An ethical fund star? Boohoo to that

Few words in the investor lexicon are more conveniently elastic than “ethical”. Like its flighty companion “sustainable”, it can be so stretched as to become nearly meaningless.

Ethical funds defy easy description but investors expect to see at least some commitment to fair employment practices, good working conditions, quality product and commitment to standards of corporate citizenship.

So how was it that fast-fashion retailer Boohoo came to feature so prominently in the range of “ethical” funds managed by Aberdeen Standard Investments?

There may be other reasons for managers to hold shares in this challenged online company. But high ethical standards don’t feature prominently, looking at the latest allegations against it.

Shares in Boohoo tumbled 29 per cent last week after press revelations about working conditions in a factory packaging clothes destined for the business. It has been accused of paying workers below minimum wage and breaching safety rules at a supplier’s factories.

The brand has been dropped by major online retailers Asos, Next and Zalando over claims of exploitation.

Enter Aberdeen Standard Investments into the eye of the storm, revealing that it has now offloaded stakes in Boohoo from its ethical funds. It branded the fashion business’s response to damaging revelations about working conditions as “inadequate in scope, timeliness and gravity” – particularly damning for a company labelled “ethical”.

The sales form part of a broader disposal by ASI, which has sold the bulk of its stake in a business in which it was the sixthlargest shareholder until last week.

This was no marginal dabble by ASI on the fringes of a “do good” fund. ASI had held some 42 million shares in Boohoo according to market data concern Refinitiv. About 27 million shares have been offloaded, worth around £76 million.

Boohoo was the top holding in the £293 million ASI UK Ethical Equity and the ASI UK Impact-employment Opportunities funds – a truly ironic name for a fund holding Boohoo. The ASI UK “Responsible Equity” fund has also sold its stake.

Nor did ASI’S exposure stop there. Boohoo was also held in ethical life and pension funds run by ASI. The £541 million Standard Life Ethical Pension fund held 1.3 per cent of its assets in the stock, while the £40 million Standard Life UK Ethical Life fund had a 2.7 per cent position.

Ethical Equity and Employment Opportunities funds manager Lesley Duncan lost no time in declaring her corporate governance credentials. Having spoken to Boohoo’s management on numerous occasions last week, she said: “We view their response as inadequate in scope, timeliness and gravity. We strive to use our influence as significant investors to achieve progress.”

Fine words. But how did Boohoo every qualify to be such a prominent holding in these ethical funds in the first place?

The company, she said, had passed ASI’S ethical screens. Yet she admitted Boohoo practices had been of concern to ASI for some time.

“Over the years”, she said, “we have lobbied the company to improve its management of supply chain transparency, environmental efficiency and working conditions. However, in the last few weeks, our concerns have grown on the progress being made,” which even before recent developments “had negatively impacted our conviction levels in the company”.

When jargon such as this is deployed, investors have cause to question ASI’S assessment rigour.

Today, it seems, we are all ethical in corporate brochure-speak now – though clearly some are more ethical than others.

Three market phases have unfolded so far in the Covid-19 pandemic: first, a mass flight to the hills and wave of selling as the virus struck; second, a charge back into markets as anxious investors sought to hitch a ride on an early recovery; and third, another bout of selling as hopes of a V-shaped recovery faded.

Unit trusts and open-ended investment companies suffered a frenzied exodus that extended into June. According to fund settlement service Calastone, UK investors pulled a record £679 million from open-ended funds investing in UK shares last month. This flight from funds exceeded that in the wake of the Brexit referendum and the onset of the fevered December general election.

UK equity income funds suffered the worst of the haemorrhage, with £671 million of outflows from income funds – also a record. The selling wave was swollen by reports of heavy dividend cuts across the UK stock market. Nearly half of FTSE 100 companies had cut, cancelled or deferred dividend payments by the end of June, leading dividend forecasts for the year to slump by a third from £91.1 billion in January to £62.3 billion, according to online broker AJ Bell.

But while UK funds suffered the biggest redemptions, those focused on all geographies, except global strategies, also suffered net withdrawals last month. Wider profit-taking saw a net £1.2 billion pulled from equity funds. Most global markets are now in positive territory this year, though the UK market, hit harder by the falls, is still down, with the FTSE All-share 15.8 per cent lower.

Index-tracking passive equity funds endured a negative month, with £62 million of net withdrawals in the retreat from risk assets. Fixed income and money market funds were key beneficiaries while the Covid storm rages.