Established in 1986, Australian Ethical Investment Limited (ASX: AEF) is Australia's leading ethical wealth manager. Australian Ethical currently has a market cap of $513 million with a $4.58 share price.
What is ethical investing?
Ethical investing is selecting investments based on environmental, social, and ethical principles with the overarching goal of building a sustainable economy. Historically, ethical investing has been a very niche market of investing. However, the recent shift in consumer and government sentiment towards sustainable practices has increased the demand for ethical investing significantly.
Australian Ethical's approach screens companies for their involvement in environmentally harming industries such as coal mining, forest logging, pollution, and CO2 emission – in addition to any activities that harm people, animals, or society. Australian Ethical avoids these companies, instead opting to invest in companies that support people, innovative technology, and sustainability.
Superannuation and managed funds providing above-benchmark returns
In the last 5 years, Australian Ethical Super is the fastest growing super fund with over 43,000 members. The superannuation fund recently achieved record new member acquisitions of 1,273 new members in one month through the company's highly successful investments into brand awareness. It also boasts the highest retention rate of any retail super fund in Australia.
It accomplished this while having the lowest superannuation outflow ratio (ratio of net cash outflows to cash inflows) across all retail funds in the industry at 29%, compared to the industry average of over 100%.
Currently, Australian Ethical Super comprises 66% of the company's total funds under management and generated 57% of total net inflows in 2019.
Australian Ethical's second product category, its investment options, is made up of 8 managed funds with different risk profiles. In 2019, these investment options culminated in the following achievements:
- 7 funds met or exceeded their respective performance benchmarks, with 1 fund significantly outperforming its benchmark, generating a performance fee
- Australian Shares fund achieved top quartile performance in the last 5, 7, 10, 15, and 20 years
- Australia's best performing growth option fund in 2019.
Expected strong growth in funds under management
Australian Ethical's management has forecasted an ongoing growth in total funds under management (FUM) during the 2020 financial year. The fund manager's recent quarterly announcement (period ended 31 December 2019) supports this prediction with a 6.6% increase in FUM to $3.64 billion with positive first quarter net inflows and investment performances.
Net cashflows have remained positive in the last 4 years and this track-record is expected to continue as total FUM continue to trend upwards. The board has also indicated that it is working on accelerating the growth of total FUM through institutional investors, which currently make up 6% of total FUM.
Foolish takeaway
Comparing Australian Ethical against one of the nation's largest superannuation providers, AustralianSuper, it's clear the company has a significant opportunity for future growth. AustralianSuper currently manages $171.5 billion in assets compared to Australian Ethical's $3.64 billion.
I believe that the shift towards sustainable and ethical investing combined with Australian Ethical's industry leading outflow ratio and retention rates will have positive impacts on the company's share price.
With the company's consistent growth expected to continue into the future, I think Australian Ethical Investment Limited is a long-term buy.
