A significant proportion of the charities managed by Quilter Cheviot have an ethical policy applied to their portfolio. Therefore, we are well versed in integrating ethical policies into our investment process. In order to complement our investment managers’ knowledge in this area we employ an independent specialist firm (Ethical Screening Company) to screen the securities researched by our analysts and advise which ones should be excluded given their exposure to sectors or activities which clients wish to avoid.
Case studyThese restrictions are loaded onto our dealing system in order to ensure on-going compliance with these exclusions. We are able to screen all direct holdings (fixed income and equities) in order to ensure that the Charity’s ethical values are incorporated into the management of the portfolio. Additionally ensuring that the portfolio is managed in conjunction with the Charity’s ethical values is extremely important. We believe the management of what you substitute these excluded activities or companies with is also important in ensuring that the Charity does not take significant, unintended risks by way for example, of increased concentration in certain sectors.
Knowledge guideIn many cases the collective vehicles we would recommend holding in the Charity’s portfolio would not contravene the ethical policy given the nature of the underlying investments. But sometimes there may be small holdings within funds which are not in line with the ethical policy; however as these are third party funds only the top ten holdings in a fund would be disclosed. Therefore we would suggest that the Charity may either take the view that these holdings (if they exist) are too small to be a concern and that the Charity focusses on direct holdings only; or that we review the top ten holdings of the underlying funds on a regular basis in order to identify any holdings which contravene the ethical policy.
We work with our clients to assess how an ethical policy may impact the portfolio. We believe this is an important part of the process as sometimes by implementing an ethical policy, an unintended (and sometimes significant) skew occurs and at times the financials’ sector is the only ‘ethical’ area which is not impacted by the screen. Understanding not just which stocks are excluded, but impact at a sector level is important in determining whether the policy will result in there being a significant bias towards certain areas within the market.
For some ethical mandates it can become difficult to distinguish whether it is the policy or the manager who is implementing it, is driving the investment returns. Sometimes managers will blame under-performance on the ethical policy, in some cases this may well be true, in others it may be a reflection of wider performance issues within the investment management firm. We therefore advocate in this instance comparing the performance of the portfolio against a similar portfolio which does not have any constraints: it is then easy to determine whether the policy or the manager is the cause.
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