Ethical Investment Criteria

Examples would include events such as British Airways (AIG) rights issue as it struggles with lower demand for flights, Boohoo’s publicity around its supply chain, or Royal Dutch Shell cutting its dividend for the first time since 1945. Each of these can understandably cause concern for investors and questions such as “should I be worried about my portfolio?”, “are Tatton doing something on the back of the news?”,  and “should I stay invested?” are regularly thrown into the mix.

Well firstly let us clarify the risk question regarding company news and if you should be worried about one company being held in your portfolio. In our model portfolios we hold in excess of 7,000 underlying companies, diversified across the UK, Europe, North America, Emerging Markets and Japan. These companies are selected by experienced fund managers (around 30 funds in each portfolio), all experts in their region and asset class.

As a discretionary wealth manager it is our role to choose funds that provide the diversification and aim to deliver exposure to the best growing companies in a region, avoiding the bad eggs but also making sure not all your eggs are in one basket. Therefore, the chances of that one company being in that 7,000 is possible, but overall, it’s a very low risk. Secondly the fund managers will know everything to do with that company, its sector, and its true valuation, making investment decisions with the best interests of the investor.

So, how do we do select these funds and monitor these on an ongoing basis?

As an investment manager that aims to utilise the most up to date technology for researching, constructing, and managing portfolios, our analysts and chief economist are consistently reviewing opportunities.

Our Chief Economist and Chief Strategists, Jim Kean and Astrid Schilo, highlight at our weekly investment meeting any market themes, government, fiscal, monetary regime shifts and economic data in order to support or challenge our existing positions.

This leads the investment committee to make active decisions, such as in April when we took an overweight position to China and the emerging markets, as reduced lockdown measures led to rise in consumer spending and trade in the region. Alongside this we underweighted UK equities as trade negotiations continued to hinder UK equity market performance.

These tactical calls then include an ongoing review of the best funds within the region. However, this does not mean picking the fund that has been best the performing in the past. It is important to select a fund that is likely to benefit in the future. For example, take a fund manager that performed well between 2011-2015 by holding oil stocks, it wouldn’t have been right to buy this fund in 2015 just because of its strong performance, it is important to understand that the oil price drove the performance and it would have been a poor time to buy said fund as the commodity markets collapsed in 2015.

It is understanding global dynamics that enable our investment team to explore opportunities to deliver consistent returns, but also make sure we are not over exposed to one sector, such as oil and gas, or more recently technology.

What steps do we take to analyse regional funds?

Funds are rigorously screened using a large database (quantitative analysis), and then the top five managers we meet face-to-face, or in the current climate over a video call. When investing in a fund we want to know the fund manager and team, look them in the whites of their eyes to truly understand their passion and process for delivering sustainable returns. It is important, just like when fund managers select companies, that when we pick funds, we select funds with a clear process, team ethos and vision.

What happens if a fund deviates from its strategy?

Firstly, it is worth mentioning that we monitor all funds daily, have a monthly review meeting to discuss any concerns, and meet all managers at least once a year. However, our regular screens highlight if a fund has changed exposure and is heavily invested in a sector.

Woodford is a good example of our active management – in April 2016 the Tatton Investment team identified a move into unlisted and micro-cap companies from small cap stocks by the manager. This increased liquidity risk in the fund and to an extent the portfolio. The team made the decision to sell in May 2016 following the meeting. This turned out to be a positive decision with access to capital restricted in more recent years in said fund.

What if a manager holds something that has been scrutinised in the media or we identify a controversial investment?

Firstly, every manager is required to justify any investment in the portfolio to us if we ask. In the ethical fund universe this is even more crucial as there are strict principles and screening criteria we apply and the manager applies. If we feel the fund is breaching its criteria and process we will sell, likewise if the fund deems a company has done something that breaks the fund criteria it is likely to sell the company. Ultimately we would expect any fund not to hold stocks that go against its investment principles and criteria or we will not invest or continue to invest. As part of our ethical screening criteria we analyse exposure to difference sectors weekly to check funds haven’t invested in anything that could be deemed controversial.

The Tatton Investment team combines the best of Top-down analysis (Macro-Economics) and Bottom-up (fund selection) to construct portfolios that take a consistent level of risk in order to generate the returns to meet client goals. Whether this is through active fund managers, passives or even in more recent years, Ethical. Tatton’s Investment Team aims to carry out the analysis described above and provide as much information to the investor as possible to maintain confidence and understanding of the approach.

For more information on Tatton Investment Management’s ethical portfolios, please speak to your financial adviser.