If I were going to buy one ASX share this week it would be Australian Ethical Investment Limited (ASX: AEF).
Australian Ethical is a fund manager that is focused on investing ethically in businesses that try to positively impact the world, or at least not impact it negatively.
For example, it seeks to invest in businesses that build a clean energy future, research medical solutions, create more sustainable products or create new technologies. Whereas it actively avoids businesses that mine fossil fuels, exploit workers, promote gambling, manufacture weapons and so on.
What has been happening recently
The Australian Ethical share price has been volatile over the past year. It rose strongly to $5.80 a year ago when the bushfires were raging. It then drifted all the way back to $4.20.
The COVID-19 crash sent the Australian Ethical share price down to $2.07 and it has only recovered back to $4.72.
The share price has grown a lot from the market bottom, but it's actually down 48% from 19 June 2020. It's this lack of recovery that makes me believe that Australian Ethical is worth looking at, combined with its good growth prospects.
In the quarter ending 30 September 2020, Australian Ethical saw its funds under management (FUM) rise by 6.5% to $4.32 billion. This was helped by $150 million of net inflows, with $100 million of net inflows for its superannuation segment.
The Australian Ethical share price has risen by 4.6% since the quarterly update.
Why I think the Australian Ethical share price is a buy
Australian Ethical is a very promising business in my opinion.
There is a growing interest by investors for investing 'ethically' – you can see that from how much the FUM has grown over the past few years. I think that trend will continue.
Fund managers are attractive businesses because of how scalable they are. This is one of the main reasons why I think Australian Ethical can grow its profit nicely over the next few years.
The company is benefiting strongly from the fact that people are signing up to its superannuation product. This means it should see consistent inflows for superannuation over the coming years, as well as the benefits of compounding growth.
Australian Ethical plans to lower its fees for investors as it gets bigger. This may be harmful for short-term profit, but it will make the company much more attractive to prospective members and hopefully help long-term growth. Lower fees help investors generate better net returns. Ethical investing can lead to outperformance of the overall market, but it's more likely to do better if the fees are lower rather than higher.
I think the company can deliver solid double digit profit growth over the coming years. In FY20 its underlying revenue and profit after tax both increased by 15%. Compounding profit can make a big impact over several years.
Its balance sheet is another big positive. It has no debt with good operating cashflow and a growing cash balance.
Australian Ethical could also be an attractive option for its growing dividend. At the current Australian Ethical share price it offers a grossed-up dividend yield of 1.8%. In FY20 its total dividend for the year was increased by 20% to 6 cents per share. As Australian Ethical's profit grows it will be able to fund higher and higher dividends, which will help total returns.
Foolish takeaway
I think that Australian Ethical is one of the most exciting ASX growth shares around with the ethical investing and superannuation trends on its side. It may look expensive compared to FY20's earnings, but over the next five years I think it could generate solid returns.
