3 reasons why the Australian Ethical (ASX:AEF) share price could be a standout idea

Australian Ethical might be a compelling business to consider.

| More on:
rising asx share price represented by stack of coins with green shoots on top

Image source: Getty Images

The Australian Ethical Investment Limited (ASX: AEF) share price could be an interesting one to consider because of a few different reasons.

This business is a fund manager that looks to provide people with the ability to invest in a way that aligns with their ethics. It’s looking to avoid companies that are harming the world and find ones that are positively changing the world. Things like fossil fuels and tobacco are sectors it doesn’t invest in.

It has been investing ethically, and only ethically, since 1986.

Here are three reasons to consider the business:

Ethical investing is a fast-growing trend

A fund manager’s profit is largely influenced by the amount of its funds under management (FUM). There is a growing number of people that are putting their money towards investing ethically.

In FY21, Australian Ethical’s funded customer numbers increased by 23%. People are regularly adding to their investment funds and superannuation funds as well.

In the last financial year, Australian Ethical experienced net inflows of $1.03 billion, which was 56% higher than the prior corresponding year. This helped group FUM rise by 50% to $6.07 billion.

The company says it’s one of the fastest growing superannuation funds in the country, by both the number of members and funds under management.

John McMurdo, the Australian Ethical CEO, said with the release of the FY21 result:

Despite the ongoing challenges posed by the pandemic, it has been a pivotal year for ethical investing, climate pledges and sustainable commitments around the world. As the coronavirus continues to reshape economies and global markets, a near-universal desire for a more sustainable future is emerging.

As a result, our ethical approach is rapidly gaining popularity for its inherent tilt towards quality, resilience and long-term capital appreciation. Over the past 12 months, we’ve seen record net flows into our award-winning products, buoyed by excellent investment performance and a growing awareness among Australians of the power of their money in driving climate action.

The ongoing growth of customers and FUM could help profit and the Australian Ethical share price.

Profit growth

The company is already delivering sizeable double digit increases to profit.

In FY21, the business achieved operating revenue growth of 18% to $58.7 million, whilst underlying profit after tax grew 19% to $11.1 million.

Excluding the performance fees it generated, operating revenue grew by 21% and underlying net profit after tax went up by 30%.

This profit growth was achieved despite the business continuing to invest in its brand, investment expertise, distribution channels, customer experience and in delivering strategic and regulatory initiatives.

Fund managers can be very scalable businesses because of how capital light they are. Australian Ethical is planning to reduce its fees for investors, which it hopes will make its offering more attractive.

Positive outlook

Management believe the business is well positioned for the future, with no debt, strong cashflows and positive momentum. However, it will continue to fight to safeguard and grow its market share.

In the short-term, it wants to deepen its investment capability, expand its product offering, grow its brand awareness, fully digitise, upgrade the customer experience and significantly expand its newer customer segments. Over the longer-term, it believes these short-term areas will cement its leadership while allowing it to leverage the scale of the business to grow profit.

Mr McMurdo has said:

We are embarking on an aggressive growth strategy that reinforces our existing market share and expands it where we see the most potential. Our goal is to build a much bigger, more impactful business and we will be investing heavily in our existing business to achieve this ambition.

Should you invest $1,000 in Australian Ethical right now?

Before you consider Australian Ethical, you'll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Australian Ethical wasn't one of them.

The online investing service he’s run for nearly a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of August 16th 2021

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Australian Ethical Investment Ltd. The Motley Fool Australia has recommended Australian Ethical Investment Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Growth Shares