Interactive Investor’s ACE 40 list of recommended ‘ethical’ investment funds has been shaken up, after a ‘torrid’ year so far for sustainable strategies.
Of the 40 funds on the online stockbroker’s environmental, social and governance (ESG) investing buy list, only two delivered positive returns in the first five months of the year.
The challenging backdrop prompted Morningstar, in day-to-day control of the list since January, to make an unscheduled review and three changes.
Analysts removed Syncona (SYNC ), an investment trust backing early-stage biotech companies, which they concluded was investing in a risky corner of the market given the nature of the team and strategy.
The Abrdn Europe ex UK Ethical Equity fund was given the boot owing to its relatively inexperienced managers and poor performance in recent years, while the M&G European Sustain Paris Aligned fund was promoted onto the list as a better alternative.
Interactive Investor, which maintains strategic oversight, noted that the long-term performance of the ACE 4o, which complements its broader Super 60 list, remains ‘strong’. Over three years, 60% of selected funds are in the top half of their sectors, while almost 80% have outperformed their benchmarks over five years.
Morningstar considers the £1.3bn trust’s level of risk and volatility too high for the rewards.
‘Given the niche nature of the trust, it makes it hard to discern if the team and structure are the best available options to access this area of the market,’ said the data and analysis group.
Managed by Martin Murphy (pictured below), the portfolio is highly concentrated in a space where outcomes of clinical trials can swing performance heavily one way or another, creating ‘significant’ risk. The analysts added that short-term returns are heavily reliant on sentiment rather than the performance of the underlying portfolio. That has made for ‘big swings’ between the shares trading at a premium and discount to net asset value (NAV) in recent times.
Interactive Investor bowed to the ‘independent’ decision, even after choosing to retain the trust in October.
‘While the performance since has been less volatile, we are also mindful that the outlook for biotech companies is more challenging than it has been, even for a conservatively managed company like Syncona,’ said Dzmitry Lipski, Interactive Investor’s head of funds research.
Syncona’s annual results released last week recorded a lift in NAV of 0.3% over the financial year as the Nasdaq Biotech declined 12%, Numis analyst Ewan Lovett-Turner noted.
Several big sales drove performance over the year, including Gyroscope being bought by Novartis for $1.5bn (£1.23bn), which has reinforced the trust’s balance sheet. Cash accounts for about 60% of the portfolio and Numis considers it a good backdrop for new investments given market turmoil.
Lovett-Turner concluded that Syncona still benefits from an ‘exceptional’ management team that has delivered multiple exits that demonstrate its ability to found and build highly valued life sciences companies.
Adieu Abrdn, bienvenue M&G
Managers Ian Hewett and Sasha Kachanova took control of the £243m Abrdn Europe ex UK Ethical Equity fund last July, with Morningstar cautioning their experience remains limited compared with peers. Despite the portfolio’s bias to growth stocks, performance had been unspectacular, even before the latest downturn.
‘Despite the fund’s growth style, which should have until recently been a tailwind to performance, performance over their tenure has been lacklustre, with the fund only managing to deliver strong relative outperformance in 2020,’ said analysts.
Morningstar said there were ‘stronger fund options available in the sector’, replacing the Abrdn fund with the M&G European Sustain Paris Aligned fund.
Manager John William Olsen (pictured below) built a strong track record on global and European strategies at Danske Capital before joining M&G and taking charge of the £327m fund in 2014.
Morningstar highlights that Olsen uses the same process he used at Danske. He focuses on finding companies with ‘sustainable competitive advantages’ that should lead to pricing power and superior returns in the long term and then waits for an opportunity to buy them at attractive valuations.
In 2021, the process was adapted to identify companies that have a meaningful plan to reduce emissions using ‘science-based targets’, aligning the portfolio to the 2015 Paris Agreement on global warming.
Olsen has secured strong performance, with annualised returns over the last five years of 5.3%, beating its MSCI Europe ex UK Index benchmark, according to the latest factsheet.
‘Performance over Olsen’s tenure has been strong and given the fund’s quality characteristics, we broadly expect it to hold up better than peers in falling markets but potentially lag in strongly rising markets,’ said the Morningstar analyst team.
‘Additionally, the concentrated nature of the portfolio may at times mean that the fund’s return profile is more volatile than that of peers.’
Investment company news brought to you by Citywire Financial Publishers Limited.