11th November 2010
The advice from Claudia Quiroz, fund manager at Cheviot Asset Management, comes in the wake of a record number of companies globally cutting their dividends, leaving many investors wondering how they can secure dividends going forward and where the best income opportunities reside.
Commenting in the 2010 Guide to Climate Change and Ethical Investing, compiled by Holden & Partners, the financial planning and investment adviser, Quiroz argues strongly that the sustainability investment space can offer "a unique combination of long-term capital appreciation and an income stream".
She adds: "Given the low rate environment, a total return strategy is likely to fare better than one focused solely on income. The uncertain economic outlook meanwhile means that a pure equity fund focused on capital appreciation alone represents a risky bet."
Under these circumstances, Quiroz urges investors to consider multi-asset allocation, offering as it does funds that can offer higher yield than pure equity funds and less inflation and interest rate sensitivity than a pure income fund.
"No single asset class will provide the long term capital appreciation and income investors seek. Multi asset strategies will help smooth out returns over the economic cycle," she says.
Quiroz adds that optimising regional allocation will support such a strategy, pointing out that strong growth opportunities in the sustainability space can be found in Asia (ex-Japan), China and India.
Developed world companies, meanwhile, are more likely candidates for reliable income stream. "Portfolios that reflect this top down view and are supported by conviction ideas with equities, corporate bonds and alternative investments should deliver good returns over the long-term," she says.
The wide ranging Guide to Climate Change and Ethical Investing reviews all ethical and climate change investment funds available to UK investors. Institutions that have had their funds included in the list of 120 reviewed by Holden & Partners include AVIVA, Henderson Global Investors, Prudential, Jupiter and and Legal & General.
An issue that exercises both investors and financial commentators alike is how ‘ethically screened' funds compare to conventional funds. The short answer, according to the Holden & Partners' guide, is that "in the majority of cases there is not much difference".
Its research into the top ten individual holdings in the ‘ethically screened' sector however does reveal a distinct difference between funds which invest globally and those which are focused on solely on the UK.
In the UK ethically screened sector there are no funds that Holden & Partners deemed as meeting its top ‘Runes' rating – a newly introduced Holden measure of the environmental focus of a fund relative to its peer group.
By contrast, in the global ethical sector, four funds achieved a Runes rating of three – the highest Rune rating available.
Holden & Partners believes this in part reflects the lack of choice for UK-focused fund managers but also indicates a desire on their part to conform to conventional standards.
The guide furthermore notes that while fourteen of the 23 global ‘ethically screened' funds have been holding oil & gas companies, of the 25 UK ethically screened ones, only three did not.
Holden & Partners point out while earlier this year, as reported by Sky News, Greenpeace protestors climbed a Cairn Energy oil rig in the Arctic to stop it deep-water drilling, four UK ethical funds were holding this stock in their top ten holdings. Furthermore, four UK ethical funds had 30% or more of their top holdings in oil & gas companies.
Holden's guide urges ‘values based' or ‘ethical' investors to look beyond the name of the fund and the criteria its fund manager sets to best match their value with their investments.
It adds: "An investment manager's philosophy is more important than the jargon associated with the fund, not just on a ‘values basis', but to ensure ‘value based' or ethical investors are not missing out on one of the great stories of the 21st century – the environment.'