Aegon Ethical Cautious Managed fund is a combination of two successful funds from the Aegon ethical desk: the UK Ethical Equity fund run by Audrey Ryan and the Ethical Corporate Bond fund run by Iain Buckle. Each fund blends a primarily stock-picking approach with consideration for the economic environment, which makes for a pragmatic, transparent and highly successful ethical mixed investment fund.
Previously Kames Ethical Cautious Managed fund.
Our opinion
The considerable experience of both managers, who are supported by a long-term stable team, combined with strong stock selection and a disciplined process, make this fund a great mixed-asset responsible investment. The bond side provides some risk protection, while the equity element will drive returns but still with a conscientious overlay. This fund is fairly unique, offering a ‘one-stop shop’ for ethically-minded investors and has proved that it can deliver consistently good performance.
Company description
Aegon Asset Management is a global investment company, with offices in America, Europe and Asia. It provides fixed income, equity, real asset and multi-asset investment solutions to a range of clients, including pension plans, wealth managers, insurance companies and individual investors. The firm originated in the Netherlands as an insurance company before going on to develop the asset management side of the business.
Fund manager
Audrey Ryan and Iain Buckle have managed this fund together since its launch in 2007. Audrey manages the equity part of the fund and Iain the fixed income part. Audrey is a small-cap specialist and has analysis duties for the travel and leisure sector. Prior to joining Aegon in 1997, she worked as a UK small companies portfolio manager at General Accident after studying accounting at Napier University.
Iain runs several fixed interest funds at Aegon, having joined the company in 2000 from Baillie Gifford where he was a fixed income analyst. He studied economics at Heriot Watt University.
Investment process
The two managers use a robust stock-selection process, with ideas generated by sector specialist analysts (many of whom are also fund managers), and combine this with a macroeconomic overlay, developed in weekly meetings with senior management.
This overlay creates a general framework in which to put the best ideas from the analysts. The fund is typically split 60:40, with the equity portion taking the larger share compared with the corporate bond portion.
For the equity portion of the fund, the initial screening process is carried out by a third party, which discounts from the FTSE All-Share index any “sin stocks” such as gambling, tobacco, weapons and adult entertainment. A further in-house screening is carried out to remove companies such as those with poor human rights, environmental or animal welfare associations, amongst others.
The team meets company boards as a main proponent of investing to create a concentrated portfolio of 60-80 stocks. It looks for companies with the potential for growth, recurring revenues and that are highly cash generative.
The fixed interest portion of the fund is an investment grade, UK and sterling-only corporate bond fund. No gilts will be included in the portfolio, however the team can buy government-backed institutions and assets dedicated to specific projects.
As with the process for the equity selection, there is a formal monthly strategy process meeting, which covers the macroeconomic backdrop and drives asset allocation and positioning. The team will then analyse and overlay this onto its favoured stock picks and areas to avoid.
Current ethical and sustainable themes within the fund include education, good health and wellbeing; environment, climate change and renewable energy; social and housing infrastructure; and software delivering solutions.
ESG
ESG - Explicit
ESG is a primary feature of Aegon’s investment strategy on this fund, and the focus is on those ESG issues which the team believes are most material to a company's financial performance. The in-house ESG research team works closely with the portfolio managers to ensure an understanding of the key environmental and social issues for each sector.
The corporate governance standards they expect of the companies they invest in are reasonably consistent across markets and sectors; the right corporate governance is always critical and a key consideration in all the investment decisions they make. However, the environmental and social issues which they consider material to investee companies will vary by sub-sector and company. The managers place great importance on engagement with the management teams of the companies they invest in and Aegon does not invest in any stock involved in a controversial industry or practice.
Risk
The portfolio is reviewed by internal compliance, trustees and an external third party on a monthly audit and Aegon’s ethical screening process is reviewed every two years. With up to 60% allowed in equities, there is risk of capital loss in the fund. However, with the remainder of the fund in investment-grade bonds, well researched in a heavily scrutinised process, this lowers the volatility levels. The condition of avoiding gilts, typically the lowest risk-rated investments, does add a small amount of risk, but due diligence, and natural avoidance of the mining and oil industries, counters this.
The fund’s natural underweights, such as oil & gas, mining and pharmaceuticals & biotechnology, may lead to periods of underperformance when those sectors do well, such as in macro-driven markets, or outperformance when those underweights are not faring so well.
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