Kames: The Ethical Imperative

by | Nov 17, 2014

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Neil Martin Talks to Audrey Ryan and Iain Buckle, Joint Lead Managers of the Kames Ethical Cautious Managed Fund


You’d think that setting out your stall as both an ethical and a cautious fund would put quite a bit of pressure on your fund management style. I mean, how many times have we heard of some investment that is lauded as ethical, only for somebody to discover some dark secret lurking in the depths? One thing’s for sure, there are always plenty of people out there making sure you do as it says on the box.


But for Audrey Ryan and Iain Buckle, the joint lead fund managers of the Kames Ethical Cautious Managed Fund – this part of their job is perhaps the easiest. The fund, which was launched in March 2007 and is valued at around £220m, has outperformed the median over the last five years and has also won the best fund award in the Mixed Asset Category at the Investment Adviser 100 Club awards. A lot of that has to do with their strict adherence to sound principles – both ethical and commercial.

Properly Independent

The responsibility of ensuring that their fund contains no surprises is down to the firm’s Screening Process and Screening Criteria. This involves an independent panel which comes up with what Buckle describes as their “investable universe.” As he explains: “So they take the criteria, they do the analysis on the companies as to what is and isn’t suitable, and then Audrey and I have the job of constructing the best portfolio we can.”

“I think it’s very important that that relationship is at an arm’s length. There’s no ability for Audrey and me to exert pressure, or to influence a decision on whether something is ethical or not. It’s important that we understand why something doesn’t meet the criteria, or does.”


This means that the two managers can focus on what’s important – stock selection, keeping the right balance between equities, cash and bonds, and ensuring a good performance. The fund is spread across stocks (where up to 60% can be invested); in investment-grade (lower risk) bonds issued by UK companies; in government bonds; and in high yield (higher risk) bonds.

Ryan and Buckle prefer to keep largely to their speciality areas – equities and bonds respectively – and they aim to deliver long term capital growth and income, and do so by not investing in companies which harm people, society, animals, or the environment.

Ethical Principles

Buckle and Ryan both stress that adhering to ethical principles is important both for them and for Kames. “We take our reputation in this sector very seriously,” says Buckle. “What you tend to find from an end investor is you get some very high conviction ethical investors – our main ethical researchers describe them almost as a kind of sector policeman.


“So there are some very well-respected ethical IFAs and ethical wealth managers who pore all over portfolios like this to make sure there is nothing that is going to be a surprise to them. In this kind of sector if you make a mistake and you invest in something you shouldn’t have done, then people are very slow to forgive you.”

However, I asked, there must surely be times when the fund finds itself holding a stock it’s not happy with? Yes, Buckle admits: “It can happen through things like M&A, when you can get companies which previously met the criteria but which now don’t.

“The example I always use is the banking area, both in equity and in fixed income. Banks which generally meet our criteria are classic retail banking institutions, that take deposits and lend them out as mortgages. But once you start getting off into corporate banking and investment banking, it starts becoming more difficult. One of the ones we previously could invest in was HBOS. But when HBOS merged with Lloyds back in 2008/9, that combined entity wasn’t one we were comfortable investing in.”


Heavy on Equities?

The managers insist that they want the fund to be a straightforward product. I was asking Buckle whether he considered it strange, as some observers had suggested, that for a cautious fund, they could be up to 60% invested in stocks, which could be volatile.

“I’d certainly say that compared to some funds in the sector, we’re a bit heavier on equities,” he agreed. “But then, it’s always been a simple product. What we are trying to have is a one-stop solution for ethical investors. There are a number of ethical corporate bond funds out there, but until we launched the fund it was a case of marrying the equity and bond elements together, whereas this to me fits within the remit of a traditional balanced fund.

“It certainly doesn’t have some of the flexibility that you would see from some of the other people in that sector. So we obviously look frequently at what other people in that sector are doing, so you might have significant exposure to non-UK equity to infrastructure, commodities, property, it could be anything.


At the half-way stage in 2014 the fund was 51% invested in equities (around 220 companies), having reached a high of 58% back in September 2009.

Smaller Companies and Liquidity

Maintaining strict ethical criteria can also mean that the management team often has to dip into smaller and mid-sized stocks to keep their principles intact. Does that present the fund with worries over a company’s liquidity?

“I wouldn’t say worries,” says Ryan. “On the UK team we have 11 fund managers who are managing quite a bit of money, and as part of our investment decision on any stock, particularly if it’s small or mid-cap, we would consider as part of our process the liquidity within that stock.


“We have a centralised dealing team of six individuals, and they help us with understanding and providing information of volumes etc. If it was a very strong investment idea, then we have to think about what percentage of the company is suitable to own, because at some point we would be wanting to sell the position, so again that is an important discussion point we have around the stock recommendation process.”

Allocations: No Falling Out

I can’t help asking if they ever fall out about the selection of investments? Ryan is insistent that there are no rows: “The key thing for Iain and me is to sit down and discuss asset allocation.

“What we do is take some leads from our house view. Kames Capital as a whole will have a view on equities, property and cash. So we’ll take that view and we’ll sit down and discuss the appropriateness of it within our portfolio. So most of the time we will first reflect what we are doing as a house and then discuss what that means in terms of percentage allocations for our portfolio. We discuss, and I guess we talk every day, but we’ve never had any major fights that I can recall, Iain, can you?”


Buckle agrees, but adds: “I do take a keen interest in some of the stocks Audrey invests in.”

It’s clear that running a fund which claims to be both ethical and cautious has more issues than many other funds, but it’s good to see that Ryan and Buckle approach the challenge with a sense of purpose and professionalism. And not too many disagreements….

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