Ethical dividends reach twenty-year milestone

This weekend sees a significant milestone achieved in the onward march of ethical investment as the Stewardship Income Fund clocks up a formidable 20-year track record. Over two decades the Fund has provided investors with a combination of regular dividends, rising capital and the rigorous screening of its universe of investments on a comprehensive range of strict ethical criteria.

Launched on 13 October 1987, Stewardship Income was the first ever fund in the popular IMA UK Equity Income Sector to operate with an ethical investment strategy which screened out companies involved with pollution, armaments, tobacco, alcohol, gambling and pornography as well as actively targeted those making a positive contribution to society and the environment.

Despite the restricted universe of companies available to the Stewardship Income Fund it has nevertheless beaten most of the competition over the last two decades, ranking 9th out of the 41 funds in the IMA UK Equity Income sector which also have 20 year track records. The Fund has notched up an impressive 445% total return compared to the sector's median return of 319% over this period (source: Lipper, 13/10/87 - 3/10/07, income reinvested). More recent performance, under the helm of managers Ted Scott and Hilary Aldridge, has been particularly impressive with the Fund winning a string of accolades and a place on the buy lists of many major financial advisory firms.

Over its lifetime the Fund has faced particular challenges in delivering the sector goal of generating a dividend yield of at least 110% of the FTSE All Share Index because some of the traditional higher yielding sectors, such as tobacco and - until very recently - banks, were excluded outright from its universe. Consequently, during its early years the Fund invariably had a high exposure to often out-of-favour smaller companies.

"The Fund's concentration in higher yielding smaller and mid-sized ethically acceptable companies meant that, at times, it found itself exposed to dividend cuts and profit warnings which meant performance could be volatile. So, when I took over the Stewardship Income Fund in 1998, I decided to radically revamp its investment strategy so that it could be a core holding for ethically-minded investors by combining both income and growth," explained Ted Scott, manager of the Stewardship Income Fund.

"We did this by introducing a 'bar bell' approach. This has enabled us to invest in a mixture of lower-yielding growth companies at one end of the portfolio with the aim of boosting the capital prospects, while at the other end we have been able to pick higher yielding shares in areas such as utilities to help us deliver the necessary income target. We have also allowed ourselves to hold some corporate bonds, as and when we think they are attractive, as an additional tool for income generation," said Scott.

Accessing lower-yielding growth companies would not normally be on the radar of a conventional equity income fund, but this approach has allowed the managers to sustain the Fund's performance during periods when value companies are out of favour and growth stocks are in fashion. It has also helped to reduce its volatility.

Influential reports, such as the Principal White List of top equity income funds, have consistently identified the Stewardship Income Fund as one of the least volatile premium performers in the sector.

"Twenty years of performance is an important landmark for any investment fund as it provides a record which encompasses a wide range of market climates and stock market highs and lows. Significantly, it also shows that investors have been able to stand by their ethics and not have to pay a price in terms of good performance," concluded Scott.