iFunds Asset Management Ltd is authorised and regulated by the Financial Conduct Authority, registered in England and Wales, No. 2442391. Registered office The TechnoCentre, Puma Way, Coventry, CV1 2TT.

iFunds Ethical PortfoliosRisk managed model portfolios with an ethical focus

Ethical Model Portfolios

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What is ethical investing?

Ethical investing places a greater emphasis on companies that have a positive impact on their consumers and the world around us. Typically, ethical investing covers companies that try to promote environmental stewardship, consumer protection, human rights and diversity, whilst looking to restrict or exclude companies involved in tobacco, alcohol, gambling, pornography and munitions. Ethical investing also considers things such as the effects of the products that are produced, waste management, the way companies treat their employees, their tax transparency, business ethics and how they finance their activities.

Ethical Model Portfolios

To invest or not to invest? The options open to investors can vary from a ‘soft’ ethical screen, e.g. to limit the investment in “unacceptable” companies, or to applying a ‘hard’ ethical screen which emphasises the exclusion of such companies. These two options fall broadly into two investment areas; ESG (environmental, social and corporate governance) and SRI (socially responsible investing). Although both fall under the umbrella of ethical investing, ESG and SRI differ in their approach.

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How do you define ethical investing?

Environmental Social Corporate governance

Energy consumption Human rights Quality of management

Pollution Child & forced labour Board independence

Climate change Community engagement Conflicts of interest

Waste production Health and safety Executive compensation

Natural resource preservation Stakeholder relations Transparency and disclosure

Animal welfare Employee relations Shareholder rights

What is ESG?

ESG refers to the environmental, social and governance practices of a company that may have a material impact on its performance. Although ESG factors are used during the analysis of companies, the main objective of ESG evaluation remains performance. Typically, ESG screening seeks to reduce exposure to companies and or sectors rather than specifically remove them or actively seek companies with specific ethical goals, i.e. a renewable energy technology firm.The table below lists common ESG factors. Investments with good ESG scores have the potential to drive performance, whilst those with poor ESG scores may inhibit performance.

Source: Investopedia

Ethical Model Portfolios

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Socially responsible investing differs from ESG in that it seeks to eliminate or select investments based on specific guidelines. This method is also known as positive and negative screening. Compared to ESG, SRI does more to balance principles with return instead of applying ESG principles to enhance return or reduce exposure to companies with a lower ESG rating. Typically, SRI filters out companies that focus on the following;

• Alcohol • Gambling • Tobacco • Military weapons • Civilian firearms • Nuclear power • Adult entertainment • Genetically modified organisms

What is SRI?

Source: MSCI

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

World SRI IndexWorld Index

Ethical Model Portfolios

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The combination of restricting and or excluding unacceptable companies means that there are less companies to choose for investment. The use of the ESG rating system can also reduce exposure to companies that investors might otherwise have had held when traditional measures, such as the size of the company, are used. Therefore, do investors have to accept that potential returns from an ethically focussed portfolio might be compromised by the SRI and ESG screening processes? Evidence would suggest not, at a global level at least. This is evidenced by the chart below which shows aworld equity index without an ethical screen plotted against an ethically screened version of the same index.

Does ethically focussed investing compromise investment returns?

World Equity Index vs. World Equity Socially Responsible Index

Source: FactSet

Ethical Model Portfolios

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There are four risk graded ethically focussed portfolio’s to choose from, each with a different risk and reward profile. This allows investors to match their desire to invest in a more ethical way with their own attitude to risk.

The portfolios

iFunds Ethical Cautious

iFunds Ethical Balanced

iFunds Ethical Growth

iFunds Ethical Aggressive

Each portfolio is made up of passive equity and bond funds that simply track the performance of an index. The allocations to each are modelled around traditional risk profilers with the Cautious portfolio holding more bonds than equities and the Growth portfolio holding more equities than bonds. The equity content of the portfolios consists of passively managed ESG or SRI qualifying funds, whilst the bond content consists of passively managed UK, European, Japanese and US government bond funds. Approximately half of the portfolio is managed using a buy and hold strategy, whilst the other half is managed on an active basis using a risk on and risk off approach. The actively managed portion of the portfolio aims to reduce drawdown (highs to lows) and volatility during times of stock market duress. Using passive funds and applying active risk management to a portion of the portfolio helps reduce costs but not necessarily at the expense of risk management.

Portfolio construction

Active equity allocation

Active bond allocation

Passive allocation

Ethical Model Portfolios

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iFunds’ use internally developed software systems to identify whether the trend of a market, equities or bonds, is in a positive or negative state. If the trend is positive, the full allocation to the asset class will be used. If the trend is negative, the allocation is reduced and held in cash until it turns positive again. In doing this, the portfolio managers aim to reduce the negative impact of severe market declines, such as those witnessed in 2008. It also reduces the traditional reliance on the bond allocation to dampen risk, potentially mitigating the negative performance that would come with any significant increase in interest rates. This process is described as risk on/risk off.

The active allocation process

40

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110

40

50

60

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90

100

110

Risk On Risk Off

The asset is in a positive upward trend so a full allocation is maintained to the asset.

The asset is in a negative downward trend so the allocation to the asset is reduced.

Ethical Model Portfolios

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Using a defined set of rules we are able to back test our risk on and risk off methodology to see the impact of going risk off during periods of high market duress. Whilst our process will not always get the decision right, the chart below illustrates the result of going risk off over the past 14 years. In this example we have applied our process to a SRI World Equity Index, reverting to cash when going risk off.

Risk on and risk off in action

0

500

1,000

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World SRI IndexWorld SRI Index (risk on / risk off)

Risk on and risk off using a World Equity Socially Responsible Index

Source: FactSet

Ethical Model Portfolios

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The application of a risk on and risk off approach results in four different asset allocation statuses;

Portfolio asset allocation

27.5%

49.5%

27.5%

49.5%

20.0%

20.0%

49.5%

49.5%

52.5%

30.5%

23.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

Both risk off

Bonds risk off

Equities risk off

Both risk on

Equities Bonds Cash

As can be seen from the Balanced portfolio example above when both equities and bonds are off, the resulting cash holding is 52.5%, thus reducing the portfolio’s exposure to market risk significantly. This will have the effect of reducing the impact of any further market declines, however, it means that, for a time, any upside effect from the markets will also be reduced. This is something investors have to be prepared to accept in trying to mitigate downside risk.

Balanced portfolio risk on / risk off asset allocations statuses

Source : iFunds

Ethical Model Portfolios

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In addition to the active risk allocation method employed, diversification is also achieved through spreading the investments across hundreds of individual companies, both domestically and internationally, through the use of passive index trackers.

Portfolio diversification

22.0%

12.5%

10.0%

5.0%8.0%

15.5%

6.0%

15.0%

5.0%

1.0%

Global Equities

UK Equities

US Equities

European Equities

Euro Government Bonds

US Government Bonds

Japanese Government Bonds

UK Government Bonds

UK Inflation Linked Government Bonds

Cash

Balanced portfolio example asset allocation (equities & bonds risk on)

Source : iFunds

Ethical Model Portfolios

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Portfolio allocations - risk on (funds used may vary from platform to platform and allocations are subject to market movements)

Asset Index Fund Cautious Balanced Growth Aggressive

Global Equities MSCI ACWI SRI Index (GBP hedged) UBS MSCI ACWI SRI ETF 17.0% 22.0% 29.5% 39.0%

UK Equities MSCI UK IMI Extended SRI 5% Issuer Capped Index UBS MSCI UK IMI SRI ETF 8.0% 12.5% 17.5% 22.5%

US Equities MSCI USA SRI Net TR Index iShares MSCI USA SRI ETF - 10.0% 15.0% 20.0%

European Equities MSCI Europe SRI Net TR Index iShares MSCI Europe SRI ETF - 5.0% 7.5% 10.0%

Emerging Market Equities MSCI Emerging Markets SRI Net TR Index iShares MSCI EM SRI ETF - - 5.0% 7.5%

European Government Bonds Bloomberg Barclays Euro Gov Bond Index (GBP hedged) Vanguard Euro Gov Bond Index Fund 13.0% 8.0% 2.5% -

US Government Bonds Bloomberg Barclays US Treasuries Index (GBP hedged) Vanguard US Gov Bond Index Fund 26.0% 15.5% 5.0% -

Japanese Government Bonds Bloomberg Barclays Japan Gov Bond Index (GBP hedged) Vanguard Japan Gov Bond Index Fund 10.0% 6.0% 2.0% -

UK Government Bonds FTSE Actuaries UK Gilts All Stocks Total Return Index iShares Core UK Gilts ETF 20.0% 15.0% 10.0% -

UK Inflation Linked Gilts UK Inflation Linked Government Bonds iShares Index-Linked Gilts ETF 5.0% 5.0% 5.0% -

Cash Cash Cash 1.0% 1.0% 1.0% 1.0%

Portfolio allocations - risk off (funds used may vary from platform to platform and allocations are subject to market movements)

Asset Index Fund Cautious Balanced Growth Aggressive

Global Equities MSCI ACWI SRI Index (GBP hedged) UBS MSCI ACWI SRI ETF 0.0% 0.0% 0.0% 0.0%

UK Equities MSCI UK IMI Extended SRI 5% Issuer Capped Index UBS MSCI UK IMI SRI ETF 8.0% 12.5% 17.5% 22.5%

US Equities MSCI USA SRI Net TR Index iShares MSCI USA SRI ETF - 10.0% 15.0% 20.0%

European Equities MSCI Europe SRI Net TR Index iShares MSCI Europe SRI ETF - 5.0% 7.5% 10.0%

Emerging Market Equities MSCI Emerging Markets SRI Net TR Index iShares MSCI EM SRI ETF - - 5.0% 7.5%

European Government Bonds Bloomberg Barclays Euro Gov Bond Index (GBP hedged) Vanguard Euro Gov Bond Index Fund 0.0% 0.0% 0.0% -

US Government Bonds Bloomberg Barclays US Treasuries Index (GBP hedged) Vanguard US Gov Bond Index Fund 0.0% 0.0% 0.0% -

Japanese Government Bonds Bloomberg Barclays Japan Gov Bond Index (GBP hedged) Vanguard Japan Gov Bond Index Fund 0.0% 0.0% 0.0% -

UK Government Bonds FTSE Actuaries UK Gilts All Stocks Total Return Index iShares Core UK Gilts ETF 20.0% 15.0% 10.0% 0.0%

UK Inflation Linked Gilts UK Inflation Linked Government Bonds iShares Index-Linked Gilts ETF 5.0% 5.0% 5.0% 0.0%

Cash Cash Cash 67.0% 52.5% 40.0% 40.0%

Active

Passive

Source : iFunds

Why passive funds?

Passive funds are funds that track an index, sometimes referred to as tracker funds. Such products have grown at a tremendous rate over the last decade and they now represent a significant percentage of assets under management in the industry. Investors have bought them due to the belief that active managers, paid to outperform their index, on average fail to do so after deducting the fees they charge. Buying a fund that tracks the index removes the uncertainty of under performing the market and fees tend to be significantly lower than corresponding active funds. The other advantage of using index funds is that the indices themselves are constructed on firm, well defined rules, which reduces uncertainty about the ethical properties of the underlying stocks they are buying.

Ethical Model Portfolios

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Summary

The iFunds ethical portfolios allow investors to access a range of low cost, actively risk managed and ethically focussed portfolios. Whilst investing ethically does not necessarily compromise investment returns, there are, of course, no guarantees that an ethical portfolio might not under perform a non-ethical portfolio. In addition, ethical investing has the potential to positively influence the boards of major companies to consider the consequences of their business activities and to promote environmental stewardship, consumer protection, human rights and diversity. Portfolio performance and costs can be found in separate marketing material such as our portfolio summary and individual portfolio factsheets.

Ethical Model Portfolios

About iFunds iFunds was established in 2002 by Nigel Baynes and Paul Hudson as an independent asset management firm. To this day the company remains independent and manages money on behalf of institutions, financial intermediaries and private clients.

What we do Managing investment risk (volatility and drawdown) is at the heart of what we do. All of our investment solutions make use of an objective, rules based and data driven approach to determine asset selection and allocation. The use of an objective approach frees us from emotional human behaviour/biases such as fear, greed & hope, all of which can have a severely detrimental impact on long-term investment performance.

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iFunds Asset Management

Who we are Stacey Ash - Director & Investment Manager

Stacey is responsible for developing and maintaining iFunds’ IFA and financial intermediary relationships. He has a career spanning over 20 years in the financial services sector, building Aberdeen Unit Trusts’ assets in its early days and re-shaping IG Index’s private client division before joining iFunds. He is a Fellow of the Chartered Institute for Securities & Investments and is also a qualified investment manager.

Nigel Baynes - Investment Director Nigel is responsible for the management of our funds and portfolios. He is an expert in the field of passive investments and was one of the first managers in the UK to launch a fund that invests solely in low cost passive index funds and ETFs. He is a Fellow of the Chartered Institute for Securities and Investments and a qualified investment manager.

Paul Hudson - Head of Financial Technology Paul leads the company’s software design and development and is responsible for the software engine that drives the VT iFunds Absolute Return Fund range and the iFunds Select DFM portfolios. Paul holds a master of science degree in Mathematical Modelling and Computer Simulation from Coventry University and has 30 years of experience in developing commercial grade software.

Craig Stansfield - Actuary & Compliance Director Craig is an actuary and iFunds’ compliance officer. He is responsible for advising, supporting and developing relationships with institutional clients and pension funds. Craig has over 25 years experience in the pension and investment field and was previously the co-owner of the actuarial consultancy firm Garvins and a partner at Barnett Waddingham.

Ethical Model Portfolios

Important information

Unless stated otherwise any opinions expressed are those of iFunds Asset Management Ltd. Nothing in this document should be viewed as indicating any guarantee of return nor should they be considered as providing personalised advice.

This document is issued by iFunds. Past performance is not a reliable indicator of future results. Quoted yields are not guaranteed. Except where otherwise indicated performance numbers are sourced from iFunds. We reasonably believe that the information contained herein is accurate as at the date of publication.

This document must not be relied on for purposes of any investment decisions. All investors should take independent financial advice on whether or not the portfolios described are appropriate to their individual circumstances and risk tolerances.

This document includes simulations which are based on our current investment processes. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those simulated.

The value of investments, and the income from them, can do down as well as up and you may not recover the amount of your original investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down.

iFunds Asset Management Ltd is authorised and regulated by the Financial Conduct Authority, registered in England and Wales, No. 2442391. Registered office The TechnoCentre, Puma Way, Coventry, CV1 2TT.

iFunds Ethical PortfoliosRisk managed model portfolios with an ethical focus