Perhaps the local share market's best hedge against global warming in Australian Ethical Investment Limited (ASX: AEF) hit a record high of $110 today, as it continues to benefit from growing demand for ethical investment funds in the superannuation space in particular.
As at March 31 2017 the company had grown funds under management (FUM) to $1.973 billion thanks to rising inflows from retail superannuation investors choosing to invest their money with an "ethical" manager. This compares to $1.15 billion as at March 31 2015, with the substantial FUM rise coming via a mix of inflows and share market appreciation.
Notably, the crashing oil price (amidst general fossil fuel price weakness) in particular has helped ethical funds outperform since 2015, as they generally avoid energy-focused investments yet are benchmarked against indices that will have some weighting to fossil fuel producers.
Fund managers like AEF charge investors a fixed percentage of FUM to bring in revenues, with AEF charging a lot more than passive or industry funds as it believes its "active" management style will deliver superior after fee returns to investors.
In fact AEF's standard investment fees for a "Growth" superannuation investment account are 1.05% pa + 0.41% pa of your account balance, before buy-sell spreads and other fees.
AEF also operates in a competitive ethical investment space with big hitters like AMP Limited (ASX: AMP), BT Investment Management Ltd (ASX: BTT) and the Commonwealth Bank of Australia (ASX: CBA) all offering ethical investing funds in an attempt to cash in on the long-term growth of ethical investment.
Should you buy?
As I have noted before AEF's best shot at building a competitive advantage is to differentiate itself as a genuinely ethical independent manager, rather than an investment fund that is part of a wider corporate institution that routinely invests in coal or tobacco for example.
Back in May 2015 I suggested this fund manager was a buy when shares changed hands for $50 as it clearly had an opportunity to grow FUM by taking just a miniscule amount of Australia's giant and ballooning superannuation pool.
Moreover, at the time I also suggested that "if the group is ever able to build scale and demonstrate a five-year plus history of strong investment performance then I imagine the big money-spinning institutional mandates could come onto the horizon."
Just last week, AEF announced it had won an $128 million institutional investment mandate. This is a landmark result for AEF and further institutional wins could be transformational for the business given the one just announced represents 6% of FUM alone as at June 30 2017.
The key to growing FUM rapidly is developing an investment track record, scale, client service and operational capacity to win the confidence of institutional investors and their consultants.
Institutional fees are lower margin, but at the big end of town a single mandate can equal the $1.9 billion in FUM the group currently has in total. When you consider the opportunity AEF also has to grow higher-margin retail FUM through superannuation and active management offerings you see it looks an attractive investment opportunity.
The success of anther fund manager I have regularly recommended over the past three years to readers in Magellan Financial Group Ltd (ASX: MFG) demonstrates how quickly a group can grow FUM in Australia if it wins the confidence of institutional money.
Over the last five years Magellan stock is up 1,000%, with AEF up 525%.
Unfortunately, I was forced to sell my AEF shares in 2015 to fund a property purchase, although given it is now winning institutional mandates it is back at the top of my watch list as an investment opportunity. It's still small with a market value around $128 million and has the opportunity to deliver investors multi-bagger returns over the years ahead given the small base it is coming off.
