the FTSE 100 index, include L&G UK Alpha.
Mr McDermott said the fund manager Richard Penny has a “a lifelong passion for investment, a calm confidence in his stock-picking, and the track record to back it up”.
Fidelity Special Values, an investment trust managed by Alex Wright, is another option to consider. Mr Wright buys undervalued companies whose potential is underestimated by the market.
How to buy the fund as cheaply as possible
The fund has a total cost (the “OCF” or “TER”) of 0.95pc a year. Be sure to buy the right “share class”, which is “C”.
The investment shop through which you buy the fund will also levy a charge – some as a percentage of the amount invested, some as a flat annual fee. Our tables will guide you to the cheapest fund shop according to the size of your portfolio.
The Telegraph has launched its own DIY investment service, designed with simple pricing. The annual cost is capped at £300 for all your Isas and general investment account, but based on an annual fee of 0.3pc, making it good for first-time fund investors and those with large fund portfolios. Alongside this, our team of investment journalists will produce an ever-greater stream of analysis on investments, aiming to help savers make the right choices.
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