Why is Prudential closing the Prudential Ethical Trust?
In the letter sent out to existing unit holders, William Nott, Chief Executive Officer of Prudential Unit Trusts Limited wrote:
"The Trust was originally launched in February 1999. The Trust is designed to maximise total long term return by investment in a portfolio wholly or mainly invested in equity type securities of companies which satisfy a prescribed set of ethical criteria.
For several years, the vast majority of the Trust has been owned by a number of corporate investors. These investors are due to withdraw their holdings. This, coupled with the fact that we do not anticipate significant demand for this Trust from investors in the foreseeable future, means the Trust will be of insufficient size to provide the level of diversification we would expect for a fund of this nature, or for the fund manager to manage cost effectively. For this reason, the Prudential Ethical Trust will be closed on Friday 8 June 2012."
Ethical Fund options contracting
The Pru Ethical fund only reached £17m of assets under management which is small and reflects the lack of traction Prudential were able to get for this ethical fund. The fund was not promoted by Prudential and did not have the support of the IFA community. This fund closure follows that of M&S in 2011 and the reduction in fund offering by Henderson for similar reasons.
The contraction of ethical funds in the fund market is part of a wider move by Investment Houses to consolidate assets within funds to reduce the costs of running those funds and thus boost profits. Ethical funds are particularly vulnerable in this environment because there are additional costs to running the funds connected with the ethical criteria set.
The Implications for Investors
Investors need to be wary when an ethical fund announces that it will close for two reasons.
Firstly there are capital gains tax implications. A gain or a loss is recognised on liquidation, which if not understood and planned for properly can result in unnecessary tax being paid. In this case if investors had been paying attention they were warned of the imminent closure of this fund in November 2010 allowing investors to exit across two fiscal years. This has given investors in the Pru Ethical fund the flexibility to utilise two annual capital gains tax allowances if required and potentially materially reducing any tax liabilities incurred as a result of the closure.
Secondly, unlike for many other types of investment an ethical investor needs to relook and rethink why he invested his money in the Pru ethical fund in the first place. Prudential were unable to offer an ethical alternative becuase M&G do not have an ethical fund. The importance of ethical considerations are a point lost by many at Investment Houses but can be paramount to the investor.
The Pru Ethical fund has not provided good investment returns in the last five years against its peer group and so is not a fund which will be missed. Investors who have been returned cash from the Prudential and who are still looking for investment alternatives should consult our fund library to analyse the performance of a range of funds which could continue to meet their ethical requirements.