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Ethical Fund managers are today’s true revolutionaries 31.05.07

Hugh Cuthbert
SVM All Europe
SRI Fund Manager

Hugh Cuthbert, Fund Manager of SVM’s All Europe SRI Funds talks to Naturalchoices about how engaged ethical fund managers are the new revolutionaries, out there battling with companies about the issues that ethical investors care deeply about.

Ethical funds tend to fit into three broad categories. The most common is the fund that draws up its ethical investment principles and then invests its fund in companies that meet these criteria, the depth of their ethical credentials can usually be assessed by a careful reading of the fund principles. The second takes its investors funds and uses them to support ethical businesses and projects- the leaders in this field would be Tridos Bank and its support for ethical businesses and the Ecology Building Society which loans out the money mainly for green building projects.

The last is the most controversial, particularly amongst ethical investors, it is the engaging Social Responsible Investment fund. Unlike the commonly used negative screening strategies which exclude companies that ‘do bad things’ engaged SRI fund managers do not necessarily go for ‘best in class’ companies, they seek out company stocks that they think have the best growth potential and whose practices they think can be improved by shareholder pressure. “Most SRI fund managers would say rate a company on a scale of 1-10 on their behaviour, they would be looking for a good 8 before they invest, we on the other hand may invest in a company that has a rating of 1 if we thought it had good growth potential, then we would actively dialogue with the senior management of that company to improve ethics and policies”.

In Hugh Cuthbert’s opinion fund managers in general do not apply due diligence if they do not consider SRI issues. “Companies that do not consider social and environmental issues will ultimately find that these issues effect their profitability” he argues. Brand and corporate image, a secure and controlled supply chain, the marketing opportunities present by the opening of new green market sectors are factors that now have to be born in mind when assessing a companies future success, and of course their future share price.

“We see it as a ladder, and we actively engage with the companies to climb higher up the ladder” said Hugh. “We analyses a stock from two angles, firstly their capacity to offer strong top line growth, stable or improving operating margins and good cash conversion. Second our SRI analyst, Craig Jeruzal, looks at their ethical, policies and practice”. What some consider to be wooly factors such as SRI are not as quantifiable as financial results and accounting spreadsheets, but does it do any harm? We find it brings us closer to a company ”.

So how does this positive engagement actually work? “Well most people have an idea that fund mangers sit in front of screens all day frantically buying and selling, for me this could not be further from the truth, I spend a large amount of my time on the road visiting company management teams in their offices”.

“On a day to day basis we dialogue with senior management of companies in our portfolio, at the CEO and CFO level. When you raise the issue of SRI with say the CFO of a company often you throw them off their stride, they are use to talking figures, but they do take notice and pass the message down the chain”.

“The approach that is very effective is drawing comparisons with competitor companies that have drawn visible benefit from climbing the ethical ladder”

What happens if a company does not deliver on its promises, what sanctions does a fund like the SVM All Europe SRI Fund have against companies that pay lip service only to SRI? “Well the ultimate sanction if a company does not implement the action it has promised in a 12 month period is to disinvest, but we would not leave in a quiet manner, we would make a lot of noise explaining why we have withdrawn” explains Hugh Cuthbert.

It all sounds very convincing but does it work, does a small boutique such as SVM Asset Management really have the access and clout to make a difference?

“Firstly is our access to senior management, Edinburgh has Standard Life, AEGON, and Scottish Widows which means that all the top management visit the city to meet with these large scale funds, but three meetings do not fill a day and this gives smaller funds the opportunity to meet with the CEOs and CFO of the big corporates. If I was in London I won’t get to lunch with the CFO of Axa, here in Edinburgh we have much better access. Secondly we specialize in small and medium caps, not 100% we have some large caps in our portfolio, but we limited ourselves to between 35 and 45 companies so we have a significant share in each company.”

The SVM All Europe SRI Fund is certainly off to a flying start. Year to date the fund has out performed the FTSE World Europe Index, achieving 16.5% against the Index’s 11.3%, and the basket of SRI Funds 8.7%. (Data from Lipper). “It is the FTSE Index we compare ourselves to, we aim to compete against all funds not just SRI Funds” concludes Hugh

Hugh Cuthbert is the joint Fund Manager of the SVM All Europe SRI Fund with Neil Veitch, he is also is Fund Manager for the SVM Continental Europe Fund.

Peter Shield

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